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On Starting a Software Business (stephaniehurlburt.com)
534 points by ingve on June 25, 2017 | hide | past | web | favorite | 145 comments

Consulting doesn't scale, software does.

One pragmatic strategy to find product/customers:

    1) Pick an industry
    2) Ask someone in that industry what they use spreadsheets for
    3) Build something better
There is a lot of 'cybernetic' processes that are a mix of humans with domain knowledge and machines with spreadsheets for schemaless storage and querying. Generally the move is to encode the domain knowledge into code and standardize the storage (i.e excel -> RDMS) to make it more useful.

I know a guy that has made quite a successful software business out of abandonware. Find some business that's using software that has been abandoned. Original authors went out of business, etc. Maybe the users are still keeping MS-DOS or Windows NT computers around because it won't run on anything newer. This is not as uncommon as you might think.

Talk to the users, try to find out how many others are also using it. Rewrite it in modern technology, sell it back to all the current users (and ideally, also sell to others in the same line of business who might need it).

I can bootstrap consulting, can't software.

On top of that consulting opens door, you get very valuable insight inside certain industries and get paid for it.

Also, I'm sure I'm not the only one who is not interested in the slightest in building a unicorn or dealing with investors/VCs.

Building software with no clients requires capital, I'd rather keep mine for my family rather than burn it in the wind into something that is most likely to fail.

To add to this conversation, you can parlay consulting into software without a ton of problems.

Do work for customers. While doing work, try and find a shared pain point across your industry/customers. Build software for it and use your existing relationship to sell it. Or sell it and then build. Whichever.

I think it's possible find a useful middle-ground between consulting and product building, in the pg "do things that don't scale" sense. As the article also points out you can kill a second bird with the same stone, which is self-funding via the consulting.

And then ideally via the consulting you find a niche(s), build your own processes & tooling for your niche to deliver value to clients, and then can product-ize once you actually understand the space and the market, who the customers will be and how to reach them, because you're already doing it via the consulting and just need to scale up.

It also serves as a sanity check that you're actually building something that has value, because you prove it to yourself via invoices for your work rather than investment in an idea.

This is a great strategy.

I've heard this before, but part of the appeal of the spreadsheet is that Patty from accounting or Joe from HR can modify it without having to ask any IT staff, including you.

So I don't think it's a foolproof scheme, unless your solution is also programmable/customizable, which is a lot of work.

Yeah it's not foolproof just a way to start.

Here is one random example that comes to mind. "Risk Management" is something every company needs to do or pretend to do.

So someone gets stuck with this responsibility and they create a spreadsheet that looks like: Department | Risk | Likelihood | Impact

So this is a fairly mediocre solution but it kinda works and "risk management" for "Small Company Co" becomes "Bob's thing".

Of course there is very likely software that already does this but in my experience it's usually what the hipster programmers call "enterprise garbage". You know what i'm talking about - buzzwordy site with stock photos, long annoying sales cycles, no online demo or sign up, some java server you have to deploy, and some extjs/jquery interface that is ugly and each click takes 5-10 seconds. You aren't competing with these guys, you're going after the long tail of small companies they are ignoring.

Your move is to register some fun name - "Riskly", "Riskque", "Risksalot", etc. Next, hire a graphic designer to put together a fun colorful site, hire a college kid to make a fun video with royalty free upbeat music and narration showcasing your app, and build a simple CRUD app with maybe some built in risks for certain industries and some cool simulations/reports.

So go spend a few years of your life and see if you can't 'Disrupt/Fix Risk Management'. Or go work for a large company for eight years, take all your earnings, go to Vegas, and let it all ride on a 10:1 bet. It works out about the same.

Odds are probably worse for the startup unless you have actual experience in Risk Management.

Proper risk management is serious business. "Risk" "management" in smaller businesses may just be pretended. This illusion will cost some time, focus and money to keep up. I believe that's the market referred to.

A lot of things in small companies are pretended, which I think was grandparent's point.

HR, benefits, invoicing, inventory tracking, project tracking, etc etc

And the fact that there are business providing most of those testify to how good of an idea it is (and how crappy the existing MBA-Sales enterprise solutions are).

This is actually largely what we're trying to do at Sonadier.com. The basic idea is that you can build most enterprise CRUD applications with drag-and-drop forms.

While we realized it before starting, we didn't fully grasp how much you need people with "computer literacy" to build these things, for lack of a better term. Just thinking about the schema of the application you need is something a lot of people can't really do yet.

As far as I can tell it's got very little to do software intuitiveness, as I've noticed the same effect on phone calls with prospective customers.

Even as enterprise moves towards managed SaaS platforms, there'll always be a huge place for power-users. Much of the time, even just defining the problem that needs to be solved takes one.

It sounds like you may have an opportunity to offload some of that power-user/consultant content to contractors who just integrate your platform in their gigs. Or, operate a linearly-scaling in-house consultancy and have your platform be a means to optimize revenue per employee.

The CRUD application is definitely not the hard part, but it can be the long part.

Spot on. We've had success with in-house consulting for medium-to-large development projects, and we're in talks with a few MSPs now to help them offer managed custom applications to their customers. In terms of long-term scaling, getting more contractors on board is our biggest priority.

What's the best email to send inquiries to? Enterprise@? Possibly relevant to my interests on the supply side.

Or reach out to ethbro . coAtGma il.

Hi there, I just noticed that I had a new reply. I've sent you an email.

>So I don't think it's a foolproof scheme, unless your solution is also programmable/customizable, which is a lot of work.

Yep, almost everyone you casually talk to about a problem domain is only casually talking about it. They'll dream, but won't let you know about the pitfalls.

After you build something, the next questions are usually, "Can you change this just for us?", which is a fun task if you have 9 other customers that won't want that change.

So you have "advanced options", add a switch, and then change all of that. And if you do it right it's still nice and modular.

Or plugins. Then say "Hey, we now have this plugin available for only $x.xx".

Ever heard of Zapier?

Consulting pays the bills when software can't. It's all about the mix and getting to what you want -- not everyone is destined to be a product owner.

Your advice is spot-on, although I would likely CAPITALIZE the words "build something better". Not so easy a proposition.

Accenture revenue in 2016, $32.9 billion. Consulting definitely scales.

The point is scaling without increasing linearly the number of employees. Accenture has approx. 400K employees

A succinct way of putting it is there is a finite profit margin on consulting.

Agreeing: https://priceonomics.com/which-companies-have-the-highest-re...

Accenture is #493 of the S&P500, at $101k of revenue per employee. (!) They're doing a bit better than McDonalds (#497). The scalability argument holds -- compare to Netflix, which scales quite well (#23, $1.9M/employee).

True, and interestingly the way that they scale and remain profitable is by going after specific industries offering quite specific consulting services. From the outside it looks like generic "consulting" but actually they sell packages that are quite specific.

O(n) vs O(log n)

In English s'il vous plait?

Basically it's saying for every extra dollar you want to earn in consulting you must hire more engineers. For traditional software you can continue to sell the same bits over and over and not hire an extra engineer for the Nth sale.

I mean there is some level of growth in the sales/marketing/accounting and non-engineering departments right? Engineering isn't the only thing in a business, sometimes it's not even the most important (as much as we might hate to hear that). I've been in extremely successful software companies that had a crap product but an amazing sales team (although I didn't stick around long).

Couldn't agree more.

I've noticed this pattern in both business and in individual engineers.

You either have a spectacular product that theoretically could sell itself with initial exposure, or you have the best marketing and a product that might as well be vapor.

Usually it's the mediocre product that's somewhere in between that wins.

In engineers I've noticed that some of the brightest I've worked with are unsociable, or have no self esteem, and get stuck in the same place for 20 years, and on the other side of the spectrum are talentless hacks that are great at selling themselves and moving around enough to increase their salary.

Meanwhile I feel like a fraud because I'm not the best, but good enough to recognize my worth and sociable enough to put myself out there.

I leverage the shit out of that and feel somewhat guilty about hoping that the really talented local engineers don't catch on to the idea.

Also the optimal mix varies according to company age.

Younger company with unknown decent product? More heavily spending on sales.

Older company with industry recommendations from previous clients? Spend less on fewer, more technical sales people.

Older company with no recommendations from previous clients? You're doing something wrong, and sales isn't the place you should be spending your money.

I feel like normally this logic is inverted at the C-level though. Sales are low and product isn't getting traction? Hire more sales and marketing folks and put off those engineering hires.

Tell that to Uber's 15,000 employees.

The above comment is implying:

Consulting requires linear increase of resources. Software product requires logarithmic increase of resources. Therefore product business is more efficient to scale than consulting.

Sure, but with < 10% margins and terrible growth rates.

When people say "it scales" they are largely referring to the cost of serving incremental customers. Software does that well, consulting doesn't.

It's a great business if you can profitably hire other engineers and skim the difference in what you charge for them and what you pay them.

>the move is to encode the domain knowledge into code and standardize the storage (i.e excel -> RDMS) to make it more useful

This is exactly what I did!

- "We can make a decent salary out of this" - 36 months - 48 months

I started and 10 years later made a successfully exit from my company, we never raised any money, the above figure is what it took us to go from financing our development our self (by having two jobs), to having enough customers to break even.

I think everyone should, bootstrap one company to get a feel for how it is, will make you a better entrepreneur.

Exactly the same setup as you, although I've not sold my company as I'm a happy owner (https://www.atlascode.com).

I launched Atlas in 2007, just one year prior to the economic crisis that followed. Nothing ensures that you keep an eye on every bill that is paid and focus ruthlessly on efficiency gains more than a global financial catastrophe. Getting through that taught me I was capable of running an already tough business under pretty much any circumstances, and gave me an incredible confidence boost.

Not that I'd recommend it, definitely some of the toughest years of my working career.

Does the website help with getting new clients? I mean completely foreign clientele, outside your reference circle.

There is a bit of detail missing that I would like to understand. How to just 'talk' and give help? Do you approach people/businesses and ask if they are having any problems? Or, your aim is to just get the conversation ball rolling, hoping that it leads to the problem part without deliberation?

Strike up a conversation with anyone, casually mention you work with computers and they will tell you every problem they have from their horrible cellphone reception to the idiot IT guy at work to issues with Excel. Whatever the current 'computer' problem is, your'e about to hear it.

That's step 1. Step 2 is give them some solid advice in the form of a few things to try. Say "Well here's what I would do" and tell them what you'd do. If they keep asking questions, tell them something along the lines of "I did something like that for another guy and charged him $X/hour, you want me to stop by?"

Mentioning an hourly rate lets them know that even though this might be a hobby for them, its not a hobby for you. It also weeds out the tire kickers.

Not if you live in the bay area

You're right. I would like to amend my comment to exclude the .004% of the Earths surface that is the Bay Area.

Not sure if you're making a jab at the fact that the Bay Area is relatively small compared to most of the world, but I thought it was a relevant comment because HN is disproportionately located in Bay Area.

Is it really? Do we have data for geographic distribution of HN users?

A little old, but this is the best I could find.


That poll indicates that the significant majority of HN readers reside outside the Bay Area of San Francisco in the US.

Yes, but that's definitely disproportional to the % of population of the Bay Area relative to the world

Why not? Can you elaborate

In the Bay area everyone is assumed to be in tech unless otherwise noted, so this sort of uninformed response to "I'm a computer guy" is generally not seen

I am in SF right now for a couple days and the vast majority of people I run across are NOT in tech. Where are the tech people? Where can I run into potential investors in SF?

When people say Bay Area I think they really mean Palo Alto!

Interesting. In my experience, at any given function, at bars, in parks, or anywhere really in the bay area, talking to anyone has around 50% chance to be someone working at some sort of tech company. Not necessarily an engineer, but certainly close enough to probably know computers to a reasonable level.

While I can't speak for OP, I've taken a similar approach with my own business. For me, the most important thing was to simply change my mindset from thinking "how can this person I just met help me (give me leads/business/etc)?" to: "how can I help this person I just met?" And that's going to be completely dependent on context. Maybe they need some help with a meetup, maybe they need some help with their iPhone, maybe they need some help with something completely non-tech related, and maybe they don't need help with anything at the moment. The point is: people like to help people who have helped them in the past. No one likes someone who appears selfish. Basically, just be a good friend to the people you meet.

I don't think it's a problem with mindset..it's the actual logistics of making it happen.

They also need to ENVISION their goal, and then WORK HARD, and OVERCOME ADVERSITY.


I met my largest side client while at a baseball clinic my son was attending. I was reading a very thick book studying for a certification when a local business owner approached me and said, "Are you in IT?"

Four years later of 15-20 hours per week side work and that chance encounter had an amazing impact on my life.

Just curious: What do you charge them?

$150 per hour.

i have a friend who is a construction contractor, and one of the tasks they needed to do is inspection of a property, and take pictures of problematic areas with notes.

Currently, this is a manual process, paper driven with digital photos, and after wards, somebody back in the office would transcribe the hand written notes into an excel spreadsheet along with pics.

This process could be made easier with an automated app on the phone. I had thought about making such an app, but haven't yet.

I guess when you talk to someone, you naturally gravitate towards issues they have.

This is pretty much our bread and butter where I work. Our system lets you design the forms using rich widgets that let you take photos, sketch on them, record tolerance measurements, etc and we generate rich data dashboards and reports from it. The clients all work on mobile devices over poor, intermittent connections. Our users love it.

We work with a lot of clients in manufacturing and construction. Our system has a way to build and schedule regular inspections, notifications, etc. We're working on business process management and moving into regulated industries.

A friend of mine works in sewers for a big construction contractor. I want this company using our stuff so that his job is more safe. Right now they take readings from his sniffer and write them out onto a sheet in a log book and throw that data in the back of the van. It might be three months or so before someone enters that data into a spreadsheet. If there was an incident and my friend happens to not make it out of the hole that day -- he's just another statistic. I hope that by taking a reading with our software we can at least anticipate the environment he's diving into. His co-workers won't be able to scribble some non-sense on paper and throw it in the back of the van before he dives in -- they'll be accountable and people will be notified if they don't.

It's amazing how much our customers still use paper and spreadsheets despite having SAP, Oracle, SAS etc servicing them with solutions for that last couple of decades. Turns out having a small team that can move fast and listen to users on the ground floor is still a good strategy.

you might like https://www.planradar.com/

disclaimer: I met the founder once at a party.

You shouldn't let the existence of a competitor stop you. The business model of Lyft/Gett/Juno is basically to carbon copy Uber and get piece of their pie. Just being a deliberate copycat isn't a terrible strategy. Trying to one-up something that already exists is also plausible, if not easier because their is already a trailblazer that has made the market and you can just piggyback. Facebook succeeded because of MySpace, not in spite of it.

You could argue Uber copied Lyft (although it might be more convergence than anything), which I suppose just highlights your point even further.

There are several apps that do this - Infrasis (if it's still around), iAuditor, etc

That app is called Evernote / OneNote / Google Keep - incrementally improving their process using off the shelf software is likely to be more practical than a custom app.

Where is your contractor friend based? I am looking for a contractor, or some contacts, for a job now.

improving their process using off the shelf software is likely to be more practical than a custom app

That really depends on context. Very often something starts out sounding like "document with text and pictures" or "database with some tables in it and some forms for UI", making it an easy job with generic business software. However, often when you look at the details the actual requirements are more complicated and require some level of domain-specific functionality.

There are many applications that are aimed at a certain industry and provide some core function that seems quite generic but then some other more industry-specific functions on top. That certainly includes tracking, displaying and annotating specifications and inspection results in the construction industry, where there are multiple players in the market already.

She and her cofounder were already in an an industry niche before then as graphics and compression experts, so I'd assume they already had a lot of contacts from former co-workers, meetups, conferences, etc. If you're an expert in something and you meet someone in a related corner of the industry to yours, they'll usually be eager to talk about what they're working on and recommend you to their contacts.

I'm wondering about how they draw the line between "give first, take later" and "don't do work unless you're getting paid for it."

How I understood it:

> "give first, take later"

This was when they were looking for leads.

> "don't do work unless you're getting paid for it."

That was in the context of the product they were selling. A choice not to work on the product when there is not a customer paying you to do so. I can imagine they chose to operate like this because it is very easy to sink many hours into perfecting a product that does not have paying customers. I believe they will step away from this rule later when they have so many customers that they want to develop ahead of payments.

I'd like to hear more specific experiences on switching from working for free to $CONSULTING_RATE for the same client

I helped a local business group with their website, their previous host shut down and all they had was an archive on CD, they had some quotes for 10-20 hours to get it back up and running (and then everyone wanted to charge them hosting/domain registration).

I did the work for free. A couple hours importing databases and site files, configuring WP/Joomla (I forgot which), some testing... My hope was that I'd get a few leads from the 50-60 companies in the business group.

I was contacted by a few but once they found out I wouldn't do the work for free...

This is an example of a more general problem with undercharging (or doing spec work) in any creative industry. If you don't charge what you're worth, perhaps because you're trying to be helpful or offering "mate's rates", then you may get one happy client but you'll also get underpaid. Then that client will happily recommend your (excellent value!) services to their friends and colleagues who are also looking for (excellent value!) services and will be happy to similarly underpay you. And so it goes on.

In my experience, there are really only two levels of pricing that work. You can work literally for free, or for some token payment so someone is an official client of your business. This is sometimes helpful very early in a business to start some sort of portfolio and establish a bit of credibility, but otherwise I think it should be reserved for genuine charity work where it's clear that it's a gift and not your normal working practice. Everything else should be charged at decent professional rates immediately, both so you don't undersell yourself and to dissuade potential clients who can't or won't pay decent professional rates and all the other similar potential clients in their network.

I phrase it as "Standing problems I solve for free, sitting problems are my usual hourly rate."

Which is to say, if I can solve your problem for you before I get tired of standing up, I'm not going to bother to charge you. In my case that's usually a half hour or so.

People seem to respond well to that, in general. I think it's in line with how most people view the value of their own time.

It's also a one off, as well. Just because it only takes me 15 minutes a week doesn't mean it's free.

>>> dissuade potential clients who can't or won't pay decent professional rates and all the other similar potential clients in their network.

Agree. Keeping cheap and non paying clients AWAY should be a top priority for any business. In consulting, that's achieved by ALWAYS charging and being clear about your rate.

I discover many years ago that if you give the client a discount rate in the beginning [1], when you switch to a normal rate, they feel ripped off instead of greatful that they got the previous discount.

[1] Like charging a startup $50 instead of $150 an hour "just until they get their funding".

Never do commercial work for free. You won't be able to turn them into paying clients. If you're under-utilized, make an impressive portfolio piece on your own time. That will be better marketing than free work.

> I'd like to hear more specific experiences on switching from working for free to $CONSULTING_RATE for the same client

You probably can't. If you perform some regular work for someone for free, then they will think that that is your rate, and they come to you because your rate is so low.

The help the OP is talking about, is things like:

"Our most successful publicity attempts always sprung out of helping others-- we did several community workshops, mentored lots of people, helped people find jobs, etc. As time went on, we also got more invitations to speak about the product at events and conferences."

If you get free advice to someone, that is the giving part. It also is an area you know so you can speak with authority on the subject. The minute you are actively helping them (you are touching a computer or phone) that's when you should be getting paid.

I would also cut off the advice giving at a certain point and bring up money.

This is a person who obviously has a lot of talent and a lot of specialised knowledge. I doubt most people can get properly paid consulting work or get to product stage as fast as she clearly could.

20 conversations; 5~8 coffee dates; 2~4 proposals; 1 gig.

Many developers believe that conversations "just happen" for some elite breed of networked/famous/etc developer that excludes them. Sales conversations generally don't "just happen", for anyone. You write some pitches and make some calls.

I'm not saying that. I ran a software business for 14 years and made a lot of pitches. However, it can be tough to get projects that end up being seriously profitable and give you space to think and plan. Those clients take a while to find. However if you are highly specialized then obviously that clientele can be identified more easily and are less price sensitive and more focused on getting what they need.

I'd like to see some responses to this from some gurus. I have the same problem. I have a bunch of generalized skill but I feel not enough to make large $ with consulting.

I don't attribute this to impostor syndrome.

You can consult for just about everything. Being a specialist is a blessing and a curse because you will stand out more, but are likely in lower demand. Plenty of shops just do frontend web development or java development and get plenty of business. The trick is being able to hustle to get contracts.

Specialize. It doesn't have to be an esoteric domain. Something like Go server apps or Docker is enough.

With an industry that moves so ridiculously fast, how do you know what'll be in use in the few years it'll take to become good at something?

I feel like if I'd learned web development five years ago I wouldn't know anything about it today.

> I feel like if I'd learned web development five years ago I wouldn't know anything about it today.

This is a wrong assumption. Web development just gives the feeling of moving fast, it's not really the case. The foundation of web development is roughly the same as 5y ago. Most things from the http protocol, web servers, data storage, authentication, websockets etc. still works the same. Give or take a few UX and state-management tools and we're not that far into the future.

Also due to the huge investments in the web during the past decade(s) things should get slower because of legacy issues. Think fe. how long it's taking browser vendors to dump Flash or to adopt WebRTC.

You answered your own question: keep learning. There isn't enough time for mastery of any particular technology, but mastery of the flow of technical change.

Specialize is possible as someone mentioned, but I think the essential is segment.

You can still be a generalist as long as you put those skills to the service of a specific community. This could be region, vertical, domain, etc. The important part is to be clear who are you aiming at, so you can hustle and leverage the network/reference effect in there.

I was thinking a bay area network, as in "got a call from Netflix," but yes.

According to the article she was in rural Oregon at the time, and now she appears to be in Seattle.

She moved to Oregon to decompress cheaply, but was still in touch with colleagues.

Related piece: Starting a Business as a Developer in 2017 https://journal.standardnotes.org/starting-a-business-as-a-d...

OT, but referring to the article: why are so many websites allergic to serving basic HTML these days? You get a lovely white page with a Javascript blocker if you try to open this article. What's particularly offensive about this one is that all the raw data is loaded in correctly anyways - the JS appears to just fiddle with making it look right, and there's no default style for if that doesn't happen.

I feel like this comment is the equivalent of posting a meme on Reddit.

It also doesn't look right if you turn off CSS styling.

The article loaded fine on my old iPhone 5s. I leave JS enabled tho because I don't believe in the Fake Idea that the web should work for me without it.

Observe what people are doing inefficiently that you can fix.

Test whether they'd buy it with google adwords or facebook ads and conversion rate to filling out the form and putting in credit card. Refund everyone.

Imagine how it would be viral and test your hypothesis as well. So your customer acquisitin cost goes down exponentially!

Do you mean before building the actual product?


So basically she got much skills and happened to meet someone who was a well known player in the game industry.

Most people have neither or just the first one.

So basically she worked hard on her skills and invested a lot of time and effort to talk to a lot of people to meet the persons that allowed her to grow her business. Most people don't do that and complain. ;-)

For me the point here was, that the meeting of that person the most crucial step and also pure luck.

Writing about "Starting a Software Business" which boils down to "just know the right people" is a bit demotivating :\

Did you miss the part where they intentionally spoke to lots and lots of people?

I read it that the "talk to lots of people" part was independent of her knowing Rich in the first place.

She made her own luck by making a concerted effort to meet lots of people who may be relevant to her business.

So basically anyone can do it. Work hard, meet people.

Interesting about the 50-50 split. If you talk to most people in the valley, they would probably tell you this is the worst thing you can do. That is, if you're looking from the perspective of a VC.

YCombinator advises equal splits. https://blog.ycombinator.com/splitting-equity-among-founders...

I've also read a bunch of articles that suggest unequal splits, and the reasons they cite seem to boil down to the idea that the split should reflect the proportional risk taken, and not much else. There are times when founders truly take the same amount of risk, and an even split is justified under the common VC thinking.

In my limited experience pitching to VCs, as someone in an even-split startup, I believe VCs do prefer to have a primary person responsible who is in the CEO seat and has authority to make unilateral decisions. I can imagine an uneven split makes it clear when that's the case. I'm certain many of them have seen cases where even split partnerships were made more difficult and ended up being unfair largely because of the even split. I'm also sure that there are cases where it's harder for them to communicate and negotiate with multiple founders rather than one.

Those reasons don't matter if you're not taking funding, so even split in a contracting partnership (even split effort), turned profitable product startup that doesn't deal with VCs makes a lot of sense.

I've done both equal and non-equal, but I've yet to have or observe a business where both the risk, contribution, and effort put in by the founders is actually equal.

Sometimes it's just a conversation founders want to avoid having because it's uncomfortable, but that in itself is a bit of a red flag.

I have no doubt you're right that it's frequently a red flag, and that founders often go equal to avoid ranking themselves.

I've also watched and been part of lots of partnerships where the expectation before hand was equal contribution, and the reality after the fact was lopsided. I feel fairly lucky that my most recent experience truly was equal risk and equal effort; my even split experience has been truly reflective of what's happened, and truly fair for both of us.

The big mistake I have made is giving people besides my co-founder too much equity. Nobody else who's contributed to my company so far other than my co-founder have lived up to what they said they'd do, and we gave out too much equity in advance of them doing it.

Considering that, and considering both the issue you brought up and the reasons YCombinator gives for pushing toward equality rather than away from it, I think the main thing founders need to do is have a mechanism for not committing equity in advance of the effort. It's important for founders to be on a vesting schedule so that when one stops contributing or contributes less for a long period of time, you can shut it off. And it's important to communicate that things are going off the rails, and then actually take the action to shut it off.

That's really basic and somewhat stating the obvious, but if you are diligent about cutting off people who don't contribute, then there's no reason to shy away from equal split plans in advance. My experience has been that people I've partnered with for equity aren't avoiding contribution maliciously, they simply and honestly didn't realize in advance that they don't have the time & energy they thought they did.

offtopic, but your ad server is a really great idea

We're talking about a small consulting shop here at the start, where the paycheck comes form the actual work. Makes a lot of sense. No VC would touch that kind of business at that point anyway, not scalable.

Even later on, once they have a product, why would you change that? 50-50 is great, since you need both parties to agree to do something, which is essential in a small business like this.

VCs want to avoid the possibility of deadlocks when it comes to control - it's an easy box to check off when it comes to protecting the investment. But realistically, even at 51/49 or 60/40, if the disagreements are serious enough at an earlier stage the company is probably in a bad place anyway.

Being 3 founders is better, going into something that demanding like a startup on an uneven footing, is never going to work out, it will be a source of constant friction.

It's not the 50-50 split that's bad, it's the part where you don't talk about vesting. I have a friend who confounded a startup with another guy. It started with my friend agreeing to put in $20K and some advice, the other guy working full time, for a 50-50 split. After one year my friend has put in $200k+, worked full time building business, marketing, etc, while the other founder does his own job poorly.

They agree my friend deserves more equity, but can't agree between a 70-30 or 80-20 split, so other founder hires lawyer and holds my friend hostage for a lucrative buyout. Company is now worth significant amount of money almost solely to my friends hard work/investment, but legally he can't move forward until co-founder signs off on every decision.

I don't understand -- how would vesting have helped? If you can't fire the other person, vesting doesn't help when you have dead weight in the cap table. It sounds like the only remedy is your friend should have had hard conversations earlier when the other partner had less leverage...

Actually vesting would have reduced the other partners leverage greatly. First, they would not have been an LLC, would have already been a C Corp. The partner was refusing to sign the transfer docs so they could become a C corp to leverage outside investment, and give employees option agreements. If they had been a C corp, my friend would have gained more shares with every investment, and could fully control corporation decisions. Vesting also would have made it more clear to his partner how little equity he yet had, and more amenable to working together.

But outside my example, starting any new idea as a 50-50 partnership without vesting requirements is a terrible idea.

But even if they had been a C corp, vesting or no vesting, it sure sounds like they were both still employed so it still would have been a 50-50 equity split. Thus your friend couldn't have ordered anyone around? In order for vesting to help, someone has to be no longer employed and thus no longer accruing equity.

I'm not arguing against vesting, but I don't understand your example.

A C corp can compensate my friend with more stock i.e. voting control for his massive cash investments, an LLC is quite a bit harder when they are both partners.

I've heard that you should have a split of 49/51, in favor of the CEO. There needs to be one person who can have the final say for hard decisions.

Taking money from a VC is probably the worst thing you can do.

Please expound, I feel like I understand some of the risks but am curious to hear your objections. I personally would prefer bootstrapping but I think there are times when a market is growing quickly and you don't want to be left on the sidelines.

Honestly I wouldn't take my opinion seriously, I have very little experience in industry and my opinion might be misinformed. But if you really care, I'm talking from an ethical perspective. Imagine if Facebook or Google or Twitter were successfully bootstrapped, think about how much better off everyone would be. If all you care about is making money then VC money probably would work I guess. But it makes me sad.

In what way would everyone be better off?

Do you think that the VC money is what drove them to behave in a way that you don't agree with? If so, how do you square that with the fact that they are now publicly traded and not subject to VC whims?

That's a big if, at least in Twitter's case.


I have a question regarding startup growth so I apologise in advance if its irrelevant here (haven't read the article to be honest).

1) I get that to get the first users, you have to go out and recruit them. That's the advertisement part. So yeah, I get how you get users by advertising.

2) I get that when you have a million customers, they become the advertisement and they are the ones who are bringing you new customers. Your product "ad surface" is way bigger than simple banners through them.

Now what I have a hard time to understand is how 300 users procures the same effect as 2) (or even 3000). I get that they gonna get you 30 more customers by talking about your product to their "friends" who, if everything goes fine, at their turn gonna bring you 3 more customers who gonna bring you 1 more customers, for a grand total of 34 more customers. And that's the end of it. That wont grow much bigger. So basically, you would have to go back to 1) to get new users.

What am I missing? Does a user have to bring you n more new customers, n > 1? How many customers do you need via advertising so that the compound growth effect kicks in?

edit: I can see actually 2 types of compound growth effects: a) a user explicitly recruit another user (ex: "hey my friend, come play to this game"), b) a non user "see" other people using the product and he tells himself that might be a good idea to try it. Anyway, so basically, what I see is that, early on, you can rely only on a) so, in average, your customers have to get you n more new customers, n > 1, by explicitly recruiting them for you. Which, if Im correct here, would give an idea how badass the product must be.

The short answer is: it depends.

The long answer...

New customers come from two primary sources: 1) marketing and 2) referrals. Marketing is things like events (trade shows, media hits, advertising, reviews, etc). None of those things happen without outreach on your part. Referrals are when (as you described) existing customers tell other people and a few of them try your product. This will not be constant, right after a customer buys your product/service, they may be excited and tell some friends. Best to model referrals over time with cohort analysis.

At the same time, you will lose existing customers. Like referrals, this is best modeled as cohort analysis. After a customer signs up, after 1 month, x% will leave, next month, a different %, next month yet another %. Typically the churn rate declines for a given customer cohort over time (though there may be bumps along the way).

So, you have customer inflow and outflow. It would be nice if there was a simple formula, but the marketing efficiency, the referral rates and churn rates will all be constantly changing. So, there is no way to know in advance if or when compound growth kicks in until you have solid data. It will vary by market, company and product.

Thank you, that gives some meat.

Ultimately, I was focusing on the fact that if a customer brings you n new customers, n < 1 (and real number), it means you get new customers only via marketing. If n > 1, you get new customers with something else than marketing - so to speak.

Actually anything n > 0 will mean you get customers by more than just marketing by definition. n > 1 for a static n is exponential growth.

Edit - though under 1 you can see a limit. For example, if n = 0.5 then you would expect to grow to twice the size. In reality it's much more complicated, but on a purely mathematical basis this should be right.

N is literally the percentage of your steady state customer base that comes from referral.

So it's the divisor on your marketing expenditure for any given customer quantity.

N > 1 never reaches a steady state, those are "viral" businesses.

It's not either-or, advertising and virality (what you're calling "n", and the cool kids in the back of the room call "k") go hand-in hand.

K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life. (Apparently, anyhow - I've never experienced it.)

K < 1 is still extremely useful - think of it as a marketing amplifier. So if you're paying $10 per click on Google Adwords, an your conversion rate is 2% for those clicks, you're paying $500 for one customer.

Implement some application flows that incentivize referrals, get that k to, say, 0.25, and now that $500 is getting you 1.25 customers - and your cost per customer has dropped to $400. That allows you to outbid your competitors for those adwords. (Except of course that they're also focussing on virality.)

K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life.

Im not entirely sure this is that rare. Lets think of it like this: whatever gives you new customers is part of what I call currently your "ad surface" or "marketing surface". If a customer brings you another customer, it's just because that guy is marketing too - obviously. So everything that gives you customers is marketing. But of course, thousands and thousands of customers are so big of a surface that they dwarf any given techcrunch articles (most likely). My point is coming.

Now let's say one of your customer write about your product in his blog. Maybe that gonna brings you, say, 25 customers. Another make a youtube video that makes 500K views. Better than that, techcrunch hears about your product and write about it spontaneously. As we can see, those are indirect marketing surfaces and they can get very big.

Now, let's talk video games, about some niche type of games, for example, roguelikes. Roguelikes arent played by many people and yet some of them are well known from roguelikes players. Ex: DoomRL. And this is my point, it seems not plausible to me that DoomRL got his users and his niche-fame from N < 1. It didnt get niche-famous by direct customer-to-customer referrals either because if you play rogueslikes, it's unlikely your friends does too. Yet DoomRL is famous. So DoomRL had N >= 1 at some point in time and not by direct customer-to-customer referrals.

The way I'm seeing it now is that, most of the time you are in N < 1 land, but occasionally you hit some special customers that completely change the average toward N >= 1. And it happens more than one think - it's counter-intuitive in some ways. Also, at some point, your product is famous, and then customer-to-customer referrals (of type b. see edit of original post) can get big.

Which means, strategically, you need to get day-to-day-N as big as possible obviously, and you need faith: you gonna hit those special customers occasionally that gonna critically change N upward. That's my current understanding. It's getting better I think :)

I think I got it now. There is a hierarchy of opinion leaders, and hitting that hierarchy is what brings N dramatically up. And this also brings customer-to-customer referrals up again because, say, most of your friends use the product now.

Is this for the company Binomial, mentioned on the author's home page?


Could totally relate to author's personal experience because this is what my biz partner and I are going through right now. Great article by the author.

Am I the only one getting a blank page on Firefox, Chromium and Opera included the google cache and archive.org versions ?

> legal fees

What is this referring to exactly? Administration fees for starting a company?

Legal help in drafting contracts with customers, license agreements for the product etc.

Sounds like LLC formation fees, yeah.

It might also include fees for accounting work etc. which could possibly be considered a legal fee

I was fortunate to see the author speak at a conference not too long ago, I really enjoyed it. Like her, I have had several bad experiences at tech companies and would just like to not ever work in one again. So I am very envious of her story and it's really cool to see how it has worked out for her and partner. (Unlike her, I don't really have contacts and I don't think I would be very good at the sales side of being a contractor.) Anyway, very inspiring stuff!

Yeah, I agree!

I like the people I'm working with, am paid well, have a good work environment and have interesting work to do, but for some reason I'm not happy and feel on the verge of burnout (if it hadn't happened already). I've done startups in the not too distant past and while they were a lot more stressful (and paid very little - we had some funding and had revenues but we never broke even), I was definitely happier working in my own thing. My problem is similar to yours. My personal network is good for changing jobs, but I have no idea how to make it work for consulting work or a startup and I'm really terrible at networking and find it difficult to talk to people (or at least, I find it difficult to strike up conversations - after that I'm not too bad). I also feel like my skills aren't very useful broadly speaking. Maybe it's imposter syndrome because I am good at my day to day work (which can be quite complex).

I enjoyed the article though. It gives me hope that perhaps I can push myself and improve to the point where I can make something work. The thought of going out selling is a scary one to me though.

I stopped reading after the "lol". I tend to do not get advice from lols lmaos & company...

That might be a decent quality filter if you're reading comments on YouTube or Disqus, but you shouldn't apply it to articles on the front page of Hacker News.

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