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. [Music]

Hello, this is Michael with Hodge and Brad. Welcome to Inside the Group Partner Lounge. So as Y Combinator 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 we 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 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 ton of money. So like Brad said, maybe if we can get these lists halfway to where we got these lists when we were doing our founder companies, you will benefit.

So, let's always start with the simple thing: what are the lies you can tell yourself? I think the first lies are always around hiring. Who wants to take this one on? Like, why will hiring not help me succeed in the 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 that I know I was super tempted by as well. It's like when you finally convince someone who's working at a big Fang company and is on a big fat salary to join your startup. 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." Only catch is—they're making like a million dollars a year between salary and equity at Google. So they kind of need me to give them like close to that in order to join. And that's just always a mistake. Have you guys experienced that or talked to founders who are desperate to hire the Fang engineer who needs a giant salary?

Yeah, 100%. I think part of this undergirding the hiring waste, the waste of money fallacy, is the psychology of it. It's 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 that startups have: that 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, and 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 one-two punch.

But what about contractors? Like, 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. You know, I think everyone of us has a story of either working with a company or our own 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 is it always almost starts as, "Hey, we know that we need to build an iPhone app and 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. And 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 like 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. Like, 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 were people asking us, "Like, who's gonna 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 those are 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?

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 ten-thousand-dollar test budgets. The reality is that it's really dangerous because the potential scale that you can get from advertising on Facebook and Google, etc., is massive, right? 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. They will gladly take infinite dollars, right? There's like 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, where I’m a startup, we ramped up to a pretty big ad budget. We were bumping up against almost like a million bucks a month on just Facebook ads. And here's what's crazy about it: like, it was actually for a long, long time profitable for us. Like, the ads actually paid for themselves. And like the way it started was exactly what Brad was saying. So, hey, we're like, "I just want to learn some messaging. Like, we're going to run some Facebook ads so we can try out different copy and words." And all those guys have just, it's just like tiny budget, like just to learn. And then like some of the ads start working, right? And you’re like, "Damn, I think we might come under our growth numbers next month." You're like, "Alright, let’s just a little bit more; we’ll just ramp up the ad spend a little bit." Right? And then you're like, "But we know we can't get dependent on that, so we've got to grow. We can't grow just like ads." But like you get towards the end of the month, you're not growing, and you're like, "Maybe if I just spend another ten on ads." Like, that kept going for about three years. Alright? And-like what ended up happening is sooner or later, you hit a point where like the ads are no longer profitable. Sometimes, honestly, it can hit you all at once. And then we were like, "Oh, damn, like ads are declining." It’s like almost all of our growth. And then we went through a painful process of like, "We're going to have to like cut the ad budget and figure out ways to grow." And like, it ended up, like we launched a new product that now drives our growth and has like driven the acquisition cost like down to close to zero. But like we should have done that in like year two, not year six. Like, if it weren't for ads, we wouldn't have done anything, because we wouldn't have had another choice.

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, you know, 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 a little bit. You're like, "Oh yeah, like I should just do the same thing. Like blah blah blah company is like how. It's like I know you're like, uh, like Twilio’s got like this massive developer conference. Salesforce has like, you know, like Dreamforce or whatever. I want to be as big as Salesforce; I should spend on like a giant conference." And again, it's like the classic pre-product-market versus post-product-market fit thing, right? 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 ten times more value than the person who had the booth or who sponsored the thing or did a talk in some side room that cost twenty thousand dollars.

I really wish people would approach events like a startup founder, like a scrappy startup founder.

What was it? We paid with the block of ice at the PayPal conference?

Yes, yes, yes, yes! So I always love that story. I'm going to totally butcher it here, but there was some PayPal conference, and we 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 rented out all the hotel rooms, so a founder snuck into the hotel and just slipped flyers under everyone's door. And like, if they had paid to have their flyer in the like a bag, it would have cost, you know, hundred thousand dollars or something. There's another one where somebody created like, um, like—uh, 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 like 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. I need to 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 pressed 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 gonna do this. We're gonna tell you not to, but you're gonna 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 I know them. If you pay me a ten-thousand-dollar-a-month retainer, I'll get your stories in front of them." And it's so tempting. And you know, I did it with my startup in the ad industry. I felt I don't know these 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 any mediaries there.

Yeah, so I spent years at YC the first time like telling startups not to spend money—not to waste money on PR agencies and then with Triplebyte when we closed our Series B, I was like, "Man, I really want some great press for this being." And I was like, "You know, I know that I've just told about a hundred founders not to do PR agencies, but I'm the exception. I'm gonna be different. Like, I'm gonna, I'm gonna be able to like actually make this work." So like different times I spent, I don't know, for like a 50k retainer, something stupid on like this fancy San Francisco PR agency, right? And I meet with like some important person at the PR agency—they made me feel really special. I'm like, "Oh, it's really awesome, really special." Right? And then two weeks before we were scheduled to launch, um, announce the Series B, I check in on them. I'm like, "Hey, so, I let you know how are we going? What are we doing? New York Times interviewing yet?"

And 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 Triplebyte did. Like, I dug into it. It was a bunch of like—dude, 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 doc 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 doing our Series B announcement calling a whole bunch of journalists myself. And I ended up getting a much better launch press or announcement press than like this fancy PR agency would have 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 thing.

Oh, so PR agencies? We're all in agreement—definitely the best way to spend money. Just yes, first dollar. Let's talk about lawyers next.

So I remember I spent fifty thousand dollars 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 like I want to get in there. I want to, you know, 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 five hundred dollars an hour, and he learned about all the employment stuff too and we learned together. Only I paid for that learning. 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 quite understand was that you need to be able to get your lawyers to spec their work before they do it. "Hey, like, 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 con, 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—tell me which of these hours I didn't work, and I'm happy to remove it from the bill." And I was like, "F*ck, 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 love payment plans. So it's like, "Oh, we just did a financing and we did a Series A, and it cost fifty thousand dollars. You don't have to pay the fifty thousand dollars right away." Oftentimes, if you work with an established large law firm, you can spread that payment out over 12 months, interest-free—basically like getting a free loan.

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, and so forth. So I think the thing with lawyers, you know the big trick: 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, 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.

Pig farms that work with startups here, I mean a big optimization is just the firms. I think like this is one thing that's cool about Silicon Valley firms—they're not perfect, but they kind of want to play the long-term game. Right? They're not trying to 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 in your advantage as a startup. So kind of don't go with sort of weird, you know, funds that work with lawyers that work with private equity funds or something.

And to add just pointed—the largest ones are usually the most willing to do payment plans and things like that because they dig that long view.

Alright, 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—is advisors. We've all seen pitches where someone's like, "Hey, and let me introduce you to my board of advisors. We need advisors; investors don't invest in companies without advisors." Or like, "This advisor can help me get in here or 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 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, "Alright, now's the time. You're in YC or whatever, you're doing a startup, you got to give me three percent of this company or something like that." And it just, it's a real bummer. And so a lot of my advisory discussions with founders are about trying to help them chill out and understand, "Hey, 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—that said, "You know, it was that advisor that—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, yeah, definitely makes a difference. But almost always, the advice comes from someone who isn't a specialist advisor. Like it's someone who's like an investor in your company; it's someone who just like is someone who introduced you 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 this ecosystem, there's a whole bunch of people who try to monetize startups by trying to sell them advice or trying to collect percentages. But the people who are really successful—like, they just don't have the time for that bullshit.

Like 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 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 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 to 1 percent. And we're like, "Bam! YC just paid for itself right there." Like 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, and 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."

Yeah, that's a big one. 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's, it seems quite possibly the best trick in the world for advisors, right? 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, right? 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? You know, 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?

You know, 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 they still 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 kind of need to like earn the right to spend the money. And the way you earn that is by being creative in figuring out like what’s the like low-cost or no-cost way of me testing this out? What's like the cheapest way for me to test out if like a human doing sales calls works? Like, what's the cheapest way for me to test out if like an Android app is going to be a good idea or not? Right? I mean, and like almost always the answer at first is like, you do it yourself. But like, there's always a creative solution. That's what you have to do early on.

And then once you've found that and once it's got some signs of promise, then you kind of have earned 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." Like, screw 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 at square one with a couple million dollars. They can afford all these things—like 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 context. It’s like 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.

Alright, 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 could take all that pent-up energy of not spending on these things. You can spend money then and realize how much these things are still kind of a waste even post-product-market fit. But pre-product-market fit, stay disciplined, let’s say. Don't spend money on anything.

Alright guys, great to see you, thanks! [Music]