

Ask HN: Why do startups need so much money? - guynamedloren

Before I get downvoted for this, let me explain myself.  This is an honest question that has really been bothering me - <i>especially</i> lately, with all of the Yuri/YC hype.  When I think of a typical tech startup, I picture of a handful of brilliant fresh-out-of-college guys that are passionate about making things and solving problems [I know this may not describe the majority of startups these days, but it's all you hear about in the media so let's stick with it for the sake of this discussion.  Obviously the expenses are significantly higher when founders have families to support, mortgages to pay, etc.]<p>Anyway, I happen to be one of these guys (though a single founder), so I know exactly how much it really costs to get by on your own - here's some perspective.  I live in a cheap 5-bedroom apartment on a college campus (Champaign-Urbana IL) and drive a gas guzzling SUV (approx 11mpg).  Entertainment is negligible since I don't drink and rarely go to movies and such (that's all there is to do around here).  My combined expenses for rent, food, gas, and bills sits right around $600/mo.  I don't have a job, so for now, all of this is being paid for with the remainder of student loads and whatever I can scrape up.  I am fortunate enough to have supportive parents that are covering my insurance and phone bill (family packages) for the time being.  Even then, my total expenses should come in below $1000/mo.<p>So, back to these other young startup founders.  I think it's safe to assume that their circumstances are similar to my own, though I realize that cost of living is higher in the valley - especially rent.  I am only focusing on living expenses because they account for the vast majority of expenses for young startup founders.  Most YC startups say that almost all of their YC seed money goes toward rent, food and bills.  They rarely outsource work, do almost everything in-house, and usually wait several months or even a year before hiring other employees.  Server costs are minimal and offices non-existent.<p>Knowing that, I can't imagine the need for so much money.  Every day I read about startups that ran out of money and just couldn't keep going, but honestly - how much money do they really need?  Maybe I am naive, but young founders have the extraordinary advantage of minimal expenses and plenty of time and energy, so I don't see how this is possible.  Why do founders need hundreds of thousands or millions of dollars to "extend the runway"?  I'm pretty sure I could live on that kind of money for several years.
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petervandijck
The answer is that money = time. Or better, money = speed.

Money buys you an employee. Things get built faster.

Money buys you a design. Things look better, faster.

Money buys you more servers. The site is faster.

Money buys you tickets to X, where you can promote your site.

Money buys you traffic.

Money = speed.

If you can add a very talented person to your 1-person startup, your chances
for success suddenly multiply. If you can build a kick-ass team, your chances
for success are way up there.

The startups that "run out of money" don't really, usually, run out of actual
money. It just means they couldn't build something successful and gave up on
the idea, often because they had accumulated costs (employees, office, ...)
that they couldn't pay for anymore.

That doesn't mean the alternative is to have everyone work for pretty much
free. That's called open source. Different story :) (I'm probably a little off
here with my logic, it's late)

~~~
thewordpainter
i'll preface this by saying that i up-voted peter because many of the points
were totally valid.

at the same time, i think money creates a distraction.

i've been bootstrapping for almost 3.5 years. throughout the process, i've
built a team of four that all shares equity, and we've recruited more than 25
interns from UGA to help us through the semesters.

you know what my burn rate is? $50/month! i have one expense: hosting.

no one has taken any pay because they believe in the mission & they're
motivated by the vision we have.

loren - i hear you my man. i think many of these YC companies will never learn
what it means to be SCRAPPY. they won't understand how you can creatively
finance things.

oh, last thing...i'm currently the live-in advisor at my old fraternity
house...i know how to get by on nothing. just imagine what i'll do on
something...

-adam

~~~
petervandijck
Don't you think money would buy you speed?

Also, your time may seem free now but it won't always feel like that.

------
arn
Depends on the scale you are talking about.

Can you create a one man startup and sustain yourself for $1000/mo? Sure.

Can you create YouTube, FaceBook, Google for the same? No, you really can't.

And if you are shooting for someone in between, can you compete against a
similar company with 5-10 engineers when you only have one? Seems like a big
disadvantage.

~~~
CyberFonic
Without Customer Development Process (Steve Blank) you may not be building
what the market needs. A solo startup might not be as productive as a 3-5 (or
more) person team.

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jerf
I think you have the causality reversed. The entire idea of investing in a
company is that the company can take advantage of the investment to do better
than it could without the investment. If you haven't got a way to spend the
money productively, don't take it.

For as cheap as a startup _can_ be, it's the odd startup that honestly _can't_
make use of a bit of funding to do better. You really can't get any more value
out of having an employee? If that's the case, then stop seeking investment.
You don't really have a startup at that point, you just have a business that
isn't seeking growth. (The definition of "startup" is certainly in the eye of
the beholder and I wouldn't limit it to "those seeking home runs", but surely
the idea entails _some_ sort of concept of succeeding and growing to some
extent.)

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ig1
Someone posted a detailed answer on Quora but I can't find it right now,
essentially hiring people. While you can feed you founders ramens, employees
need to be paid market rate. $1 million dollars gets you 6 people for a year.

Sure you can try to do everything yourself, but you'll be destroyed by a
competitor that can scale up by hiring more staff.

~~~
guynamedloren
By 6 people, do you mean 6 developers? If so - the market rate, at $166,667
annual per developer, is extraordinarily higher than I thought. That seems a
bit pricey for a developer working at a scrappy startup.

~~~
exline
You have to factor in other costs on top of the employee wage:Taxes, Insurance
(liability/health,etc), Retirement/401k, Office Space (Rent & Utilities
optional if running virtual)

I'm sure there are other costs some optional, some not. Depending on how lean
you want to run you can have a very low overhead.

It also depends on what level of developer you are hiring.

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nwmcsween
#1 Rule of a business if your not making a profit now, you won't make any
later. About 99% of the time effort is equal to profit, (as an example not
directed at op) don't like cold calling? To bad go do it.

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va1en0k
money is a common "key" to many doors and solution for many problems. not
every problem and not every door, of course, but if you can throw some cash on
some annoying problem to get rid of it, it may be better solution than solving
it with your time

see also [http://teddziuba.com/2010/12/the-3-basic-tools-of-systems-
en...](http://teddziuba.com/2010/12/the-3-basic-tools-of-systems-
engineering.html) \- this extends to many other fields

still, having no money is not an excuse to be lazy

------
ruckxs
I had this same question, thanks for asking it.

~~~
guynamedloren
Please upvote so we can maybe get some decent answers here.

