Paul Graham: The 3 Golden Rules of Successful Business

This essay is based on a lecture for the Harvard Computer Society. Of course, I don’t expect to cover the whole issue in one short essay; moreover, I have deliberately excluded what was discussed in Hackers and Artists.

To start your business, you need to get the right people to work for you, come up with a software product that your customers really need and finally spend as little money as possible. Most new companies fail precisely because they miss one of these points. A company that follows these rules has every chance of success.

Sounds good, doesn't it? Moreover, all this is quite achievable, although not easy. And since the success of a new company brings its founders a lot of money, then it turns out that wealth is also quite achievable goal. Difficult but achievable.

And if I wanted to tell you very briefly what’s most important when starting my own company, my story would have come to an end: it doesn’t take any extraordinary ability to start a business and solve problems successfully.


Idea

In fact, in order to start a business, you can do without “super ideas”. It is enough that the technological solutions you offer are better than the existing ones. Then your company will be profitable. And given the disgusting quality of the programs we are forced to use, it will not be difficult to improve them.



For example, Google’s initial plans were to create a search site that wasn’t as disgusting as the rest. Google’s success came with just three basic ideas: indexing more resources; using links to rank search results; showing results on simple web pages with unobtrusive ads that include search query keywords. In addition, they were determined to make their site easy to use. Of course, there are a lot of technological tricks inside Google, but the original plan was completely uncomplicated. Now, of course, their ambitions have increased, but even these three basic principles still bring them about a billion dollars a year.

Of course, good ideas play a big role in creating a new company. The problem is that they are not transportable. You can’t come up with an idea and pass it on to someone who will make it happen. The main value of new ideas lies precisely in the fact that they are a kind of starting point: these are questions that must be thought out and solved by their authors.

So the main thing is not the ideas, but the people who invent them. The right people will figure out how to fix a bad idea, but if people are wrong, no good ideas will help them.

People.Who do I mean when I say “right” people? One of the most rewarding lessons I learned from my experience is deciding who to hire.

The specifics depend on the job: it may be a salesman who just doesn’t understand when they’re told no; a hacker programmer who will sit until four in the morning but won’t go home knowing that his code is wrong; a PR man who will cold-bloodedly call New York Times reporters on mobile phones; an artist who feels physical pain if something is shifted in his drawing by a couple of pixels.

When choosing programmers, we were guided by three more tests. Is someone really talented? If so, is he able to get things done? And finally, since so many talented programmers have a completely unbearable character, can we tolerate his presence on our team?

It should be noted that the latter factor least affects the final decision. It turns out that we can tolerate any kind of eccentricity, if a person is really talented. What we didn’t tolerate was an overestimated opinion of our person.

However, this does not always work, because over time people begin to behave as usual in their environment.

Like most small companies, ours was formed in a narrow circle of friends, and we recruited new people mainly by acquaintances. This is the main difference between small and large companies – if you were friends with a person for at least a couple of days, you probably got to know him much better than large companies after a few hours of interviews.

If you start your own business, then most likely you will have partners who you studied with. It’s good to be friends with all the talented students, isn’t it? No way. Never try to get into trust. It won't work with hackers.

It is best to have at least two founders and no more than four. It will be too hard for one to bear the moral burden of a company founder. Even Bill Gates, who is clearly capable of carrying a fair amount of moral burden, created his company in half with his partner. It's bad when a company has so many founders that it starts to look like a group photo. First, you don’t need as many people at first, and second, the more people you have, the harder it is to resolve conflicts. When a company has two or three founders, you know that disputes need to be resolved immediately, otherwise your company has no future. If a company has seven or eight founders, the controversy can go on for quite a long time, and there may be groups among you that support this or that solution. But your company doesn't need a parliament and a vote. You need unanimity.

Among the founders of an information technology company should be programmers. During the dot-com boom, such companies were often opened by businessmen. They came up with an idea, and then they tried to hire good programmers to do it. This trick doesn't work. Businessmen are very vague about issues related to technology. First, they do not know the possible options for implementing the idea, they do not know which problems will be difficult and which will be easy. When businessmen hire programmers, they can’t pick the best ones. This choice is not easy to make even for programmers who hire other programmers. For businessmen, this is roulette.

Do you also need business owners? It depends on the circumstances. In our industry, the whole business is about finding people who will pay for what you do.

As soon as I realized that I had to forget about incompetence, and got down to business, I quickly found that business is not as complicated and boring as I feared it was. Of course, it has its own esoteric – taxation, for example, or some secondary pricing, but at the initial stage you do not need it. To start a business, you only need common sense and skills that people acquire before they even go to accounting courses or universities.

Take the Forbes 400 list and put crosses in front of the names of people who have an MBA, and you will understand something about the value of this kind of education. The first cross will appear only at number 22, Phil Knight, the general administrator of Nike. In the first 50 names of such crosses only four. But it immediately catches the eye how many people there with technical education: Bill Gates, Steve Jobs, Larry Ellison, Michael Dell, Jeff Bezo, Gordon Moore. The kings of information technology come from programmers, not businessmen. And if you’re thinking about how to spend two years in business, the reality speaks for itself: learn to code and don’t waste your time on an MBA.

However, there is one reason why you may need a businessman even at the initial stage of the company’s development. You must have at least one person who is able and willing to focus on the desires of users. Some people think that only business people can do this. They say that programmers are able to write code, but not invent and design the product itself. This is total nonsense. The ability to program does not affect the ability to understand what users want, just as ignorance of programming does not guarantee the desire to understand users.

If you do not know what users need, try to find a partner who will understand this. This is the most important rule for new companies and the very iceberg that sinks most of them.

What users want About the desires of users should care not only start-up companies. It seems to me that in most cases, failure befalls those who do not know how to give customers what they want. At least get some restaurants. A quarter of all new restaurants close after a year. And now tell me, will the restaurant, where delicious cooking will close?

We see the same picture in our field. There are a thousand reasons why new companies fail, but has anyone ever heard a company that makes a hugely popular product fall apart?

Almost every time, the real reason for failure is the unwillingness of customers to use the software product. The official reason, however, prefer to consider “insufficient funding”, but this is a consequence, not a cause.

At first, I included a fourth item in the list of things that every new company needs: to release the first version of the product as soon as possible. Then I turned it down because it follows from the principle of “creating what customers want.” The fact is that the only way to do exactly what they need is to release a working prototype and immediately improve it based on user reactions.

There is another approach. I call it "Hi, Mary." You plan carefully what product you’re going to build, then you hire a team of software engineers (people who do that call hackers “software engineers”), and then, about a year later, you find that you’ve spent two million dollars on something nobody wants. This happened quite often during the Boom period, especially in companies run by businessmen. Businesses always feel that programming is so complex and scary that it requires careful planning and control.

Like most newcomers, we had to change plans on the fly. At first, we thought our clients would be web consultants. However, they did not like us very much: our program was easy to use, and it was posted on our website. It turned out that theoretically, with the help of our program, clients of web consultants could do without their services. We also hoped that our offer would appeal to companies that sell their products in catalogs. However, it was 1996, and for many trading companies the word “Internet” meant not so much new opportunities as unnecessary problems.

And yet we managed to get a few risky trading companies. Among them was “Frederick’s of Hollywood”, thanks to which we learned from our own experience what a heavy load on servers is. However, most of our clients were not large trading firms, but small companies and even individuals. For them, the web was almost the only way to start a business. Some owned retail stores, others only existed online. And we changed our plans. Instead of continuing to develop a system for web consultants and big retailers, we decided to make our product even easier to use.

We learned a very valuable lesson from this story: throw all your energy into making the program easy to use, it will definitely pay off. We hackers are so used to computers that we have no idea how scary they can seem to ordinary people. Stephen Hawking’s editor once told him that every equation he included in his book reduced sales exponentially. When you make your product simple, the curve curves the other way. If a program becomes 10% easier to use, it will sell not 10% better, but 200% better.

How do you know what users want? Just watch them. This is best done at exhibitions. Exhibitions are unlikely to bring you new customers, but they will provide excellent material for research. At the exhibitions, we did not only make presentations. We showed people how to create their own online stores. So we watched them work with our program and talked to them about its functionality.

It doesn’t matter what kind of company you set up. If you release software, it will be very difficult to understand what users need at first. There is only one exception – you can write a program for which you are the typical user. This is how open source projects are usually built. These are operating systems, programming languages, all kinds of editors, etc. So, most likely, if you want to make money, you will not write programs for hackers. What’s more, it can serve as a good brainstorming exercise in choosing a product idea: What do high-tech people who are not like us need?

When people talk about companies starting their own business, they are talking about Apple or Google. Everyone knows them because they are the most famous brands. But for every such well-known company, there are about twenty that exist in niche markets. So even if your company is profitable and successful, most likely, you will not see worldwide fame.

In other words, you have little chance of creating a well-known consumer brand out of your company. It’s easier to succeed in niche markets. Newly created small companies make money by offering people better programs than they already have. So it's best to offer an alternative to something totally disgusting. There's hardly anything more disgusting going on in any corporate IT department. You wouldn’t believe how much money companies pay for software every year, or how much crap they get paid for it. Such an obvious imbalance means that you can succeed.

Want an idea for a new product? Spend two weeks at a non-tech company and see how people work at computers. A good programmer, even in a terrible dream, will not imagine what the daily routine of such companies is made of. So a rich American would never be able to imagine living in a Brazilian slum.

Write your software for small companies and it’s easier to sell them. To sell your application to a large company, you need to invest very well. Just like the guys who don't waste time and money selling shit to big companies that they pay big bucks for. Yes, your programmers may have a couple more twists than those who write Oracle, but the person who sells Oracle will never beat you. So if you want to make money selling good software, focus on small companies.

Even from a strategic point of view, it is the most important part of the market. In high-tech, whoever owns the lower end of the market eats the upper end. It is much easier to release an inexpensive product and then make it powerful than to release a powerful product and make it cheaper than others. Therefore, those programs that initially provided a few simple and convenient options, gradually grew into powerful full-fledged products. As water gradually fills the room, presses objects floating on the surface to the ceiling, so programs popular "in the bottom" displace their competitors, "floating from above."

It is very dangerous to let competitors “under themselves”. If you offer the simplest and cheapest product, then the “lower level” is yours. If not, you are in the crosshairs of someone who owns this level.

Where to get the moneyTo make your dreams come true, you need money. Some are financing a new company out of their own pockets, such as Microsoft. But most people do things differently. It makes more sense to take money from investors. In order not to take money from anyone, you need to start with a consultant, and only then switch to creating your own products, and this can be quite difficult.

When it comes to finance, any new company has as much chance of success as of failure. To get rich, it’s more important to maximize your chances of success than to cling to your company’s stock. If for a portion of the shares you can get something that will significantly increase the likelihood of success, it is very reasonable to do so.

For most hackers, the very word “investing” sounds intimidating and mysterious. There's really nothing mysterious about it. It's just a rather boring and tedious process. Let me briefly describe what it consists of.

First, you’ll need tens of thousands of dollars to develop the first prototype. It's seed capital. Since it is a very small amount, it will not be difficult to find it. At least immediately, without too much delay, you will hear either “yes” or “no”.

Usually, the initial capital can be obtained from rich people – “angels”. As a rule, they have earned their own fortune in the field of high technology. Investors don’t expect a detailed business plan. Most people know that a decision needs to be made quickly. Often, you can get a check for the required amount within a week, while signing a half-page agreement.

For some angels, especially those who have been programmers in a past life, a small demonstration of your idea or even a verbal description of what you are going to develop is enough. However, you may be asked to provide a business plan – at least in order not to forget later what was discussed.

In order for the angel to fork out, you must officially represent the company. Registration of the company is not difficult. Problems can begin when you need to decide who is among the founders and what percentage of the shares they are entitled to. If there are only two of you and you work on an equal footing, there will be no dispute. But what if there are more of you, and the measure of participation in the project is different for everyone? Solving this problem can be quite difficult. So once you’ve made a decision, consider it set in stone. Do not change it under any circumstances.

There is nothing more I can advise you. Finding the right solution in such a situation is very, very difficult. However, there is one very useful rule: if all participants in the transaction feel that they are slightly cheaper, that you could get more for your work, then you divided the shares correctly.

It all happened when we found a buyer for our company. Suddenly it was discovered that one of our founders had made an agreement in which all his ideas belonged to one huge firm that paid for his higher education. In theory, this meant that most of our business was owned by third parties. The deal, of course, stalled, and we frantically tried to find a way out. The situation was aggravated by the fact that, knowing about the upcoming purchase, we allowed ourselves not to worry about the supply of money. There was almost no cash. In order to continue working, we urgently needed to find additional funds. And looking for money from investors, when clouds are thickening over you, it is not easy.

Before registering a new company, find out what obligations each of you has previously made to other organizations.

Well, you've become a real company. And it's kind of awkward to walk and knock on the doors of the rich asking for tens of thousands of dollars for what is best described as "a few young people with ideas." Now look at it from the perspective of the rich, and the picture will look very different. Almost all rich people want to invest money. And if you’re sure you have a chance of success, you’re doing them a favor by telling them how to benefit from their savings. So rest assured, looking at you investors feel ambivalent: on the one hand, they do not want to part with the money, and on the other, if these guys will make another Google?

From a financial point of view, angels are usually equated with the founders of a company. In other words, they own a certain number of shares and will receive a corresponding share of the profits in the future. How many shares can I give them? It depends on your ambition. If you give X percent of your company for Y thousand dollars, then you have an idea of how much your entire company is worth. If you give a 5% stake to investors in exchange for $100,000, you think your company is worth two million.

But how do you know how much the company is worth? No way. In the beginning, it's just a guess. I didn’t understand this when I was looking for a new fund. Our lawyer, Julian, thought we were worth a few million dollars. I thought it was a bit presumptuous to estimate a few thousand lines of code at that amount. In the end, we settled on one million because Julian said no one would give money to a company that was worth less.



The next round of finding money can lead you to venture capital ventures. Don’t forget to start talking to them before you run out of capital. Venture companies are always hard to lift. The decision to issue money can be postponed for several months. You don’t want to sit on bread and water all the time.

Getting money from venture capital is harder than finding seed capital. This is not tens of thousands, but millions of dollars. Therefore, the transaction is much slower, and you have to give away most of your shares, and on more stringent terms.

Sometimes a venture capital venture requires you to make an administrative director of their person. Typically, the main reason is that they think your company should have at least one adult with business experience. I don't know, maybe sometimes it's really necessary. But Bill Gates was neither an adult, nor an experienced, nor a businessman, and look, he did a good job. And Steve Jobs flew out of his own company thanks to an adult and experienced businessman who soon managed to ruin everything. In general, it seems to me that the value of “adults and experienced in the field of business” is somewhat exaggerated. We used to call them "TV presenters," first because they always had a neat hairstyle and a deep, confident voice, and second because they knew no more than they showed on TV with a running line.



You have more weight in the eyes of venture capitalists than you realize. The main reason is the existence of other venture capital firms. Now I know quite a lot of venture capital enterprises and understand that it is all about the market situation. Even now, they have too much money and too few ideas to invest in.

Another question is what can be told during a conversation with venture capitalists and what is not. This is an important question because one day they may start funding your competitors. I think it's best not to be secretive, but not to give details. After all, as venture capitalists like to say, they care about people, not ideas. And the main purpose of the conversation is to get to know you better, not the technological innovations you are going to use. So it’s best to tell just enough that they think you’re someone who knows what they’re doing. But nothing more. [7]

Try to communicate with venture capitalists as often as possible, even if you don’t need their money. There are two good reasons for this: first, they can recommend your company to a potential buyer, and second, if you present your company in a favorable light, they will not want to invest in the business of your competitors. The easiest way to get acquainted with venture capital firms is at the conferences they periodically organize for start-ups (especially if you only need to declare yourself, not take money).

How not to spend money too quickly

When (and if) you get money from investors, the question is, what do you do with it? Save money, that's what. New companies fail for the same reason: they don’t have enough money. Of course, there are other reasons behind this, and the lack of money is only a consequence of them, but nevertheless, even this should make you immediately think about saving.

During the dot-com boom, many companies, having barely entered the market, sought to become large as quickly as possible. Ideally, this would mean “getting as many big customers as possible,” but in reality it ended up being much simpler: “hiring as many people as possible as soon as possible.”

Adjusted for our field of activity, it can be changed as follows: “Try to get all users, then advertisers will simply have to advertise from you.” And in general, when developing a product, first try to make it necessary and convenient for users, and only then think about how to make money on it. There is always room for competitors between you and your users.

In order for users to like the program, they must be well understood. A large company is more difficult than a small one. So I tell you, don’t be in a hurry to grow. The slower you burn through the initial investment, the more time you will have for trial and experimentation.

Saving money is also good because you instill a culture of frugality in the company.

Getting a few million dollars from investors makes it easy to feel rich. It's wrong. A company with high income can be considered rich. Money in the bank is not income. It’s just a certain amount that good people have given you in the hope that you will make their money work and generate income. So even if you have a few million in the bank, you're still poor.

Most new companies are better focused on the student environment rather than the style of law firms. Nice and cheap, not expensive and catchy.

By the way, the apartment is much better programmed. The endless corporate cubes are just awful. You know that if you’ve ever tried to work in such conditions. Have you noticed how good it is to code at home when you come home from work? Yeah? So why not make the office look like a home?

When looking for a new office, don’t worry about how professional it looks. The word “professional” should apply to your product, not to silent elevators and glass walls.

Apart from the fact that renting an apartment is cheaper, apartments are also located in more convenient places. This is very important for the new company.

If you want to save money, try not to hire new employees. I may sound like an extremist, but in the beginning it is the worst thing a young company can do. First of all, new employees mean monthly recurring costs, and that's terrible. In addition, sooner or later, you will have to find a new place to work, because new employees no longer fit in the old, such a wonderful office.

But if new employees are expensive and even slowing down, why do most companies do it all the time? I think it's because they like the idea that they have a lot of people working for them. This weakness is characteristic of many, often it reaches the level of directors of the company.

Of course it's stupid. If two companies have the same income, the one with fewer employees should make an impression. When I was asked how many people worked for my new company, I would say twenty, and I could see them thinking, ‘Hmm, twenty, is that a company?’ And then I added, "Well, our competitor, who we kick ass to, has a hundred and forty people working." Who do you think should be proud of the number of employees? ?

As with choosing an office space, you need to choose which is more important – to appear cool or be cool. Those of you who were in high school and high school knew what I was talking about. Keep going as you start your own business.

Do you want it?

Do you need to start your own company at all? Will it work? If so, is it worth spending so much time and effort?

Many people will cope with this, it is a pity that not everyone realizes it. That is why I am writing this article. There could be one in ten more software manufacturers in the world today, and I think everyone would benefit from that.

So, who should start their own business? A good programmer, between the ages of 23 and 38, who prefers to solve financial problems immediately and for a long time, rather than getting a little bit every month throughout his working life.

At the time, I didn’t realize that this experience helped me better understand the business of creating and selling software. My experience was very negative: you can’t call meetings often; you can’t let different people own parts of the code; you can’t let salespeople run the company; you can’t rush to writing a complex multifunctional product; you can’t let the code grow too big; you can’t leave the search for errors in the code to the quality control department; you can’t move from Cambridge to the 128th highway, and so on. However, negative experiences are no less valuable than positive ones. Maybe it's even more important. It is very difficult to copy impeccable behavior, much easier to avoid the mistakes of others.

Don’t start your business before 23 because you won’t be taken seriously. Investors will treat you with distrust, customers will fear that one day you will disappear and leave them without any support.

Some people can start their own business even at 18. Bill Gates created Microsoft with Paul Allen at the age of 19. (Allen was 22 at the time, though, and that may have played a role.) And if you’re now reading this and you’re thinking, “I don’t care what he’s saying, I don’t care – I’m starting my own company right now!” you can actually do it before the age of 23.

The 38-year limit is less severe. The main reason, in my opinion, is physical ability. Few people have sufficient stamina, having crossed this age threshold.

Finally, the latest test is perhaps the toughest. Do you really want to start your own business? From an economic point of view, this means compressing working life in a minimum amount of time. Instead of working eight hours a day for a paycheck for 40 years, you only work four years. Maybe it won't bring you anything - although it won't take four years to understand it.

You hardly have time for anything other than work.

Probably, the total amount of nonsense that you have to face when starting your business does not exceed the amount that you encounter in ordinary life. Maybe it’s even smaller – it’s just squeezed into a narrow time frame. As you can see, the main problem is time.

If you want to start your own business, start. There is nothing mysterious or super-complex about it, as it may seem from the outside. You don’t need to know “how to do business.” Just write a program that users will love and try to spend less than you earn. Is it really that difficult? published



P.S. And remember, just by changing our consumption, we change the world together! © Join us on Facebook , VKontakte, Odnoklassniki

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