Why Being Broke Is A Founder’s Greatest Asset

Posted on Oct 23, 2012 - 3:13 PM PST

I asked Nick O’Neil, a past interviewee, to write about one of the big observations he made while listening to Mixergy interviews. Nick is the creator of AllFacebook, a blog that covered all issues pertaining to Facebook including new applications, general news, and analysis about the future of Facebook. You should follow him on Twitter.

Enter Nick

You would think wealthy founders would be far more effective entrepreneurs than those without access to capital, but as one recent Mixergy interview highlights, the exact opposite is true.  In fact, scrappiness is a key characteristic of successful entrepreneurs (as seen on Mixergy time and time again).  So what’s the scrappiest group of founders?  Those with little or no money.

This group proves it’s creativity over and over. In her recent interview with Andrew, Erica Douglass discusses how through collecting used servers (aka. picking up someone else’s garbage) and posting links on slashdot and in IRC chat rooms, she was able to get her hosting business off the ground. Since she couldn’t pay her bills with savings, she lived off PHP development gigs found through Craigslist and ran her hosting company on the side.

This is the epitome of scrappiness. When Erica ended up selling the business for more than $1.1 million, it illustrated that ingenuity and creativity pays off. If you’re a regular Mixergy reader, this type of story isn’t new to you though. There are hundreds of other interviews on Mixergy with bootstrap founders, including myself.

Yet when you read about the countless startups receiving funding, it’s easy to be deceived. Life must be easier there, right? Not necessarily. I see apps regularly that launch, get a ton of hype, don’t even work, and fizzle out. Some of the founders of such companies can be found vacationing on exotic islands around the globe thanks to their comfortable savings account.

Yes, there are whiz kid entrepreneurs who crank out their startups at young ages (like Gurbaksh Chahal and Christian Owens), yet there is double the number of entrepreneurs over 50 than those under 25. The point: most entrepreneurs aren’t building businesses the way you would think if you were reading Techcrunch and the rest of the tech press on a daily basis.

Most startups aren’t venture funded, and most need to become profitable quickly in order to support the founder(s). In other words, most founders are hungry (literally) and have nothing else to lose.

What do you think?

What are some of your favorite stories of how being scrappy paid off? Please share in the comments!

  • http://mixergy.com Andrew Warner

    When I Bradford & Reed, having no money drove me. It kept me working when I was tired and forced me to keep working when I doubted myself. And it brought out creative solutions (like returning my J Crew clothes so I could use the refund to grow my business).

    Then, when I launched V1 of Mixergy, I had money so I didn’t think clearly. I didn’t validate my ideas. Etc.

  • http://www.highballblog.com/ Constantin Gabor

    It’s amazing what you can do without cash! With cash…well, any stupid can spend it.

  • http://www.myjobsit.com/ Mike Kawula

    Great point and agree mostly. The growth in our company came with our own money. I do always wonder if we’d grown faster or could grow faster if we did accept investors for building sales teams and other marketing activities we don’t currently do that require larger monetary commitments.

  • iaindooley

    One of the biggest ways my attitude to business has changed in the past 2 years (since, coincidentally, I started listening to Mixergy as if it were a bodily function) is to see VC, or any other source of capital as a tool, rather than a goal.

    In the comments on a blog post he wrote recently that was posted on HN[1] Jason Cohen writes:

    “A better question is what the money is for. If the company could stop all marketing and on-boarding spend and be profitable, then you can easily argue that the funding is for growing something that is profitable, but where we want to get larger in exchange for money now.”

    It seems like one circumstance funding is a huge asset is when you’ve figured out how to print money, ie. you’ve got a reliable and profitable lead acquisition channel, you know your conversion rates, your lifetime customer value etc. and you can effectively say “if we spend 10 times the amount on marketing that we do now, we’ll make 100 times more money”.

    This ties in with the perspective from one of my favourite business books “Ready, Fire, Aim!” by Michael Masterson where he says in the first section (the book is divided up roughly into 3 sections: 0 – $1,000,000, 1 – 10, 10 – 100) that the primary goal of any entrepreneurial business (he avoids the word startup) is to figure out how to sell their product profitably, and do so.

    Taking VC *before* you have figured that out seems, historically, to be a path to Acqui-hisition (haha does that work? Maybe Acquihizzle). You either strike it lucky and get fucking massive within 2 years, or you get a job at Google (leading me towards the somewhat pessimistic view that the entire VC industry is nothing more than a glorified Human Resources outfit, a view point somewhat reinforced by the fact that YC will now accept founders not only without a business, but without an *idea*!!).

    [1]http://blog.asmartbear.com/unsustainable-companies.html

  • iaindooley

    “This time around, I have money so I’m going to do it RIGHT!!” <— I've heard this a few times before, sound about right?

    As you know I'm (severely) bootstrapped, not very profitable and all round a bit of a failure (other than the fact that I manage to live in a really nice part of the world and work on my own terms :) but I *have* been involved in a really well funded startup before.

    It was funded by an independently wealthy businessman and I was brought in as a technical cofounder. I thought "this is it! this is the one!", but because he already had a successful business elsewhere, it was really clear to see that he was treating the new business as "too big". We had fixed costs of $10,000 a month before we'd even made a cent. It was crippling.

    I think we ended up spending close to a million before it was eventually sold off for whatever he could get.

    This roughly parallels your own experience (and, as I recall it, Nick's in building Holler) – once you *have* that money you make the mistake of thinking that just having money in a business automatically makes more money. It's so easy to overlook the fact that if the fundamental goal of the business (to take a product and sell it profitably) is missing, everything else is a facade that will eventually crumble.

  • http://www.nickoneill.com/ Nick O’Neill

    Thanks for the note Mike. I think you organically grow and then if you’d like to inject capital you can use that to expand. But using excess capital to get the company out the door doesn’t seem to work very well from what I’ve seen.

  • http://www.nickoneill.com/ Nick O’Neill

    “This time around, I have money so I’m going to do it RIGHT!!”

    I think you’ve nailed it. And yes, I’ve had a similar experience :)

  • http://www.facebook.com/people/Hanna-Aase/787535586 Hanna Aase

    This pretty much sums up the last 6 months of my life. Thanks!

  • http://www.myjobsit.com/ Mike Kawula

    Thanks Nick – Great Advice. Love your post by the way of your discussion with Andrew and finding the pain: http://nickoneill.com/find-the-pain/

  • http://runnersconnect.net/ Jeff Gaudette

    Here’s my quick story. Take it with a grain of salt because I haven’t made it yet…

    Because I started with $0 in the bank (actually, it was negative because I had school loans and cc’rd debt) I couldn’t hire someone to create or design a website for me. So, I had to learn how to do it myself.

    While I was lucky that WordPress existed, I’d never heard of css or php. It took me a lot of extra hours to learn how to do things that would have been a quick, 15 minute task for someone else. However, I can now design landing pages pretty quickly, fix my website if I want to add or remove something, and for things I don’t know how to do, I can more accurately vet potential candidates on Odesk and similar sites.

    If I would have had money, I wouldn’t know how to do the simplest fixes on my website and would have a harder time communicating with developers.

  • http://www.nickoneill.com/ Nick O’Neill

    Thanks for sharing Jeff! I went through the same process about 13 years ago. I had a friend who was going to build a website for me using PHP. He didn’t finish the job so I spent countless hours learning to code. Just like you it took me a week for what would otherwise be a 15 minute task … but now I can code. A lot of the people I now know who hire developers for their products wish they had learned to code. Great job!

  • http://mixergy.com Andrew Warner

    I keep seeing the creativity of bootstrappers here.

  • http://mixergy.com Andrew Warner

    That ability is priceless.

  • http://mixergy.com Andrew Warner

    Which part?

  • Martin S.

    Interesting. If money wasn’t a positive factor, do you think there’s anything else that would’ve helped you build/grow B&R or V1? Connections, people to delegate to, guidance, anything?

  • http://mixergy.com Andrew Warner

    Michael & I used to talk about making B&R into a machine where we’d put in quarters and get dollar bills on the other side.

    We did that by paying affiliates 25 per lead and working like mad to find advertisers who paid a buck a lead. (The egreeting card business was just machine that took quarters and turned them into dollars.)

  • http://www.ShizzleDizzleMagic.com Matthew Jones

    You know, as someone who has to bootstrap I really agree with this. One thing I’ve learned is to avoid throwing money at other people to solve your problems. Do it yourself. Not only will it cost less, but often times your own solution is better than what you’d pay for…

  • http://www.nickoneill.com/ Nick O’Neill

    Someone on HackerNews made me realize there should be a distinction between “broke” and “almost broke”. I’ve been in both circumstances. “Broke” was me firing a friend because I literally had no more money. “Almost broke” was an incentive to come up with a business model quickly. For the purpose of this article I was referring to those who are “almost broke”.

  • http://www.nickoneill.com/ Nick O’Neill

    I don’t think doing it yourself is always the best way. I’ve made this mistake as well. However coming up with scrappy ways of getting the project done is always valuable (even if that includes doing a lot of things yourself). I think there are ways to get others to help you out as well without a huge budget.

  • iaindooley

    I think the deliniation is processes and automation. You lose money when you outsource your risk (or, ironically, you increase your risk).

    What I mean is this: entrepreneurs love a low, fixed price quote on an end-to-end job. No vendor who knows what they’re doing would provide one, therefore a lot of entrepreneurs get stung on projects that end up in production hell, never getting delivered or getting something so terrible delivered it’s not worth the hard drive bits it’s stored on.

    However, if you have a process, or documentation, and you assume the risk when outsourcing something (ie. pay an hourly rate for someone to follow a 20 step process to manage some aspect of your business), *then* you save money by having someone else do it and valuing your time properly.

    It’s rare that you can cost effectively outsource a bespoke task or job in it’s entirety at a price that will save you money without a high degree of risk that the thing just won’t get done at all (I say bespoke because naturally if you find a vendor that has figured out a way to scale just the task you need through a product or productised service you can often get something done at a fraction of the cost and time it would take you to do it, OR to outsource it to someone else).

  • http://basus.me/ Shrutarshi Basu

    That’s an interesting point you make, but as you say, there are examples and anecdotes on both sides. I’d like to see some actual studies and hard evidence to back up your claim.

  • Manhattan Perry

    It’s called the power of limits. It applies to art and commerce (sometimes)

  • http://twitter.com/infocaptor Disruptive Dashboard

    It is like evolution in a way. Throw a fish out of water, some die and some by their sheer will power turn their fins into legs and evolve into something that is able to survive without water.

  • Richard Jordan

    This is misleading nonsense. You’re extrapolating a trend from a small number of anecdotal datapoints.

    If you look at many made-it-from-nothing founders of the companies we know, they rarely start out broke, are often independently wealthy (it’s a lot safer to drop out of an ivy-league school with a wealthy family as a back-stop) or have made significant money from earlier stages in their careers.

    Being broke is a huge distraction to most founders, having to focus on the distractions of family, sometimes a spouse and/or kids, and struggling to pay bills – none of that is a good thing for one’s ability to focus on getting your startup to any kind of critical mass.

    Motivation-by-commitment, as many sales organizations will put it, is more like what’s being talked about in the article – that if desperate a smart person will figure out ways to make money and often stabilize some sort of business out of that. But even that is a stretch to claim being an advantage over being broke.

  • http://erica.biz/ Erica

    Hi Nick,

    First of all, thanks! Imagine my surprise to see my name here… :)

    I agree that scrappiness is a key trait. I have no doubt that if I had some sort of comfort level (like having a full-time job), I wouldn’t have been able to grow my business as quickly.

    At the same time, though, I think the broke-ness has some negative aspects. Once you start getting money in, you have to be able to part with the money you’re getting. It’s so easy to cling to being broke, and breaking bad habits is hard. One example: I didn’t hire a bookkeeper and an accountant until it was way too late. It’s too easy to segue from being broke to being *cheap.*

    Really, though, I wouldn’t have had it any other way. The key was that I *had* to make it work. And so I did.

    -Erica

  • iaindooley

    “I didn’t hire a bookkeeper and an accountant until it was way too late”
    Boy did I make this mistake REALLY hard. I didn’t hire a bookkeeper because I was just always under the assumption I couldn’t afford it. As a result I never had up to date numbers. As a result I had no idea if I was making money or not. As a result I didn’t realise I was accruing a massive tax debt.

    The hilarious thing is that the debt was about 10% of revenue (I basically could afford to live, but never paid my GST). All I would have had to do is put my prices up 10%, but I got that information about 18 months too late.

    Bookkeepers are so cheap, in comparison to this mistake. It’s absurd that I was grossing $200k and didn’t spend $5k of it on a casual bookkeeper to do my receipt entry.

  • Martin S.

    I smell Lamarckist.

  • http://erica.biz/ Erica

    This, x1000. Penalties and late fees will eat you alive. I’ve learned: Do it right the first time. And do not try to do it yourself–unless bookkeeping/accounting is actually the product your business sells to others.

  • http://twitter.com/astrogurl Sandra Wong

    We are one of these companies and thank you for this article. Lucky Lady Games works very hard and very creatively with the funds we have. It’s not easy, and we could have easily taken some seed money but we found out the hard way that there is no such thing as easy money…. I am happy we have held all equity and say in our company. It’s not easy but at the end of the day… we hold each other accountable and our small team believes in the ‘why’ rather than the ‘what’ we are doing! I think our small team of 3 core-members accomplishes what a larger studio of 10 could do! :) Don’t give up!

  • http://twitter.com/MikeGelphman Michael Gelphman

    Like I always say: constraints aren’t a limitation….they’re an opportunity.

  • http://www.facebook.com/geoffrey.l.barrows Geoffrey L. Barrows

    Spot on- having limited resources forces you to be clever and cut out the fat that inherently works it’s way into projects. On the other hand, having too many resources for a problem invites burdens. I’ve learned these the hard way:
    * Too much time/money can give you a false sense of comfort, and allow you to procrastinate answering tough questions like- “Is the thing I am building something that people really want?”
    * Too much time/money gives you (and your employees, who often don’t know what it means to make payroll, and are otherwise somewhat isolated from the pains of cost overruns) license to say “OK now we’ve got the money, we’re gonna build it right”. Those are code words for “We’re gonna add every single feature we think the customer may want, then polish and repolish the code, be thorough and research every single possible selection of a component before making a decision, write the perfect mother-of-all user manuals” and otherwise succumbing to Parkinson’s Law. The end result is an Albatross that can bleed you dry. If you succeed in building the system, it will be more complex than necessary, so servicing it, modifying it, or using it as a basis for new products in the future will also be more resource consuming than necessary.
    * If you have a lot of money you might feel like you need to make the product “professional” when all the customer wants is for it to be “useful”. Suddenly cosmetics become a necessity, and so the Albatross grows…
    * Said Albatross then becomes harder to kill since people have invested more of their lives into it.
    * It is very easy to confuse “having money” with “being smart”, which makes it even easier to succumb to the above.
    It took me a long time to learn this (I am dense at times…), but if you are fortunate in a project to have ample resources, try to pretend you don’t have it (unless you really need it say for certain capital purchases) and always keep a scrappy mentality by default.

  • iaindooley

    Hey Geoff, regarding this:

    “We’re gonna add every single feature we think the
    customer may want, then polish and repolish the code, be thorough and research every single possible selection of a component before making a decision, write the perfect mother-of-all user manuals” and otherwise succumbing to Parkinson’s Law. The end result
    is an Albatross that can bleed you dry”

    I’ve found that one of the biggest things that engineers particularly do when they “have enough money to do it right” is get completely obsessed with the technology, architecture and process (this is speaking as a recovering engineer myself).

    So it’s not just *feature creep* one needs to look out for, but “tech creep”, don’t you think? Becoming obsessed with using a particular technology because it’s cool and, in their “day to day” job they’ve never had the chance to use it in a *real* project is a pretty big red flag, as is enthusiasm for following a particular development or management strategy (“by the book” agile/tdd development can be really expensive when “done right” for example!)

  • http://www.facebook.com/geoffrey.l.barrows Geoffrey L. Barrows

    Iain- I agree, speaking also as a recovering engineer. :) Whether feature creep, tech creep, scope creep, or whatever, a big problem is that there is a difference between optimizing a part that resides within a system and optimizing the system as a whole. In this case the “whole” is the entire business while the “part” is the technical aspect of a product. You are also right engineers can easily fall in love with the technology to the detriment of the business itself.

  • http://www.decalmarketing.com/adwords-book/ Iain Dooley

    I don’t think that’s the spirit of the article: it’s not about saying “you can do it too because we did it so it’s your fault you’re poor”, it’s about saying “don’t worry that you see companies getting big funding – you can still compete”.

    I know what you’re talking about, though. More often than not the rags to riches story is actually just “rich” to “more rich” but that’s not the sentiment I took away from this article (or discussion).

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  • http://www.nickoneill.com/ Nick O’Neill

    Hi Erica,

    Thanks for inspiring the post ;) As for broke-ness having negative aspects, I agree. I think the title wound up containing some hyperbole, however the point is you need to be scrappy to start getting the revenue in the door. As you say, you *had* to make it work … that’s a great way to get you performing! Thanks again.

    Best,
    Nick

  • http://twitter.com/worldwideincorp Jennifer

    Interesting post! It would be interesting to see the stats on that, money or no money!

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