Top Ways Startups Waste Money

I'll say this, if you want to get really good at firing vendors, hiring a PR agency is a great way to get your feet wet, right? Because I don't know anyone that's ever hired a PR agency that hasn't fired PR agencies. Hello, this is Michael with Harge & Brad. Welcome to Inside the Group Partner Lounge. So as Y Company, the group partners, we find ourselves repeating the same often seemingly obvious advice to startups many, many times. Before COVID, we would gather together in the group partner lounge at the YC office to try to figure out why this was the case and how we could help startups figure it out faster. Today, we're going to talk about the top things early stage founders waste money on. Brad, why don't you set this one up? So I love this topic because it's tricky. In the next few minutes, we're going to talk about exactly what you said, Michael, the top things early stage founders waste money on. But in my experience, even though we're going to list this stuff out and we're going to tell you why you're wasting your money on it, founders are still going to go and do this stuff. Everyone makes these mistakes the first time. And no matter what we say, maybe we'll be able to change half of these things for you. And that would be a huge win. But just about everyone still gives it a try and spends money on these things. And so it's a funny topic because we know what you're going to do, listeners out there. But we're going to do our best to try to explain why you're wasting your money on this stuff and equity sometimes, too. Yeah, I don't know a single founder who looks back at their startup expenses for the first year and can't think of a good chunk of it they could have trimmed. Literally, Justin and I in the early days of Twitch had this on a whiteboard and we would list the money we've wasted. And the problem, speaking of advisors, is that I once paid an advisor in equity. And so I won this game because that equity ended up being worth a fucking ton of money. Like Brad said, maybe if we can get these lists halfway to where we got these lists when we were doing our companies, you will benefit. So let's start with the simple thing. What are the lies you can tell yourself? The first lies are always around hiring. Who wants to take this one on? Why will hiring not help me succeed early days? Yeah, we've talked about why hiring in general doesn't mean you move faster. But I think there are specific types of hiring that companies and founders are going to waste money on. I'll start with one, and I know that I was super tempted by this as well. It's when you finally convince someone who's working at a big fan company and is on a big fat salary to join your startup. And they're super qualified. And you're like, oh, man, this is a dream hire. It's going to be awesome when I tell everyone that I hired this Google engineer or something. The only catch is they're making a million dollars a year between salary and equity at Google. And so they kind of need me to give them close to that in order to join. And that's just always a mistake. Have you guys experienced that? Yeah, 100%. I think part of this undergirding the hiring waste of money fallacy is the psychology of it is tricky. I think it's really hard to not think that somewhere out there, there's someone that can come in and make a huge leap forward in your productivity and fix all these problems that you have. There's actually a name for this. It's called Sebastianism. If you look, there's a Portuguese myth that the King Sebastian will return after being lost in battle hundreds of years ago to save and solve all the problems in the country. And this is the same thinking the startups have. Somewhere out there, there's this mythical FANG engineer or FANG salesperson that's going to come and make everything work. Yeah, the thing that frustrates me about it the most is that FANG companies are huge now. And so the workflow, the decision-making, the tools, the support that a FANG engineer has, needless to say, they have none of that when they come to your startup. And so you might be seeing someone who's extremely talented, but extremely talented in that system. And they might not be able to bring the same level of productivity while they certainly are bringing the same level of cost. So that seems like a killer, a killer one-two punch. But what about contractors? All these people are expensive. But if I just have an army of contractors, I can get so much done and pay rock-bottom prices. I think every one of us has a story of either working with a company or from our own startups where we tried to replace one person with five contractors. And it just doesn't go well, right? There's something about not having skin in the game. There's something about not having taken the time to get caught up with the system. Just having a different set of incentives and an agenda from you, just bringing out a bunch of contractors isn't going to do it either. Yeah, the way I see this come up with founders, it always almost starts as like, hey, we know that we need to build an iPhone app and we're going to hire a contractor. We know we have to eventually just bring this in-house, but we haven't got any time to lose. So they always think of it as a band-aid. But then the problem is you never rip the band-aid off. It's always more pain to go out and find a great person to join your team and do the work versus just to keep paying this person in cash, even though they're crazy expensive on a per-hour basis and they're not really part of the company. Also, sometimes I feel as though people don't understand that they might have to learn something new when doing their startup. Maybe you need to learn how to build an iOS app. There was a day not too long ago when no one had iOS experience. And if you wanted to build an iOS app, you had to learn. So many of our early office hours are people asking us, who's going to do X? And we say, well, you. You're doing it. That's the game. What game did you think you were playing? No, but I'm running the company, Brad. I don't have time to do the work and run the company. So that's hiring. The next biggest place where people throw away money is marketing. It's like a one-two punch between hiring and marketing. You can really spend every dollar you've raised. What do you all think about marketing spend? So this is a subject near and dear to my heart as someone that ran an ad tech company where it was literally my job to go around and get people to give me $10,000 test budgets. The reality is that it's really dangerous because the potential scale that you can get from advertising on Facebook and Google, et cetera, is massive. Everyone's on there. You can potentially get millions of customers, thousands of users, all this stuff from spending on these platforms. However, you're not going to learn very much while you do this. And they will gladly take infinite dollars. There's no limit to how much you could spend on ads. And so it's very tempting. The salespeople at those companies are incredible at their jobs. The materials are amazing. The UIs make you feel really smart when you figure stuff out. But you're not going to learn that much from just plowing a bunch of money into ads early on into your company. Yeah, I can speak to this. So with TripleByte when I started off, we ramped up to a pretty big ad budget. We were bumping up against almost a million bucks a month on just Facebook ads. And here's what's crazy about it. It was actually, for a long, long time, profitable for us. The ads actually paid for themselves. And the way it started was exactly what Brad was saying. So hey, I just want to learn some messaging. We're going to run some Facebook ads so we can try out different copy and words and all those kinds of things. It's just a tiny budget just to learn. And then some of the ads start working. We're like, hmm, damn, I think we might come under our growth numbers next month. All right, let's just a little bit more. We'll just ramp up the ad spend a little bit. And then you're like, but we can't get dependent on ads. We've got to grow. We can't grow just by ads. But you get towards the end of the month. You're not growing. And you're like, hmm, maybe if I just spend another 10% on ads. And that kept going for about three years. And what ended up happening is sooner or later, you hit a point where the ads are no longer profitable. And sometimes, honestly, that can hit you all at once. And then we were like, oh, damn, ads is declining. It's almost all of our growth. And then we went through a painful process of we're going to have to cut the ad budget and figure out ways to grow. And it ended up, we launched a new product that now drives our growth and has driven the acquisition cost down to close to zero. But we should have done that in year two, not year six. And if it weren't for ads, we would have done it. We wouldn't have had another choice. Yeah. Yeah, ads are too often used as a substitute for building. And if you're not building stuff, then you're not creating value. Anything else in the marketing area that people throw money away on? I think there's a broad bucket of stuff that's hard to track. Things like events and sponsorships, like brand advertising. And I think those things are really tempting because you can almost always think of an example of another startup that succeeded by spending money on those sorts of things. And you can cargo cult it a little bit. You're like, oh, yeah, like, you know, like, I should just do the same thing. Like, blah, blah, blah, company is like, I don't know. You're like, oh, like Twilio's got like this massive developer conference. Salesforce has like, you know, like SalesCon, whatever that Dreamforce. Like, like, I want to be as big as Salesforce. I should spend on like a giant conference. And again, it's like the classic like pre-product market versus post-product market fit thing, right? Like dropping a lot of money on a huge event once you already have a brand, maybe. But like, it's not going to create a brand for you. Yeah, there are a lot of fun stories from YC companies where they would basically go to an event and either do a stunt or really work the room and get 10 times more value than the person who had the booth or who like sponsored the thing or did the talk in some side room that cost $20,000 and no one attended. Like, I really wish people would approach events like a startup founder, like a scrappy startup founder would. Was it WePay with the block of ice at the PayPal conference? Yes, yes, yes, yes. Yeah. So I always love that story. I'm going to totally butcher it here, but there was some PayPal conference and WePay didn't want to spend money marketing at this conference. And so they made a huge block of ice with, I think, money frozen inside of it and dumped it out in front of the conference because PayPal freezes your funds and everyone was talking about it. That was smart. Yeah, we had another one where the conference had entered out all the hotel rooms. So a founder snuck into the hotel and just slipped flyers under everyone's door. And if they had paid to have their flyer in the bag, it would have cost $100,000 or something. There's another one where somebody created like, they figured out how to work with the hotel separately for almost no money to create a little place where people could do phone calls. And then it was like, oh, you need a quiet place to do phone calls. You can come here. And because they weren't going through the conference, they didn't pay stupid amounts of money for some big sponsorship. And then they got to talk to everyone. You could do a phone call and it was like all their customers. So there's so many ways to hack these things. So that's marketing. You know, what about PR? I don't know any reporters. How am I supposed to get press without paying a PR agency, right? Like, guys, this is like obvious, you know, like, of course, you have to do this. This is the one, folks listening at home. You're going to do this. We're going to tell you not to, but you're going to do this. You know, the typical founder does not have like a media background and a ton of friends that work at publications. The media industry is very mysterious. It seems out of reach. A lot of founders are all fueled up on having read a ton of startup media. And so these bylines and the people on Twitter with the big audiences, it all seems very distant. And so it's so tempting when someone comes along and says, well, I'm actually friends with these people. And if you pay me a $10,000 a month retainer, I'll get your stories in front of me. And it's so tempting. And, you know, I did it with my startup in the ad industry. I thought, oh, I don't know these like little ad tech blogs and stuff. And we paid these guys in New York that knew all these folks. And, you know, they'd get us some little ad, some media placements in these blogs. But at the end of the day, it's kind of your job to build those relationships. And you can do it. Guess what? The journalists, they want to get to know you. If you're building something awesome, they want to have a direct relationship with you so they can get scoops about what you're doing and report the latest. They don't want intermediaries there. Yeah. So I spent years at YC the first time by telling startups not to spend money, not to waste money on PR agencies. And then with Triple Buy, when we closed our series B, I was like, man, I really want some great press for this B. And I was like, you know, I know that I've just told about 100 founders not to do PR agencies, but I'm going to be different. Like, I'm going to be able to actually make this work. Think different, Harj. Think different. I was like, think different. Think PR agency. I spent like, I don't know, I put like 50k or something stupid on like this fancy San Francisco PR agency. Right. And I meet with like someone important at the PR agency. They make me feel really special. Really awesome. Really special, right? And then two weeks before we were scheduled to launch and announce the series B, I check it on my head. I said, you know, how are we going? What are we like, New York Times interviewing yet? And they like, they're like, oh, yeah, hang on. We're just going to send you like the concept pitch or something. It was a document that like, it was clear they didn't even understand what Triple Buy did. Like, I like, I was like, so like, I dug into it. It was a bunch of like, they just handed off to a bunch of junior people who I'd never met, who had just Googled our company and put together a pitch talk that no one had responded to. So I had to like fire this agency and then spend like the week before we'd announced that we were like doing our series B announcement, calling a whole bunch of journalists myself. And I end up getting a much better, like, launch press or announcement press than like this fancy PR agency I'd ever done. It was such a waste of money. I'll say this. If you want to get really good at firing vendors, hiring a PR agency is a great way to get your feet wet, right? Because I don't know anyone that's ever hired a PR agency that hasn't fired PR agencies. We hit the exact same thing. And the only mistake we made was we bought it with some equity. So we basically paid for our person with some equity. And that was such a bad, such a bad thing. So PR agencies, we all agree, definitely the best way to spend money. Just check. Your first dollar. Yes. Let's talk about lawyers next. So I remember I spent $50,000 with my law firm within the first month because I thought that it would be interesting to try to customize our employment agreements because, hey, we're signing these employment agreements with these new employees. And I want to get in there. This is where I'm adding value, right? I'm going to go kind of do this. And just like the PR agency, I was attached to some literally first year in the law firm, just graduated from law school lawyer. And he just billed me at $500 an hour. And he learned about all the employment stuff too. And we learned together. Only I paid for that learning. And at some point, I forgot who set me aside and was like, Michael, this is not where innovation is happening. And if you have to innovate on the employment contract for employees, you probably don't have a company. But unfortunately, I'd spent a ton of money. And then I would say that the other thing that people kept on telling me that I didn't understand was that you need to be able to get your lawyers to spec their work before they do it. Hey, I need an incorporation. How much is that going to cost, right? And if the lawyer basically says, oh, I don't know. Every incorporation is different. That's kind of not true in most cases. There are edge cases. But in most cases, if a lawyer can't tell you approximately how much something costs, that probably means they haven't done it a lot of times. And that's a bad sign. Like, you want lawyers who've done it so many times that they can actually be very upfront with you. I think the other trick with lawyers that I learned, a lot of people said, oh, I negotiate my legal bills and I get them to take things off my legal bills. I think it's really hard. I once had a lawyer who was like, so you don't want to pay me for my work. Because like, tell me which of these hours I didn't work and I'm happy to remove it from the bill. And I was like, fuck, you got me there. You've lured me. But what a lot of large law firms are willing to do is give you what's called a payment plan. And I fucking love payment plans. So it's like, oh, we just did a financing and we did a series A and it cost $50,000. You don't have to pay the $50,000 right away. Oftentimes, if you work with an established large law firm, you can spread that payment out over 12 months, interest free. It's basically like getting a free loan. And so a lot of times we would use that because legal fees can be spiky. A lot of times we would use that trick to kind of smooth out legal fees, extend our runways, so on and so forth. So I think the thing with lawyers, you know, the big trick is don't customize shit that you shouldn't be customizing. Get quotes, get specs, figure out how much you're going to spend before you spend it, not afterwards. And if you get big bills, you can always spread them out with payment plans to kind of help you through the way. Any other tips on interacting with the lawyers you guys have come across to not waste all your money? Yeah, I just if you're doing something weird with lawyers, it should literally be the focus of your startup. That's like the only time it's a good idea. And if that's not the focus of your startup, like the weird thing that you're talking to your lawyers about, then you probably shouldn't be doing it. Pick firms that work with startups. You know, I mean, a big optimization is just the firms. I think like this is one thing that's cool about Silicon Valley firms is they're not perfect, but they kind of they want to play the long term game, right? They're not trying to like squeeze you on the easy stuff because they're hoping that one day you're going to go public and they'll make lots of fees on you at the IPO. And like that works for your own startup. So kind of don't don't go with sort of weird like funds that work with lawyers that work with like private equity funds or something. And to Harjit's point, the largest ones are usually the most willing to do payment plans and things like that because they take that long view. All right. The last area where people spend money and this money tends to be bad if you're successful because it's almost always equity, but sometimes it's cash. It's advisors. We've all seen pitches where someone's like, hey, and let me introduce you to my board of advisors like we need advisors. Investors don't invest in companies without advisors or like this advisor can help me get in here, can help me do that, or it's going to do one call with me a month and it's going to change my life. What have you all seen on the advisor front? And when have you seen the advisor make the difference? I'm curious if you've seen if you've ever seen the advice, the paid compensated advisor make the difference. Well, the short answer is no. What I see is a lot of times YC founders come in under considerable stress and agony almost because there's some person that they really respect or admire or they've long wanted a relationship with or they feel some sort of obligation to for some reason they've helped them in the past. And they're basically saying, all right, now's the time you're in YC or whatever. You're doing a startup. You got to give me 3% of this company or something like that. And it's a real bummer. And so a lot of my advisory discussions with founders are about trying to help them like chill out and understand, A, they don't have to do anything. And then to your question, Michael, pointing out that I've never heard of a startup that is successful. Oh, we sold the company. We went public, whatever. You know, it was that advisor. That's what did the thing. That's how we got product market fit. That one advisor made the difference. It's just I've never heard that before. Advice definitely makes a difference, right? Like getting advice from people definitely makes a difference. But almost always the advice comes from someone who isn't a specialist advisor. It's like someone who's like an investor in your company. It's someone who just like it's someone who you were introduced to as a domain expert who just gave you the advice for free. Like I got lots of valuable advice on like building a company from various people, like executives at other companies. And like they always just volunteered it for free. Like I never had to give them equity. They just wanted to help out. And I think people don't know about that. Like if you're in that this ecosystem, there's a whole bunch of people who try to monetize startups by trying to sell them advice or try to collect percentages. But the people who are really successful, like they just don't have the time for that bullet. Like, Harjit, even if those people who did a call with you wanted to charge you, like the amount of time it would take them to figure that out and then track that equity over time. Send you an invoice. For some startup that's going to make no money. It's like, no, no, it's easier for me to give this away for free. So, yeah, the advisor thing, it's also tricky kind of your point, Brad, in the kind of bio hard tech, you know, we see a lot with folks coming out of universities where like they'll have some professor who wants 20, 30, 40 percent of their company, but like the professor is not going to be working full time. That's another one where like you'd be shocked at how often we tell the founder they can push back. And the founder goes to that professor and the professor goes from like 30 percent to 1 percent. And we're like, bam, YC just paid for itself right there. That one phone call and founders just don't know that they can do it. Like it's pretty simple. The other move is and this happened to me with my startup. I came into YC and I had these five people that all wanted to be advisors. They wanted equity. I didn't know what to do. I was worried about this. And I did an office hour with PB and he said, ask them to invest instead. And four of them did. Problem solved. Now you're a shareholder. Yeah, they gave me money. That's a neat trick. I love that trick. It seems quite possibly the best trick in the world for advisors. Instead of me paying you, why don't you pay me and then be incentivized to give me advice because we both own equity in this company. So I want to play the devil's advocate here. We talked about all of these things you shouldn't spend money on, but we all know that large, successful companies spend money on all of this stuff. How should I think about this? It's so often the case that when I'm a pre-product market fit company, people are yelling at me where to not spend money, but I see everyone around spending money on this stuff. So how should I think about this? When should I spend money on hiring? Quick answer is once you have product market fit and you have the customers that are trying to rip the product out of your hands and you know what you're building and you've got a product out there that's making money and it's growing, that's when companies spend money on this stuff. And the problems we run into are people who are not in that place, but still they have the money and so they're spending it on this stuff. Yeah, I think there's a general mindset you should have as a founder, which is like you need to earn the right to spend the money. And the way you earn that is by being creative and figuring out what's the low cost or no cost way of me testing this out. What's the cheapest way for me to test out if a human doing sales calls works? What's the cheapest way for me to test out if an Android app is going to be a good idea or not? I mean, almost always the answer at first is you do it yourself. But there's always a creative solution and that's what you have to do early on. And then once you found that and once it's got some signs of promise, then you kind of have the right to spend money on it and try and scale it. Yeah, I always think about this like when we were coming up, it was a bit of a simpler time just because the average startup had less money. And so it was a lot easier to say, I can't spend money on this because I can't afford it. I would love to spend more money on these things. I just literally can't afford it. I think one of the tricky things in the last four or five years is that we see a lot of founders who are basically starting a square one with a couple million dollars. They can afford all these things. They can buy all these things and still have money to spend. And so they need another kind of mechanism to figure out whether it makes sense. And I love the do it yourself. I also love the idea that like, man, if you don't even at least try to do it yourself, how can you hire someone to do it? Like you have no contest. You're in no way an authority to hire someone if you haven't tried it yourself. So I think that's a huge one. All right. So in summary, we just told you a whole bunch of ways that you're going to waste money. As Brad mentioned in the beginning, if we only prevented you from wasting half of this money, this video is extremely valuable and we're patting ourselves on the back. Let's hope that that was the case. And when you're post-product market fit and you raise that big round, go nuts. You can take all that pent up energy of not spending on these things. You can spend money then and realize how much of these things are still kind of a waste even post-product market fit. The pre-product market fit, stay disciplined, let's say. Don't spend money on anything. All right, guys. Great to see you. Thanks.