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Ask PG: Correlation between frugality and startup success?
48 points by hooande on May 14, 2008 | hide | past | favorite | 30 comments
Have you seen any relationship between the amount of money a YCombinator company spends over the summer/winter and their eventual success?

I would guess that it's bad for a startup to blow through their investment money, but how big of a factor is day to day frugality for a startup?

Good question. There is a huge correlation. People who are cheap are much more likely to succeed. And not just because their money lasts longer; a frugal attitude seems to correlate with success.

I definitely agree that a frugal attitude is essential for success. But I'm reminded of a great article on "I Will Teach You To Be Rich" called Cheap vs. Frugal.


Being cheap means spending as little money as possible often ignoring quality and efficiency. Now frugal, might not necessarily be the cheapest but it is the best value.

From the article above:

"Cheap people think short term. Frugal people think long term."

Any thoughts on why this is? My first thought is those that are frugal understand the long-term consequences of their decisions, understand the fragility of their position and are otherwise more measured decision makers. All qualities which I think translate well to running a successful business.

Frugality is just a basic life skill. It serves you well in anything.

However, I'm beginning to notice now that our customer base has grown and our revenues have doubled a couple of times over since our time in YC that what used to seem extravagant (paying people to do things for us) is now becoming the smartest way to make problems go away. I just paid Google $500 yesterday to handle search on our site, because it is a problem that has effected me on a couple of occasions, and I decided that even one more day of me fighting with full text search in MySQL and PHP (which is not a comfortable language for me to work in, as I use Perl mostly) was one day too many--the opportunity cost was just too high, when that one day spent talking to customers could close a deal worth many times the $500/year that I pay for Google Custom Search.

But, that's frugality of another kind (one that considers the value of both time and money), of course, so it doesn't invalidate the idea that frugality is pretty much always a net win. I just thought it worth mentioning since I've seen plenty of entrepreneurs take frugality too far. Colocating their own box instead of renting a server in order to save $10/month, for example...if you have a single hardware problem during the 18-36 months that the server is in service you end up with a raw deal (because you either have to go to the colo and deal with it, or hire the colo service folks at $100/hour to deal with it). If it's not the focus of your business, try to find someone else who does have that as their focus to do it for you. Work on your differentiating factors, not the day-to-day crap that every business has to have.

That's a very good example of what frugality is. A lot of people seem to equate "frugal" and "cheap" which is wrong; fragality is only spending money when you need to. Or in your case, you determined that the cost of spending $500 for a Google custom search was worth less money than the time you yourself were putting into doing it yourself.

Supporting your comment, I've heard the phrase "many people spend a lot of time to save a little money and some people spend a lot of money to save a little time."

How many lawyers/doctors/executives do you know who do handyman work? It is just so much more cost effective to pay someone to fix this or change the oil so that the person can get another billable hour or another patient or another business deal or address client/customer needs? So I won't quite call it frugality, but more efficiency. The question becomes "are you efficient with your money and time?"

That's also a good point. I think there's a disconnect there in a lot of cases, several of them being former employers of mine.

I think the ones who stray from "frugal" to "cheap" are failing to consider the value of what they're spending their money on, and rather focussing on the number of dollars that are leaving their account.

I that the more money you have the more you think about how to spend them. If you don't have a lot of money you don't have these options.

It takes a lot of discipline to raise a lot of money but still keep the same amount of speed/focus as you did before you raised the money.

Crystal Towers is definitely an outlier...

crystal towers actually isn't that expensive. I'd say its pretty price competitive for the area (North Beach). YC startups actually probably bumped up the price by filling the place up (and the latecomers had to pay more)

I got this quote last December, for anyone curious. Price has probably gone up by now.

>One bedroom units here are priced from $2500 to $3000. Two bedroom units are priced from $2550 to $3300.

You're right, it's definitely not too bad if you have three or four people in a two bedroom. And it's also furnished and on a 3 month lease.

Crystal Towers is one of the worst deals in SF. The only thing it has going for it is 3 month leases. For the same price, you can get a similar corporate housing vibe, but in a new building, if you look near the Caltrain station. If you are really into the George Jefferson retro hi-rise aesthetic, there are plenty of places around Japantown that are $700-$1200 cheaper for the same square footage.

Um, near caltrain would be SOMA where rents for a comprable place to CT are at least the same if not more. CT is also far from a corporate housing vibe, you pay for the view and the location (North Beach). Calling it one of the worst deals in SF is just flat out false. Check craigslist for housing in North Beach, its all in the same price range.

That is good to hear, because I am very frugal.

Maybe this is because excessive spending is caused by not thinking carefully and precisely about all the factors relevant to the startup, whereas frugality comes from trying to maximize everything to one's benefit. So even if the actual money savings doesn't make a huge difference, it's a visible indicator of doing the right kinds of things.

That is definitely a large part of it. When Greg Mcadoo from Sequoia spoke at YC this winter, he said he'd also noticed that frugal startups did better. When I asked him why, he said probably because frugality was an instance of focus, and that focus is the key to success in a startup. Overspending = spending on inessential things, which in turn implies you don't understand what's essential.

For the same reason, it's bad when founders can't explain what they're doing concisely.

I've think there are a couple of hidden factors which help explain the correlation between frugality and startup success - economic intuition, and the sense of entitlement.

Many startup founders don't have good economic intuition, and this expresses itself both in a lack of frugality, and an inability to come up with a realistic business model. In other words, similar skills and experience are needed to answer both these questions:

1. How long do we need our investment money to last, and what is the best way of spending it over that time?

2. What kind of products will people will pay for, and how much will they be willing to pay?

So you'll often see a startup which is spending money unnecessarily, and also finding it impossible to bring enough in.

On the second point, some startup founders have a sense of 'entitlement'. By this I mean a belief that the world owes them a good life without them having to earn it. Perhaps this is because investment is too easy to come by in the current environment.

Instead of feeling a heavy sense of responsibility and guardianship over their investors' money, and focusing on providing a return, these founders think they've been given a free ticket to go pursue their dreams. This will express itself both in a lack of frugality regarding money, and also an unwillingness to put in the long hours necessary to make their startup succeed.

Frugality is useful, but so many people who are tight with money tend to underestimate the cost of time. Or the cost of friendship when you refuse to pay your share. Or the cost of a bad impression when your clothes look old.

Be careful with money, but be careful to also spend money.

like anything else, it's a matter of balance. i used to be a hardcore bootstrapper and would pride myself on getting something to market on a $x,000 budget, or saving a few bucks on an SSL certificate, laptop, office space, tax deductions, etc. but the result is i'd waste a lot of time and emotional energy on shit that didn't really matter to our core business.

but there are two things to remember:

- your time is a lot more valuable than you think (as others have pointed out)

- often money, wisely allocated, (i.e. hiring a couple engineers or investing in a good work environment, not all-around extravagant spending) can help you get to market and achieve your goals faster

and since speed is a startup's only real advantage, this is often the difference between a 1 or 0 outcome.

As a startup, the more you constrain your target audience, how feature-heavy your product is, and how much money you spend building it, the more likely you are to find a market you can succeed in -- or fail quickly. Both are positive outcomes.

But, you have to value your time properly. Otherwise your perception of being frugal is really just an accounting error.

Our competitors outspend us by orders of magnitude. But we've been frugal and focused. So while they're worried about raising their series X and lining up an exit, we're worried about serving our customers better and how to spend our profits. I wouldn't want to switch places.

Yeah, they didn't once ask us where we spent the money. I think the assumption is "food, rent and hosting".

How does this work come tax time? From my understanding, you can only write off hosting, half of food (sometimes) and maybe a part of rent. How did you guys deal with this?

I don't know that we're representative, but, so far, I mostly just wave my hands around and go, "This sucks." And then leave it for later (meaning we haven't been doing much with write-offs or expenses on our tax filings). Pretty much all of my bookkeeping to date has been of the form "put it in a folder for when we hire a bookkeeper". Luckily, this will be the year in which we hire a bookkeeper, and I won't have to think about it too much any more, and I most likely won't end up in jail for not reporting things correctly or on time (fingers crossed).

on a failed startup of mine, i redid my taxes 3 years after i closed the company. i received $25k as a refund, and it cost me $4k for the accounting. good accounting is WORTH IT. had i used that firm in the first place i might have saved an additional $50k and spent $4k on fiscal advice. Since i self funded i did a lot of stupid things when it came to managing cash flow and spending personally for my company. also for being able to better leverage credit vs opportunity cost on selling stocks and paying employees, i could have much better used my available margin trading ability that had an interest cost of only 5%, and with some stocks, waiting till the fiscal reports would have been worth 20%, which would have kept me in the black personally, vs. having a burn rate.

oh the things i would do differently, and well, the things i am doing differently with social helix.

Frugality makes you creative. If you think you have abundant resources then you will always throw money at the problem. Whereas if you feel your resources are limited then it will force you to come up with creative solutions to make the most out of what you have.

As long as you're not being "penny wise and dollar foolish", you're better off. If you loose time/friendships/customers/reputation (as others have mentioned) by saving money, you might be being dollar foolish.

Definitely good to hear. I am very frugal too. One of my blog postings on the topic: http://buzzpal.wordpress.com/2008/02/17/bootstrap-then-raise...

YC is frugal with their investments - they give companies just enough to survive, which motivates the founders to be as frugal as possible.

when the investment is micro (10-15k) I suspect (as said in their documents) that Ycombinator doesn't even keep track of where the money goes.

YC doesn't keep track of anything, except the people involved (and even that is optional).

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