Top Ways Startups Waste Money

In this episode of Inside the Y Combinator Group Partner Lounge, Michael Seibel and Brad discuss the common financial pitfalls for early-stage founders, emphasizing the tendency to overspend on non-essential services and hires before achieving product-market fit. They warn against the allure of hiring high-salary tech veterans, relying on contractors, and using advertising as a crutch for growth. They also debunk the perceived necessity of PR agencies, noting that founders often end up firing them, and highlight the importance of understanding and negotiating legal fees. The conversation turns to the pitfalls of compensating advisors with equity, stressing that most valuable advice often comes free from experienced individuals. Ultimately, they advise founders to be scrappy, validate their business model first, and spend money on scaling only after proving their product's market fit.

• Firing vendors is a common practice for those who hire PR agencies.
• Many founders have gone through the experience of hiring and then firing PR agencies.

"I don't know anyone that's ever hired a PR agency that hasn't fired PR agencies."

• This quote highlights the frequency with which startups hire and then terminate their relationships with PR agencies.

• The Group Partner Lounge at YC is a place where partners discuss common advice given to startups.
• They aim to understand why startups often repeat the same mistakes despite advice.
• The focus of the discussion is on the top things early-stage founders waste money on.

"So as Y Combinator group partners, we find ourselves repeating the same often seemingly obvious advice to startups many, many times."

• This quote emphasizes that Y Combinator partners frequently have to reiterate the same advice to startups, indicating common recurring issues.

• Founders often ignore advice on spending and make the same mistakes.
• The hope is to change founders' spending habits, even if only partially.
• Founders retrospectively notice unnecessary expenses in their first year.

"Even though we're gonna 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."

• The quote suggests that despite being aware of potential financial pitfalls, founders often proceed to make the same spending errors.

• Hiring is often seen as a solution to startup problems, but it can be a fallacy.
• Early hiring decisions, especially of highly paid individuals from large companies, can be costly mistakes.
• The psychological aspect of believing in a savior figure, known as "Sebastianism," is common in startups.

"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."

• This quote reflects the common realization among founders that they could have been more frugal in their initial spending.

• Startups are tempted to hire individuals from large tech companies (FANG) with high salaries.
• These hires may not perform as well in a startup environment due to differences in workflow and support systems.

"It's when you finally convince someone who's working at like a big FANG company and is on a big fat salary to join your startup...that's just always a mistake."

• The quote warns about the financial risks of hiring employees from large tech companies who are accustomed to high salaries.

• Founders mistakenly believe that contractors can replace full-time employees effectively.
• Contractors may lack commitment and alignment with the startup's goals.
• Relying on contractors can become a crutch that prevents hiring dedicated team members.

"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."

• The quote suggests that contractors may not have the same level of investment or understanding of the startup as full-time employees would.

• Founders may need to learn new skills, such as building an iOS app, rather than outsourcing.
• Founders should be prepared to take on various roles within their startup.

"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."

• This quote emphasizes the need for founders to be adaptable and willing to acquire new skills as necessary for their startup's success.

• Marketing is another area where startups can waste significant amounts of money.
• Founders should be cautious about allocating large budgets to marketing without a clear strategy.

"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."

• The quote highlights the danger of startups spending excessively on marketing and hiring without careful consideration.

• The potential scale of advertising on platforms like Facebook and Google is massive.
• Millions of customers and thousands of users can be reached, but it may not provide valuable learning for the company.
• There is no limit to how much a company could spend on ads, making it very tempting.
• Salespeople and UI at these platforms are designed to make you feel smart and encourage spending.

"The potential scale that you can get from advertising on Facebook and Google, etc., is massive. Everyone's on there; you can potentially get millions of customers, thousands of users, all this stuff from spending on these platforms."

This quote highlights the vast reach and potential customer base available through advertising on major platforms like Facebook and Google.

"They will gladly take infinite dollars. There's like no limit to how much you could spend on ads."

This quote emphasizes the limitless nature of ad spending on these platforms, indicating that they are designed to encourage continuous and potentially unbounded investment in advertising.

• Spending heavily on ads in the early stages of a company will not yield significant learning.
• The user interfaces and sales materials of ad platforms can give a false sense of accomplishment.

"You're not going to learn that much from just plowing a bunch of money into ads early on into your company."

This quote suggests that early heavy investment in advertising does not equate to valuable learning or understanding of the market for a new company.

• Triplebyte experienced a period where Facebook ads were profitable.
• Initially, the ads were meant for learning about messaging with a tiny budget.
• As some ads began to work, spending increased to meet growth numbers.
• Overdependence on ads was recognized as a risk, and efforts were made to find alternative growth strategies.

"With Triplebyte, 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."

This quote reveals the extent of Triplebyte's investment in Facebook ads, showing how spending can escalate in the pursuit of growth.

"We should have done that in year two, not year six. If it weren't for ads, we would have done because we wouldn't have had another choice."

This quote reflects on the strategic mistake of over-reliance on ads and the delay in pursuing alternative growth strategies.

• Non-digital marketing efforts like events, sponsorships, and brand advertising are hard to track and often not cost-effective.
• Startups may imitate successful companies by investing in these areas, hoping for similar success.
• The effectiveness of such marketing efforts is contingent on the company's stage and existing brand recognition.

"There's a broad bucket of stuff that's hard to track, things like events and sponsorships, brand advertising."

This quote identifies types of marketing efforts that are difficult to measure and may not yield a clear return on investment.

"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."

This quote warns against the misconception that spending heavily on big events will create brand recognition from scratch.

• YC companies have found creative ways to get more value from events without spending heavily.
• Examples include WePay's block of ice stunt at a PayPal conference and a founder slipping flyers under hotel doors at a conference.
• These guerrilla marketing tactics can be more effective and memorable than traditional paid marketing at events.

"WePay with the block of ice at the PayPal conference... they made a huge block of ice with 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."

This quote describes a clever and cost-effective marketing stunt by WePay that generated buzz and highlighted their message in a memorable way.

"There's another one where somebody created a little place where people could do phone calls... they didn't pay stupid amounts of money for some big sponsorship."

This quote provides an example of how a company used a small, thoughtful gesture to engage with potential customers in a meaningful way without incurring large expenses.

• Founders often feel they need to hire a PR agency due to a lack of media contacts and understanding of the industry.
• PR agencies can be tempting as they promise access to media contacts for a fee.
• Building direct relationships with journalists is part of a founder's job and can be more effective than using a PR agency.

"The typical founder does not have a media background and a ton of friends that work at Publications... it's so tempting when someone comes along and says, 'Well, I'm actually friends with these people.'"

This quote illustrates the allure of PR agencies for founders who feel disconnected from the media industry and believe that hiring an agency is the only way to gain media exposure.

"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."

This quote encourages founders to take initiative in building their own media relationships, emphasizing that journalists are interested in direct connections with newsworthy companies.

• The speaker reflects on his experience with PR agencies, initially advising against them, then succumbing to hiring one for his Series B announcement.
• Spending on PR agencies is criticized for being ineffective and costly.
• The speaker recounts a negative experience with a PR agency that failed to understand his company and delegated work to junior staff.
• Personal efforts in reaching out to journalists yielded better results than the hired PR agency.
• The speaker suggests that hiring (and firing) PR agencies can be a learning experience in dealing with vendors.

"I spent years at YC the first time 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."

• The quote highlights the initial stance against spending on PR agencies and the eventual decision to hire one for the purpose of achieving good press coverage for a Series B funding round.

"I meet with like the like the like some someone important at the pr agency they made me feel really special."

• This quote illustrates the PR agency's initial impression on the speaker, making them feel valued as a client.

"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 would have done."

• The speaker had to terminate the contract with the PR agency and personally took charge of the media outreach, which resulted in better press coverage than the agency could have achieved.

• The speaker discusses the high cost of legal services, particularly when attempting to customize employment agreements.
• The importance of getting quotes and specifications for legal work upfront is emphasized.
• The speaker advises against unnecessary customization of legal documents.
• Payment plans with law firms are suggested as a strategy to manage legal expenses and extend a company's runway.

"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."

• The quote reveals the speaker's initial decision to invest heavily in legal services to customize employment agreements, which he later suggests was not a wise investment.

"If you have to innovate on the employment contract for employees you probably don't have a company."

• This quote underscores the notion that innovation in a startup should not be focused on employment contracts, and doing so may indicate a lack of a viable business model.

"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."

• The speaker advises that inability of a lawyer to estimate costs might indicate inexperience and is a red flag.

"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."

• The speaker shares a tip about negotiating payment plans with law firms to manage cash flow better by spreading out large legal fees over time.

• The speaker touches on the topic of startup advisors and the tendency to overvalue their contributions.
• Equity is often given to advisors, which can be costly if the startup is successful.
• The speaker is skeptical of the need for advisors and suggests that their impact is often overstated.

"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."

• This quote reflects the common but potentially misguided belief among startups that having a board of advisors is necessary to attract investment.

"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."

• The speaker criticizes the overestimation of advisors' roles and influence in a startup's success, questioning the actual value they bring in exchange for equity or compensation.

(Note: The transcript provided did not include any explicit advertisements to be identified and omitted.)

• Many Y Combinator (YC) founders experience stress due to advisors demanding equity.
• Founders feel obligated to give equity to respected individuals who have helped them.
• It is rare for an advisor's contribution to be cited as the critical factor for a startup's success.
• Successful startups often receive advice from investors or domain experts without giving away equity.
• Founders are advised to understand they are not obliged to give equity to advisors.

"I've never heard of a startup that is successful... that said, you know, it was that advisor, that's what did the thing, that's how we got product-market fit, that one advisor made the difference."

• This quote emphasizes that successful startups rarely attribute their success to a single advisor's influence.

"The people who are really successful, like, they just don't have the time for that bull... it's easier for me to give this away for free."

• Successful individuals often prefer to provide advice without compensation, finding the process of monetizing advice for startups not worth the effort.

• Founders can push back on equity demands from advisors, such as professors from universities.
• Negotiation can lead to a dramatic reduction in the equity percentage demanded.
• Founders are often unaware that they can negotiate these terms.
• A strategy for dealing with multiple advisors is to ask them to invest instead of giving them equity.

"You'd be shocked at how often we tell the founder they can push back and the professor goes from like 30 to one percent."

• Founders are encouraged to negotiate with advisors who initially request high equity stakes, as they may settle for much less.

"I had these five people that all wanted to be advisors; they wanted equity... and I did an office hour with PB and he said ask them to invest instead."

• This quote shares a tactic where founders can convert potential advisors into investors, thus aligning incentives without losing equity.

• Founders are cautioned against spending money on non-essential items before achieving product-market fit.
• Large, successful companies do spend money on various things, but this is typically post product-market fit.
• Founders should seek low-cost or no-cost solutions and be creative in their approach to testing ideas.
• Founders earn the right to spend money by proving their concept with minimal initial investment.

"Once you have product-market fit... you have the customers that are trying to rip the product out of your hands... that's when companies spend money on this stuff."

• This quote advises that significant spending should occur after a startup has confirmed product-market fit and has a growing customer base.

"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."

• Founders are encouraged to validate their business ideas using inexpensive methods before committing substantial financial resources.

• Founders should attempt tasks themselves before hiring others to understand the process and gain authority.
• Having a DIY mindset helps founders avoid unnecessary spending and allows them to be more informed when eventually hiring for those tasks.
• The recent increase in funding for startups makes it tempting to spend money without proper validation.

"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."

• This quote underlines the importance of founders attempting tasks themselves to gain experience and context, which is crucial for making informed hiring decisions later on.

• The conversation aims to prevent founders from wasting money on unnecessary expenses.
• Founders are advised to stay disciplined and avoid spending money pre-product-market fit.
• Post product-market fit, founders can consider spending more freely but should still be aware of the potential for waste.

"When you're post-product-market fit... 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."

• Once a startup has achieved product-market fit and secured significant funding, the founders may have more flexibility to spend, though caution is still recommended.