Inside the Group Partner Lounge: Top ways startups waste money

we're gonna 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 gonna talk about exactly what you 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 gonna tell you why you're wasting your money on it, founders are still gonna go and do this stuff. Right?

Like, 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 gonna 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, you know, startup expenses for the first year and can't think of a good chunk of it they could have trimmed.

Literally, Justin and I, in the early days of Twitch, had this on a whiteboard, and we would list the money we've wasted. And and the problem, speaking of advisers, is that I once paid an adviser in equity, and so I won this game because that equity ended up being worth a fuck ton of money.

And 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 our companies, you you will you will benefit. So let's all let's start with the simple thing. What are the lies you can tell yourself? I think the first lies are always around hiring. Who wants to take this one on? Like, why will hiring.

not help me succeed early days? Yeah. We 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. I'll start with the one. One that I least I and I know that I was super tempted by this as well.

It's like it's when you finally convince someone who's working at, like, a big fan company and is on a big fat salary to join your startup. And they're super qualified, and you're like, oh, man. This is a dream hire. It's gonna be awesome when I tell everyone that I hire this, like, Google engineer or something.

Like, the only catch is, like, you know, they're making, like, a million dollars a year between, like, salary and equity at Google. And so they kinda need me to give them, like, close to that in order to join. Right? Like, and that's just always a mistake.

Like, have have you guys experienced that or or talked to founders who are, like, desperate to hire the, like, FAANG engineer who needs a giant salary?

Yeah. A %. I I think part of this undergirding the the hiring waste, waste money fallacy is the the psychology of it is tricky. Ever I think it's really hard to not think that somewhere out there, there's someone that can come in and make a huge, leap forward in your productivity and fix all these problems that you have. There's actually a name for this. It's called Sebastianism.

If you look, there's a there's a Portuguese myth that, the King Sebastian will return after being lost in battle hundreds of years ago to save and solve all the problems in the country. This is the same thinking that startups have. That somewhere out there, there's this mythical fang engineer or or FAANG salesperson.

that's gonna come and and make everything work. Yeah. The thing that frustrates me about it the most is that FAANG companies are huge now. And so the workflow, the decision making, the tools, the support that a FANG engineer has, needless to say, they have none of that when they come to your startup.

And so you might be seeing someone who's extremely talented but extremely talented in that system, And they might not be able to bring the same level of productivity while they certainly are bringing the same level of cost. So that seems like a killer 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 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 taken the time to get caught up with the system.

Just having a different set of incentives and an agenda from you. Just bringing out a bunch of contractors isn't gonna do it either.

Yeah. The way I see this come up with founders, it's so it always almost starts as like, hey. We know that, like, we we need to build a iPhone app and, like, you know, we we're gonna hire a contractor. We know we have to eventually just, like, bring this in house, but, like, we'd like we haven't got any time to lose. So they they always think of it as a Band Aid.

But 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 you 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 start up. 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. Right? 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 y'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 $10,000 test budgets. The reality is that it it's really dangerous because the the potential scale that you can get from advertising on Facebook and Google, etcetera, 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. However, you're not gonna 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 it's very tempting. There's the salespeople at those companies are incredible at their jobs.

The materials are amazing. The UIs make you feel really smart when you figure stuff out. But you're not gonna 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 Triplebyte, my startup, like, we ramped up to a pretty big ad budget. Like, we we were bumping up against almost, a million bucks a month on just Facebook ads. And, like, 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 I just wanna learn some messaging. Like, we're gonna run some Facebook ads so we can try out, like, some target, like, different crew like, copy and words and all those kinds. They just it's just, like, tiny budget, like, just to learn. And then, like, some of the ads start working.

We're like, like, you know, like, damn. I think we might come under our growth numbers next month. Like, alright. Let's just, like, let's just a little bit more. Just, like, we'll just ramp up the ad spend a little bit. Right? And then you're like, but, you know, we can't get dependent on ads. So we gotta grow.

We can't grow just via 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. Alright? 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, that can hit you, like, all at once. And then we were like, oh, damn. Like, ads is declining. It's, like, almost all of our growth. And then we went through, like, a painful process of we're gonna 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 and if it weren't for ads, we we would have done because we wouldn't have another choice.

Yeah. Yeah. Ads are too often used as a substitute for building. And if you're not building stuff,.

then you're not it's you're not creating value. Anything else in the marketing area that 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, brand advertising.

And I think those things are really tempting because you can almost always think example of another start up that succeeded by spending money on those sorts of things, and you can cargo cult it 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, oh, like, Twilio has got, like, this massive developer conference. Salesforce has, like, you know, like, SalesCon or whatever that Dreamforce. Like like, I wanna be as big as Salesforce. I just spend on, like, a giant conference. And, again, it's, 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 gonna 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 $20,000 and no one attended.

Like, I I I really wish people would approach events like a startup founder, like a scrappy startup founder would. Was it WePay with the block of ice at the PayPal conference?

Yes. Yes. Yes. Yes. Yeah. So I I always love that store. I'm gonna totally butcher it here, but there was some PayPal conference, and WePay didn't wanna 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, bag, it would have cost, you know, hundred thousand dollars or something.

There's another one where somebody created, like like 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 who needed to do a phone call, and it was, like, all their customers. So there's so many ways to hack these things. So that's marketing. You know? What about PR? I don't know any reporters.

How am I supposed to get press without paying a PR agency? Right? Like, guys, this is, like, obvious. You know? Like, of course, you have to do this. This is the one, folks, listening at home. You're gonna do this. We're gonna tell you not to, but you're gonna do this.

You know, the the typical founder does not have, like, a media background and a ton of friends that work at publications. The media industry is very mysterious. It seems out of reach. A lot of founders are all fueled up on having read a ton of startup media. And so these bylines and the people on Twitter with the big audiences, it all seems very distant.

And so it's so tempting when someone comes along and says, well, I'm actually friends with these people and I know them. And if you pay me a $10,000 a month retainer, I'll get your stories in front of them. It's so tempting. And, you know, I did it with my startup in the ad industry. I felt, oh, I don't know these, like, little ad tech blogs stuff.

We paid these guys in New York, 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 kinda your job to build those relationships. And you can do it. Guess what? The journalists, they wanna 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 intermediaries there.

Yeah. So I spent years at YC the first time, like, telling startups not to spend money and not to waste money on PR agencies, and then would triple buy it when we closed our series b. I was like, man, I really want some great press for this b. And I was like, you know, I know that I've just told about a hundred founders not to do PR agencies, but I'm the I'm gonna be different.

Like, I'm gonna I'm gonna be able to, like, actually make this work. And so, like Think different, Tard. Think different.

I was like, think different. Think PR agency.

I spent, like, I don't know. I put, like, a 50 k retainer or 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. It's really awesome. Really special. Right?

And then two weeks before we were scheduled to launch, announce the series b, I check-in. I'm like, hey. So I let you know how we're going. What are we like, new New York Times interview in yet? And they're like they're like, oh, yeah. Hang on. We're just gonna send you, like, the concept pitch or some something.

It was a document that, like, it was clear they didn't even understand what Triplebyte did. Like, I like I like I was, so, like, I dug into it. It was a bunch of, like, they just handed off to a bunch of junior people who I'd never met who had just googled our company and put together a pitch doc that no one had responded to.

So I had to, like, fire this agency and then spend, like, the week before we'd announced that we were, like, doing our series b announcement, calling a whole bunch of journalists myself, and I end up getting a much better, like, 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 wanna 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 had 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. Ugh. So PR agencies, we all agree, definitely the best way to spend money. Just check. A %.

A bit. Your first dollar.

Yes. Let's talk about lawyers next. So I remember I spent $50,000 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 wanna get in there. I wanna you know, this is where I'm adding value. Right?

I'm I'm gonna go kind of do this. And just like the PR agency, I was attached to some literally first year in the law firm, just graduated from law school, lawyer, and he just billed me at $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 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 your employees, you probably don't have a company. But, unfortunately, I'd spent a ton of money.

And then I would say that the other thing that people kept on telling me that I didn't quite understand was that you need to be able to get your lawyers to spec their work before they do it. Hey. Like, I need an incorporation. How much is that gonna cost? Right? And if the lawyer basically says, oh, I don't know. Every incorporation's different, That's kind of not true in most cases.

There are edge cases, but in most cases, if a lawyer can't tell you approximately how much something costs, that probably means they haven't done it a lot of times, and that's a bad sign. Like, you want lawyers who've done it so many times that they can actually be very upfront with you.

I think the other trick with lawyers that I learned, a lot of people said, oh, I negotiate my legal con my 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 wanna 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, fuck.

You got me there. You've you've lawyered me. But what a lot of large law firms are willing to do is give you what's called a payment plan, and I fucking love payment plans. So it's like, oh, we just did a financing, and we did a series a, and it cost $50,000. You don't have to pay the $50,000 right away.

Oftentimes, if you work with an established large law firm, you can spread that payment out over twelve months interest free. It's basically like getting a free loan. And so a lot of times, we would use that because legal fees can be spiky. A lot of times, we would use that trick to kinda smooth out legal fees, extend our runway, so on and so forth.

So I think the thing with lawyers, you know, the big trick is don't customize shit that you shouldn't be customizing. Get quotes. Get specs. Figure out how much you're gonna 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 have come across to 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.

Pick firms that work with startups. Yeah. I mean, I think 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 wanna 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 gonna go public, and they'll make lots of fees on you at the IPO. And, like, that works for you 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. So they're just gonna Yeah.

And to Harj's point, the largest ones are usually.

the most willing to do payment plans and things like that Yeah. Because they take that long view.

Alright. The last area where people spend money, and this money tends to be bad if you're successful because it it's almost always equity, but sometimes it's cash. It's advisers. We've all seen pitches where someone's like, hey, Anne. Let me introduce you to board of advisers. Like, we need advisers. Investors don't invest in companies without advisers.

Or, like, this adviser can help me get in here or can help me do that, or it's gonna do one call with me a month, and it's gonna change my life. What have you all seen on on the adviser front? And and when have you seen the adviser make the difference? I'm I'm curious if you've have you ever seen the advice the paid compensated adviser make the difference? Well, the short answer is no.

What I see is a lot of times, YC founders come in under considerable stress and agony almost because there's some person that they really respect or admire or they've long wanted a relationship with or they feel some sort of obligation to for some reason. They've helped them in the past. And they're basically saying, alright. Now's the time. You're NYC or whatever. You're doing a start up.

You gotta give me 3% of this company or something like that. And it it just it's a real bummer. And so a a lot of my adviser advisory discussions with founders are about trying to help them, like, chill out and understand, a, 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 adviser that that's what that's what did the thing. That's how we got product market fit. That one advisor made the difference. It's just I've never heard that before.

Advice definitely makes a difference. Right? Like getting advice from people Yeah. Definitely makes a difference. But almost always, the advice comes from someone who isn't a specialist adviser. Right? Like, it's like it's someone who's like an investor in your company. Like Yep.

It's someone who just like it's someone who you were introduced to as a domain expert who just gave you the advice for free. Like Yes. 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, Haj, even if those people who did a call with you wanted to charge you, like, amount of time it would take them to figure that out and then Track that out. Send people over time. Send you an invoice. Like, for some sort of that's gonna make no money, it's like, no. No.

It it's easier for me to give this away for free. So, yeah, the the adviser thing, it's it's also tricky kinda your point, Brad, in the kind of bio hard tech, you know, we see a lot with folks coming out of universities where, like, they'll have some professor who wants twenty, thirty, 40 percent of their company, but, like, the professor is not gonna 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 1%. And we're like, bam. YC just paid for itself right there. Like, that one phone call.

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 advisers. 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 wanna 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 it's so often the case that I'm when I'm a preproduct 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 but 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 kinda need to, like, earn the right to spend the money. And the way you earn that is by being creative in figuring out, like, what's the, like, low cost or no cost way of me testing this out?

What's, like, the cheapest way for me to test out if, like, a human doing sales calls works? Like, what's the cheapest way for me to test out if, like, an Android app is gonna 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, the the there's always a creative solution. That's what you have to do early on.

And then once you once you found that and once it's got some signs of promise, then you kind of have earned the right to spend money on it and try and scale it. Yeah. I always think about this.

Like, when we were coming up, it was a bit of a simpler time just because the average startup had less money. And so it was a lot easier to say, I can't spend money on this because I can't afford it. Like, screw it. I 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, 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 you have no contest. It's like, you're in no way in authority to hire someone if you haven't tried it yourself. So I think that's a a huge one. Alright. 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. Let's hope that that was the case. And when you're post product market fit and you raise that big round, go nuts. You could take all that pent up energy that of not spending on these things.

You can spend money then and realize how much of these things are still kind of a waste even post product market fit. But pre product market fit, stay.

disciplined, let's say. Don't spend money on anything pre market fit.

Alright, guys. Great to see you.

Thanks.