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 why come native 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 gonna list this stuff out and we're going to tell you why you're wasting your money on it uh Founders are still

going to go and do this stuff everyone makes these mistakes the first time and no matter what we say like 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 gonna 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 and the early days of twitch had this on a whiteboard and we would list the money we've wasted and 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 our companies you you will you will benefit so let's always let's start with the simple thing what are the lies you can tell yourself I think the first lies are always around hiring he wants to take this one on like why will hiring not help me succeed early days yeah we've we've talked about why hiring in general doesn't mean you move faster but I think there's specific types of hiring that companies and Founders are going are going to waste money on um I'll start with one one that

I I know that I was super tempted by this as well it's like it's when you finally convince someone who's uh working at like a big fan company and is on a big fat salary to join your startup um and they're super qualified and you're like oh man this is a dream higher it's going to be awesome when I tell everyone that I hire this like Google engineer or something like only catches like you know they're making like a million dollars a year between like salary and Equity at Google and so they kind of need

me to give them like close to that in order to join right like um and that's just always a mistake like have you guys experienced that or talked to Founders who are like desperate to hire the like Fang engineer who needs a giant salary yeah 100 um I I think um part of this undergirding the the hiring waste waste of money you fallacy is the the psychology of it is tricky every I think it's really hard to not think that somewhere out there there's someone that can come in and make a huge uh 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 there's a Portuguese myth that uh 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 that somewhere out there there's this mythical Fang engineer or or Fang sales person that's going to come and make everything work yeah the thing that frustrates me about it the most is that thing companies

are huge now and so the workflow the decision making the tools the support that a Fang engineer has um needless to say they have none of that uh 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 um so that seems like a killer a killer one-two punch but 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 every one 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 uh it just it just doesn't go well right there's something about not having skin in the game there's something about you know not not having um taken the time to get caught up with the system um just having a different set of incentives and an agenda from

you um 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 so it always almost starts as like hey we know that I mean we need to build a iPhone app and like you know we we're going to hire a contract and we know we have to eventually just like bring this in-house but like we like we haven't got any time to lose so they always think of it as a Band-Aid and then the problem is like you never rip the Band-Aid

off like 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 like a per hour basis and they're not really like 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 you you maybe you need to learn how to build an IOS app like 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 like who's gonna do X and we say well you you're doing it that's the game what what game did you think you were playing no but I'm running the company Brad I don't I don't have time to do the work and run the company so those are 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 a ad tech company where it was literally my job to go around and get people to give me ten thousand dollar test budgets um the reality is that it's really dangerous because the the potential scale that you can get from advertising on Facebook and Google Etc is massive right there's everyone's on there you can potentially get millions of customers thousands of users all this stuff from spending on these

platforms um however you're not going to learn very much while you do this and they will gladly take infinite dollars right there's like no limit to how much you could spend on ads and and so uh it's very tempting um there's the sales people at those companies are incredible at their jobs the materials are amazing the uis make you feel really smart when you figure stuff out um but uh you're not going to learn that much from just plowing a bunch of money into ads early on into your company yeah I I can speak to

this so with triple byte where I start up like we ramped up to a pretty big ad budget like we were bumping up against almost like a million bucks a month on just Facebook ads and like well here's what's crazy about it like it was actually for a long long time like 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 like I just want to learn some messaging like we're going to run some Facebook ads so we can try

out like some talk like different crew like copy and words and all those guys they've just it's just like tiny budget like just to learn and then like some of the ads start working right like like you know like damn I think we might come under our growth numbers next month like all right let's just like let's let's a little bit more just like we'll just ramp up the ad spin 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 like spend another 10 on ads like and that that kept going for about three years all right um and like and what ended up happening is sooner or later you hit a point where like the ads are no longer profitable and sometimes honestly I can hit you like all at once and then we were like oh damn like ads is declining it's like like almost all of our growth and then we went through like

a painful process of 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 um and if it weren't for ads we would have done because we wouldn't have had another choice yeah yeah ads are too often used as a substitute for building um and if you're not building

stuff then you're not 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 um 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 you know 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 sales force has like you know like sales coin or whatever that dream Force like like I want to be as big as Salesforce I should spend on like a giant conference um 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 twenty thousand dollars and no one attended like I I I really wish people would approach events like a startup founder like a scrappy startup founder what was it we pay with the block of ice at the PayPal conference yes yes yes yes yes yes so

I always love that story I'm gonna totally butcher it here but there was some PayPal conference and we paid 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 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 um 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 um so that's marketing um 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 um you know

the typical founder does not have like a media background and a ton of friends that work at Publications um 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 and 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 like little ad Tech blogs and stuff and we paid these guys in New York uh that 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 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 would triple by it when we close our series B I was like man I really want some great press for this being uh and I was like you know I know that I've just told about a hundred Founders not

to do PI agencies but I'm the Excel 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 like 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 the like the like some someone important 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 my hey so I let you know how are we going what are we doing new New York Times interviewing yet um and they like they're like oh yeah hang on we're just going to send you like the concept pitch or some something it was a document that like it was clear they didn't even understand what triple bite did like I like I like I was like so like I dug into it it was a bunch of like Jude 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 ended up getting a much better like um launch press or announcement press than like this fancy PR agency I 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 and the only mistake we made was we 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 oh so PR agencies were all agree 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 um 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 um 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 like 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 um 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 um 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 um 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 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 [ __ ] you got me there you've 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 and so um 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 and so forth so I think the thing with lawyers you know the big trick is don't customize [ __ ] that you shouldn't be customizing um get quotes get um 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 on interacting with the lawyers you guys that 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 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 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 advantage as a startup so kind of don't don't go with sort of weird like you know funds that work with lawyers that work with like private Equity Funds or something and to hard just point the largest ones are usually the most willing to do payment plans and things like that because they dig 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 um we've all seen pitches where someone's like hey and let me introduce you to my board of advisors like we need advisors that 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 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 advise the paid compensated advisor make the difference well the short answer is no um what 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 NYC 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 uh a lot of my advisor advisory discussions with Founders are about trying to help them like 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 that's what did the thing that's

how we got product Market fit that one advisor made the difference um 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 like it's someone who's like an investor in your company it's someone who just like is someone who introduced to as a domain expert who just gave you the advice for free like um 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 bull like hard 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 the advisor thing it's it's also tricky kind of your point Brad in the kind of um 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 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 to one percent and we're like bam YC just paid for itself right there like that one phone call um and and Founders just don't know that they can do it like it's 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 I'm when I'm a pre-product market fit company people are yelling at me where to not spend money but I but I see everyone around spending money on this stuff so how should I think about this like when should I spend money on on hiring quick answer is once you have product Market fit and

you have 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 that's when companies spend money on this stuff and the the 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 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 uh 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 um and then once you 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 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 you know we see a lot of Founders who are basically starting a 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 you have no contests 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 a huge one all right so in summary we just told you a whole bunch of ways that you're gonna 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 and we're patting ourselves in the back um let's hope that that was the case and

when your 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 uh disciplined let's say don't spend money on anything all right guys great to see you thanks [Music]