Ask HN: Is frugality underrated in startups?
I feel frugality is one of the most important points for startups and entrepreneur. I'm curious to hear more from you guys regarding this, as what's your take on frugality and any other need/must to have qualities to be a successful entrepreneur?
198 comments
[ 3.3 ms ] story [ 65.2 ms ] threadIf you are a VC-funded growth company, trading money for time is often one of the smartest decisions you can make.
It’s the old saying: penny-wise, pound-foolish.
Growing your team is going to add an incredible amount of friction in terms of increased demands on collaboration and communication, and I've worked for many startups that have assumed that the processes that worked well for them as a 10-person startup would continue to function at 100 people. What nearly always ends up happening is that everything grinds to a halt, and often the company ends up moving slower than they did when they were much smaller.
That doesn't mean that you shouldn't grow, but you should be careful about it. Some absolute key things to internalize before you grow your team substantially:
- Everyone can't have input into every decision anymore. You're going to have to compartmentalize, and trust that product is going to build the right products, and marketing is going to launch the right campaigns. This is doubly true if you're a founder or CEO - your team can scale, but you can't, and at some point you can't be the final say on every little decision anymore.
- You need to be thoughtful and deliberate about how departments and teams communicate - "just bug someone in the department on Slack" isn't going to cut it anymore after a certain point.
- Whether you want to or not, you're buying into a lot of more traditional roles in a company that you probably thought you were too cool / modern for as a tiny startup. A 100 person company without HR isn't hip and modern, it's a massive risk.
There's obviously no one way to success in entrepreneurship. If times are lean and you have no easy access to money, sure, being frugal is phenomenal. If you're a 40 year old PM at Facebook thinking of doing your own thing? Pay to delegate every single thing you can. All in all, play to your strengths.
I know Bezos' perspective was that the door desks were a way of creating the culture he wanted in the company both for employees and for investors. A desk from Costco would probably cost $400 to $2000 whereas the cost of what you need for the materials for a door desk from Homedepot is $50 to $75. Having put together some furniture from Costco, I'd guess that the time spent creating a door desk is probably less than the setup time for a Costco desk. Folding tables might be another option in the same price point / setup time as the door desk.
If you look at some startups, it seems like they're simultaneously frugal and not frugal. E.g. early Google 1999 paid for meals cooked by a chef and onsite massage therapists even though they had no revenue and profit until 2002 -- but on the other hand -- they were very frugal with spending the least amount of money for computer parts[1] and datacenter rack leases.
Likewise, Amazon was famous for being cheap by having employees make desks out of doors but they were bold in spending money on acquisitions that were strategic to their goals or taking expensive risks on Prime's "free shipping" getting abused by customers.
The way to reconcile the inconsistency is that being frugal can't be applied in every area of the company.
So maybe a more realistic tactic for a new YC company is ... it's ok to splurge $5000 on an automatic cappuccino machine in the office for employee well-being, but at the same time, be ultra frugal in AWS costs and analyze the line items like a hawk to make sure the developers are not leaving up idle EC2 instances and wasting money.
[1] https://commons.wikimedia.org/wiki/File:Google%E2%80%99s_Fir...
Sure it’s great that you’re saving money somewhere, but you’re still handing the limited runway money hand over fist for unnecessary luxury, no matter how much you save on the little details. If you were actually frugal, you could have much better service without having to worry about each line item as much.
Penny-pinching AWS cost makes sense if and only if you want to pay a team which has "responsively manage compute resources" as 1 of 3 ongoing focus areas.
Though yes EC2 is not the cheapest but if you're using "only that" (or maybe S3/R53, etc) and being cheap I can accept you're being frugal.
Frugality =/= cheap. Frugality is about spending wisely; getting good value.
This is such a stupid idea. At some point it would make sense to start making your own optimally designed desks.
Didn't this bite them too, via a lack of ECC and associated software development costs? Meanwhile, Amazon used off-the-shelf expensive Sun/HP machines for many tasks.
In my other life when on job interviews sometimes they would describe various perks (free food, drinks, twice a year retreat, pool tables, Friday night outings etc. etc. ) as an advantage of working for their company.
Maybe I am weird but my internal thoughts were - can I just have it in cash and I'll find my own ways to organize my life. Do not need any help in this department.
Think about it like this: "employer-mandated fun creates opportunities for me to expand my network and connections which help me make more money. As an added bonus, I might as well enjoy it."
Erm, so we're mandating what people should do now? Yours seems to be a rather black/white view of such events, when (since it involves humans) it's on a spectrum:
There are people who do not want to spend their time with their work colleagues.
There are people who do not want to be forced to spend with their work colleagues.
There are people who dislike that unless you spend time with their work colleagues in corporate sponsored events you will be sidelines.
And that's assuming that the corporate event is good at all. Which, quite frankly, most aren't.
I am just a guy on the internet but I've been around the block so I share what I truly believe is the best advice.
>> unless you spend time with their work colleagues in corporate sponsored events you will be sidelines.
That's a naïve view. People don't sit in a conference room saying "ftoscano didn't come to the bar last night, let's ostracize him" - it's just that the more opportunities to bond with your team that you pass up, the worse your communication with them is (compared to what it could have been if you invested in it) which legitimately makes you less impactful at work.
>> And that's assuming that the corporate event is good at all. Which, quite frankly, most aren't.
Debatable but not the point. The point is that these things already exist and they are opportunities for you to build up your career (and maybe even allow yourself to have fun.) You can chose to hate it and not participate but like I said, that's strictly worse for you so why adopt that attitude?
If every potential detractor involved just says to themselves "this is what everyone else likes, so I'll fix my attitude and head to the bar", you can end up with several of them contorting to fit in, and then you're just cargo culting a good culture instead of really having one.
If you see $5 laying on the ground, it's better for you to pick it up. That's different than saying we must structure society in a way that people are relying on finding money on the ground (which is where you are taking it.)
It's OBVIOUSLY possible to have teams and employees that operate fine without these experiences. My point is that these experiences are just opportunities to make it better (like picking up the $5) so why wouldn't one try to be the kind of person who is happy to pick up the $5 rather than someone who grumbles about it?
Sure, it's good to find and pick up $5 on the street, but in this case it will inevitably lead to a place where people have to rely on finding money on the ground.
What wasn't fun was the month of extreme anxiety (I have social anxiety) and sleepless nights that led up to it. Up to the moment of departure I fantasised about "accidentally" oversleeping and missing the coach.
It's pretty hard to assess (at least for me) whether the upside (fun) was outweighed by the downsides (prolonged feelings of anxiety). In all honesty, I bonded more with colleagues on typical Friday nights at the pub (yeah alcohol, but plenty didn't drink).
In my life, I found that "diving into" the anxiety repeatedly helps prove to me (both logically and emotionally) that it's actually fine and reduces anxiety over time. So for me, the experience you describe is valuable because it contributes to overall "liberation" but it may not be that way for everyone.
How is it for you?
G-d forbid! Conformity is the worst thing ever. I am probably more in favor of that view that anyone else. My appreciation for weird people is extremely high.
I am approaching this from a different angle - from the individual's point of view. As an individual, you "should" want to be as capable and versatile as possible. The version of you which is capable of enjoying socialization with your coworkers is strictly more flexible that the version of you that fears it. It doesn't take away your option to go home and do introverted activity when you want to.
I have infinite examples of this in my life. Just a quick one - I grew up extremely introverted and shielded from human interaction, spent much of my (especially) highschool and college years behind the computer. This was very helpful to me developing great technical and developer skills.
Fast forward many years, I had the opportunity to go to business school. One of the most painful parts of b-school for me initially was the happy hour. I didn't know how to small talk or just hang out and "be." It was rough and I hated it. But over the course of the years, I got used to it, relaxed about it, and found myself enjoying it. It's one of the things that enabled me over time to move to product management - the realization that I went from someone ill at ease speaking with new people to someone who doesn't think twice about it.
Did I "conform" or lose a part of myself? No, I am currently hiding out on the balcony learning React and playing with Serverless while my wife is hanging out with the baby. I am choosing right now to spend my time not much different than how I spent it in high school, and I am loving that. The point is though if I had a social family or work obligation to go to in the evening, I wouldn't lose my shit about it anymore - I'd get dressed, go, enjoy it, and possibly get the networking/wife brownie points out of the experience. It's a strictly better way to be than dreading/avoiding it.
PS: thank you for your comment, it made me reflect on what I am trying to convey and, hopefully, convey it more clearly in this response.
These things have the benefit of enabling you to get to know your colleagues, establish networks, break down communication blocks, etc. In other words, in addition to being fun, they also benefit you as an employee and the company overall.
That's why the companies spend money on it and in my experience they get return on it.
Hope this helps.
Frankly simple work related interaction were more than enough for me to "get to know". If both parties felt interested enough we'll hook up out of work. At least that was my experience.
As many of the comments (correctly IMO) point out, VC-backed start-ups trade money to compress timelines: for example, hire in two weeks what a non-VC might be able to hire across two years. When you have VC funding and more of it is available, it is in your interest to leverage that money as efficiently as possible to make the case for growth and further investment. Frugality can further hurt you if you are in a VC-fueled industry race because you’ll be outspent and outbuilt by your VC-fueled competition, and it will be harder for you to raise $.
That said, if you’re a regular entrepreneur or business owner, the script is flipped. You are always working within the constraints of profitability and (assuming no major investments are made in you), access to capital is difficult and expensive - debt and credit financing can only grow as a function of revenue and needs to be paid back (whereas VCs give you ‘free’ money, free-as-in-equity). Given that, if you make a dumb financial decision it makes more of an impact on your business. While you still want to go in on big (validated) bets, in general it makes sense to err on the side of frugality and spend less than you bring in.
The problem is that regular entrepreneurs and business owners still must share the market with venture backed startups. You're always one pivot away from some hotshot startup or bigcorp going to war to take away your marketshare by forcing you to address that "the market can remain irrational longer than you can remain solvent" -- in order to compete with VC-backed startups, you need /more/ than just frugality. You need actually better execution -- execution which more effectively serves market demand than your competitors.
I used to be a lot more bullish about this before 2020's interest rate drop and subsequent declining bond yields, and the insane injection of capital into the markets. But now, I'm not so sure. Investors are reaching quite a bit further than I originally had expected in order to seek yield.
1. They are spending money foolishly to get things that will not actually help them achieve thier priorities in their context.
2. You misunderstand their context or priorities and for them to follow your advice would be penny-wise and pound-foolish.
Monetary Frugality can waste time, trust, team performance, or all three.
The countability of money creates a special case of the https://en.wikipedia.org/wiki/Streetlight_effect.
Frugality can mean being penny wise pound foolish. Not buying tools people need, building things when you could buy them, and settling for less. It's hard to evaluate people on frugality without it being about cheapness. I would argue buying top of the line monitors, software, computers and chairs for your engineers is the frugal choice with the best mid and long term value for your money, but will it look like that to others? Likewise I've seen cultures where the CTO had to approve buying a $50 replacement laptop charger - that's just a waste of time.
That said, leadership should be very deliberate in how money is spent. Taken too far, you can end up with a bunch of high cost low value tools. For example many times I've seen AWS bills where a few weeks of work means millions in savings per year, or tools that cost $10s of thousands per month but are only used by 1-2 people. And that adds up.
To give a couple of examples. The office was kitted out with poor monitors - cheapest Dell sold. Some people bought their own but most people were fine with them - they're just monitors and they're 'fine'. Then a small group were rewarded with 'premium monitors' as a prize for some internal competition - and this did cause annoyance, as it recognized that the company knew it was being cheap.
Second example. "We're getting new chairs!" Supplier dropped off half-a-dozen different models for us to try out and then we collectively chose our favourite. Except we couldn't have it, as it was too expensive, and we got the "second choice". Now that second choice was amazing compared to what they were replacing. An office full of premium ergonomic chairs cost the company a small fortune - but decision was tainted with cheapness. We weren't worth the chair we'd chosen. If they'd just pulled the chairs they couldn't afford from the competition, it would have cost the same and made us happy.
That just seems like a very poorly executed trial. Clearly the company should have decided on its price limit up front and brought in chairs that conformed. It's not even really unreasonable to decide that the price of Mirra 2s (which are perfectly good chairs) is fine but Aerons is not. But, in that case, don't bring in Aerons for people to try.
Not to say that frivolity is good and frugality is always bad. But it shouldn’t be an obsession.
As an employee I would much rather work for a company with soaring revenues than one with quickly decreasing costs :)
Cost and revenue are not related like that. You're thinking of profit margin, but even then it's not that simple. Most expenses can be written off, but profits are taxed. Revenue can be increased by spending, by adding features that increase demand, or just by plain advertising. You can have high profit margins but low profits due to low revenue, all because you cut spending.
Moreover, for a new company, being profitable is far less important than (an expectation of) growth. A mostly unprofitable company like Tesla has incredibly high expectations of the future already priced in.
There was a post on HN recently about a SAAS that listed out all of the SAAS products they were using, and for a team of 5 they were purchasing g suite, an email productivity "enhancer" to avoid conversations moving to slack, and a meeting scheduling tool, for 10% of their revenue (something like $150/month). Being frugal would likely have cost them less than percentage points of productivity, and increased their runway.
The cost of a kubernetes cluster while working on an MVP is not a unit cost. It's a development cost. If they don't even have the MVP yet, then I don't think it's fair to say they're going to pay a multiple of that kubernetes cost for every sale - I could be wrong of course, the details matter.
Your second example to me seems more clearly totally fine. Those costs scale with the number of employees, not with the number of sales. If their sales scale linearly with their number of employees, they are totally screwed under the VC funding model. As somebody upthread said, frugality is important for traditional businesses, but not so much for software-y startups.
$150/month is peanuts for their runway almost certainly, too. Think about it this way: even at a meager $50k/employee/year, their costs are 99.3% in the employees, and 0.7% in those software products. Or think of it this way - $10k will cover the $150/month for over 5 years, which is a really long time.
Love this.
The one caveat though, and why it's important to keep costs low (maybe wait until after you sell the startup), is because when you are profitable, then you are in control of your time and get to set your own schedule. Or, in the form of the above quote: your revenue can go up to infinity but your time left is capped at 100.
This presupposes that you can get to high marketshare profitability while keeping costs low. That's not always realistic. A more growth-minded competitor can push you out of the market entirely by willing to execute where you won't.
It hadn't yet crystalized in my mind but to clarify my advice is keep your personal cost of living low as a rule of thumb. Optimize for free time over more money.
For business, spending money is essential. Ideally try to spend other people's money.
Counter-example that springs to mind is AvE's Juicero teardown - https://www.youtube.com/watch?v=_Cp-BGQfpHQ&ab_channel=AvE
Their product was lavishly over-engineered and beautifully made at vast expense - they were never going to make their costs back however over-priced their fruit-pods were. The more customers they got, the more it was going to cost. Frankly didn't make any difference if the Juicero staff were getting free meals or not (or had their salaries halved) - the lack of frugality at the core of their business doomed them.
You can't architect a complex application stack with a couple of interns and a newbie developer with no oversight. We'd pay below-market salaries for senior engineers and architects, because "a programmer is a programmer", and we'd lose them.
We'd refuse to pay $150 to have our DevOps guy get his AWS certification because "he may get a better job and leave"... which he eventually did anyway.
Yet the same company was burning $4,000 a month on AWS services that were severely under-utilized, because the DevOps guy left and no one knew how to optimize our AWS usage.
None of these products eventually succeeded. One of the two companies above shut down years ago after a multi-year schedule slip that resulted in the private equity funding drying up. The last time I looked, the other company has been struggling with cash flow problems for the better part of a decade, barely making ends meet, slashing salaries and jobs several times, pushing the better devs to greener pastures.
A few other companies I worked for had sound leadership and a clear vision. Not being a unicorn or a FAANG means we paid above market average salaries and empowered our engineers to make decisions (and mistakes!) to retain great talent and build cool stuff, which we shipped and sold. We invested in growing our people while keeping other overheads (such as unused conference rooms, wasteful pantry supplies, AWS expenses, etc.) low.
Frugality is being cheap just for the sake of not spending money. Most startups on the other hand have more incentives in maximizing their spend towards increasing and retaining their current and future cash-flow.
If we combine that with network effects, your cash-flow is technically growing relative to the exponential growth of your network / userbase / community.
Related post: https://wallstreetplayboys.com/become-a-minimalist-dont-be-f...
For example: 1) no free lunches or snacks (though there was always lots of free food around from leftover meetings with customers); 2) "swag" for employees once per year, one item, thoughtfully chosen and good quality. This resulted in everyone getting really EXCITED about it and rallying around it; 3) a Bevi machine (effectively a bubble water fountain) instead of coolers of free drinks.
By way of analogy, consider a household that is really frugal and doesn't spend most of the money the could spend. If that is part of a goal to put their kids through college with no debt, save up to buy a business, pay off debt, etc. then there is a plan. If they are just stuffing money away into a mattress it isn't quite the same.
For instance, when you are buying equipment, you don't buy the cheap stuff just because it's cheap. You buy the best stuff the first time, because you will usually save money over the long run. If you bought the cheap stuff first, and it didn't work or didn't last, but then bought the best stuff later, now you paid extra and wound up at the same place.
This doesn't apply to everything, though. The boss I had who operated this way strictly decided he didn't want the $80 video card in his computer, he wanted a $200 one (which back then was like buying a GeForce 3070 just to run spreadsheet applications on a single monitor).
Cue: Sam Vimes's "Boots" theory:
"The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness."
If it's heavily financed in a winner takes all environment where growth is the only metric that matters frugality is not required.
If it's boot strapped (no investment) and/or the product/market fit is not yet established then frugality is required.
I've only ever started businesses that are bootstrapped. It requires a huge amount of patience!
The graveyard of dead startups is littered with stillborn corpses as a result of founders who focused on frugality to feel productive rather than engaging in the necessary user research and product experimentation to validate product-market fit. If nobody wants to buy the thing you made, it doesn't matter how cheap you can make it. You won't survive long term.
What separates successful people and companies from the rest is "investing in the right stuff and ignoring the rest."
Your whole success depends on your ability to identify that which gets the bulk of your resources and that which gets nothing.
Money is extremely cheap and easy right now.