Frugality is a virtue

By October 15, 2015Uncategorized

Sam Altman of YC posted a long tweetstorm yesterday on the theme of frugality in startups. In short he thinks it’s a virtue we’re in danger of losing. That’s more true in the US than over here where there’s still less money in the market, but it’s a point worth repeating.

 

The positives of frugality are that working with the constraint of limited capital forces creativity and sets the culture right for the long term. Investors love companies that have achieved a lot with a little.

The negative of anti-frugality (if that’s a word) is that even with the best of intentions it can quickly lead to premature scaling, which is one of the biggest causes of startup failure. I like to describe premature scaling as growing functions before they are working. The result is that the inevitable mistakes are more costly and slower to fix. The classic version of this mistake is launching in multiple geographies before the first one is working well enough and repeating mistakes simultaneously in more than one place. Another is growing the team quickly when the jobs that need doing are still evolving rapidly.

The challenge, of course, is balancing ambition and a desire for rapid progress with prudence. For every business at every phase there is an optimum speed. The trick is to find the optimum, and not just go all out.

For most businesses that optimum speed should be at least partially independent of the amount of money that can be raised (assuming sufficient capital is available). Doubling the amount of cash in the bank doesn’t mean the company should grow twice as fast. It’s rare that doing twice as much of anything results in twice as much output – doubling marketing spend won’t double sales, doubling the tech team won’t halve development times etc. Rather, growing fast requires experimentation and experiments take time.

I agree that if investors are offering money it generally makes sense to take it rather than risk not being able to raise cash when you need it. The trade off (and there is a trade off for everything) is that it takes extra discipline to remain frugal. Best to go into this trade off with eyes open.

Key tweets from Sam’s tweetstorm below.

  • Rmicals

    Certainly a US problem and not a UK problem as you mention. I think in the US there is a certain Fear of being left out (FOBLO) by startups solving similar problems. Reality is it can be a disadvantage if your competitor just raised a large one ahead of you and even if you are a great team your ability to raise capital can make or break you. I think in the beginning you have to be incredibly frugal and resourceful but then a time comes when you have to lay your chips on the table. When that time comes its important that you don’t be frugal.

  • exitcreative

    This is great stuff. Easy for me to say as a founder of a small services firm, but we started with $25k. (Also, I think you’re looking for _profligacy_ as your anti-frugality phrase at the top.)