Is frugality underrated in startups?

Rule #1 of business:

You can generate revenue to infinity, but you can only cut costs to zero.

This alone means that a bias toward frugality will probably cause you to spend time on the wrong things. It's the equivalent of a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!

Of course, if you haven't found product-market fit, frugality can help give you more time to find it. But once you have a proven business, frugality is a death sentence. While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers.

Generally, you get what you pay for. So if your gut is to always pick the cheap option, you're going to be using bad tools and hiring bad people, and creating bad products.

It really depends on how your business is financed and on your access to capital.

As many of the comments (correctly IMO) point out, VC-backed start-ups trade money to compress timelines: for example, hire in two weeks what a non-VC might be able to hire across two years. When you have VC funding and more of it is available, it is in your interest to leverage that money as efficiently as possible to make the case for growth and further investment. Frugality can further hurt you if you are in a VC-fueled industry race because you’ll be outspent and outbuilt by your VC-fueled competition, and it will be harder for you to raise $.

That said, if you’re a regular entrepreneur or business owner, the script is flipped. You are always working within the constraints of profitability and (assuming no major investments are made in you), access to capital is difficult and expensive - debt and credit financing can only grow as a function of revenue and needs to be paid back (whereas VCs give you ‘free’ money, free-as-in-equity). Given that, if you make a dumb financial decision it makes more of an impact on your business. While you still want to go in on big (validated) bets, in general it makes sense to err on the side of frugality and spend less than you bring in.

>I feel frugality is one of the most important points for startups and entrepreneur.

If you look at some startups, it seems like they're simultaneously frugal and not frugal. E.g. early Google 1999 paid for meals cooked by a chef and onsite massage therapists even though they had no revenue and profit until 2002 -- but on the other hand -- they were very frugal with spending the least amount of money for computer parts[1] and datacenter rack leases.

Likewise, Amazon was famous for being cheap by having employees make desks out of doors but they were bold in spending money on acquisitions that were strategic to their goals or taking expensive risks on Prime's "free shipping" getting abused by customers.

The way to reconcile the inconsistency is that being frugal can't be applied in every area of the company.

So maybe a more realistic tactic for a new YC company is ... it's ok to splurge $5000 on an automatic cappuccino machine in the office for employee well-being, but at the same time, be ultra frugal in AWS costs and analyze the line items like a hawk to make sure the developers are not leaving up idle EC2 instances and wasting money.

[1] https://commons.wikimedia.org/wiki/File:Google%E2%80%99s_Fir...

A piece of advice I once got from an old boss and very successful entrepreneur was to focus on increasing revenue, not on decreasing costs. I said don’t both ways increase profits? He responded that your costs could only go down 1x but your revenue can go up almost infinitely.

Not to say that frivolity is good and frugality is always bad. But it shouldn’t be an obsession.

As an employee I would much rather work for a company with soaring revenues than one with quickly decreasing costs :)

I would say frugality is very underrated. It's also not just about saving money. Reducing complexity in your operations (saving time) is arguably more important. Every purchasing decision we make at our 7-person company usually passes through me at some level, and the first question I always ask (in my head) is:

"Would I spend this capital if it were my own money?"

If I answer yes, then it is an automatic approval. Examples of this being petty cash expenditures like one-time licenses for software tools, or very-low-cost on-going services (<$50/m).

If I answer no, then I usually have to engage in a conversation with other stakeholders in the business to build an understanding of how the expense will add value to our business over the long term.

What I like to try and do is push all purchasing decisions into the trivial camp if at all feasible. Outsourcing to 3rd parties is the most obvious way to do this. E.g. instead of hosting your own git repositories on your own servers, look at using Git[Hub/Lab] public/enterprise. This can take a $10k+ capex and diffuse it out into a monthly concern that is lightyears easier to account for and change over time. The challenge is making sure that you aren't outsourcing your key value drivers to 3rd parties. Compliance & industry fit are also a consideration here. Developing some things in house can potentially save you a ridiculous amount of money depending on the specific problem you are trying to solve. And, in-house development will ultimately contribute to a far more important basis of value - your company's intellectual property.

Overrated. When you are running a business you have to consider income, labour and employee retention. Businesses generally spend "extra" money in order to save labour or generate income. That skiing trip to the Alps that you organised for your workers last year? That saved you 10 times as much in recruiting, on-boarding and pay rises. That really expensive enterprise SAAS that you bought? Its boring, but it freed up time for your sales people to generate 3 times more business. etc.

I think it's a bad thing for the lower ranks and a really good thing for leadership.

Frugality can mean being penny wise pound foolish. Not buying tools people need, building things when you could buy them, and settling for less. It's hard to evaluate people on frugality without it being about cheapness. I would argue buying top of the line monitors, software, computers and chairs for your engineers is the frugal choice with the best mid and long term value for your money, but will it look like that to others? Likewise I've seen cultures where the CTO had to approve buying a $50 replacement laptop charger - that's just a waste of time.

That said, leadership should be very deliberate in how money is spent. Taken too far, you can end up with a bunch of high cost low value tools. For example many times I've seen AWS bills where a few weeks of work means millions in savings per year, or tools that cost $10s of thousands per month but are only used by 1-2 people. And that adds up.

I'd always looked at it as there being '2 strands' within the company. There's the main one, where you "make the money" - this (obviously) has to be profitable at all costs. Then there's the other than intertwines around this to serve the first indirectly - and you can be more flexible here. e.g. Revenue from google's adwords has to support the cost of their infrastructure and free services - if that's ticking along well, you can have the nice buildings, free chef meals etc. This can be turned up and down depending on the market.

Counter-example that springs to mind is AvE's Juicero teardown - https://www.youtube.com/watch?v=_Cp-BGQfpHQ&ab_channel=AvE

Their product was lavishly over-engineered and beautifully made at vast expense - they were never going to make their costs back however over-priced their fruit-pods were. The more customers they got, the more it was going to cost. Frankly didn't make any difference if the Juicero staff were getting free meals or not (or had their salaries halved) - the lack of frugality at the core of their business doomed them.

Joel Spolsky wrote a classic blog piece on this 20 years ago. If you're in a new market trying to grab leadership, frugality is not important, speed is. If you're in a competitive market keeping costs low is very important. https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...

I think frugality is absurd, and minimalism is what you wanna be aiming for where you are highly sensitive to the ROI of your each and every spend.

Frugality is being cheap just for the sake of not spending money. Most startups on the other hand have more incentives in maximizing their spend towards increasing and retaining their current and future cash-flow.

If we combine that with network effects, your cash-flow is technically growing relative to the exponential growth of your network / userbase / community.

Related post: https://wallstreetplayboys.com/become-a-minimalist-dont-be-f...

This may not be exactly what you mean, but I worked for a successful startup that chose to cut certain costs in favor of others. I appreciated this practice--no excessive waste, only spending on what felt like mattered. My salary was above average for the market, with best in class health care. Those matter way more to me than pool tables and beer kegs.

For example: 1) no free lunches or snacks (though there was always lots of free food around from leftover meetings with customers); 2) "swag" for employees once per year, one item, thoughtfully chosen and good quality. This resulted in everyone getting really EXCITED about it and rallying around it; 3) a Bevi machine (effectively a bubble water fountain) instead of coolers of free drinks.

I think spending smartly is more important than simply being frugal.

For instance, when you are buying equipment, you don't buy the cheap stuff just because it's cheap. You buy the best stuff the first time, because you will usually save money over the long run. If you bought the cheap stuff first, and it didn't work or didn't last, but then bought the best stuff later, now you paid extra and wound up at the same place.

This doesn't apply to everything, though. The boss I had who operated this way strictly decided he didn't want the $80 video card in his computer, he wanted a $200 one (which back then was like buying a GeForce 3070 just to run spreadsheet applications on a single monitor).

It depends based on the type of business you're in.

I help run a physical goods business. Margins on these types of businesses (for the most part) 10-15%.

If we find a way to reduce expenses by 0.5% (of revenue) by spending 10 hours, it's worth it. On the face of it, it seem trivial and not worth it. But at the end of the year, these cost saving tactics add up and contribute to profitability. Sometimes it's the difference between giving our team a bonus or not.

Whereas in a SaaS business, the margins are far higher and your time is better spent (probably) on increasing revenue, rather than shaving expenses.

As someone already said, there's only so many expenses you can cut.

Being frugal is only half of the equation. It depends what you do with the money you save. Are they being frugal to make targeted investments in the things that have a good pay off or are they frugal in ways that prevents them from even taking advantage of opportunities.

By way of analogy, consider a household that is really frugal and doesn't spend most of the money the could spend. If that is part of a goal to put their kids through college with no debt, save up to buy a business, pay off debt, etc. then there is a plan. If they are just stuffing money away into a mattress it isn't quite the same.

If anything I'd say it's overrated. For all the hype, how many Lean Startup success stories do we have vs. VC-backed, burn-money-for-time plays? How many IPOs in the past 10 years have come from turning old doors into desks instead of going to Costco?

There's obviously no one way to success in entrepreneurship. If times are lean and you have no easy access to money, sure, being frugal is phenomenal. If you're a 40 year old PM at Facebook thinking of doing your own thing? Pay to delegate every single thing you can. All in all, play to your strengths.

I personally think frugality is always important, regardless of whether you're well funded or not. It helps set the tone for your company as one that wishes to avoid frivolousness, which helps you and your people make good decisions, in addition to preventing you burning through cash too quickly.

Balance is more important than frugality. Know where to spend and where to cut costs. I've been in more than a few small companies that took penny-pinching to extremes.

You can't architect a complex application stack with a couple of interns and a newbie developer with no oversight. We'd pay below-market salaries for senior engineers and architects, because "a programmer is a programmer", and we'd lose them.

We'd refuse to pay $150 to have our DevOps guy get his AWS certification because "he may get a better job and leave"... which he eventually did anyway.

Yet the same company was burning $4,000 a month on AWS services that were severely under-utilized, because the DevOps guy left and no one knew how to optimize our AWS usage.

None of these products eventually succeeded. One of the two companies above shut down years ago after a multi-year schedule slip that resulted in the private equity funding drying up. The last time I looked, the other company has been struggling with cash flow problems for the better part of a decade, barely making ends meet, slashing salaries and jobs several times, pushing the better devs to greener pastures.

A few other companies I worked for had sound leadership and a clear vision. Not being a unicorn or a FAANG means we paid above market average salaries and empowered our engineers to make decisions (and mistakes!) to retain great talent and build cool stuff, which we shipped and sold. We invested in growing our people while keeping other overheads (such as unused conference rooms, wasteful pantry supplies, AWS expenses, etc.) low.

This is a funny question.

What separates successful people and companies from the rest is "investing in the right stuff and ignoring the rest."

Your whole success depends on your ability to identify that which gets the bulk of your resources and that which gets nothing.

At the moment we are living in a time with very strange monetary policy, in any situation where we have zero (or more absurdly negative) interest rates any venture that has potential to be profitable while growing will find that the easy funding tends to be valued more than frugality from the perspective of those providing funding. In a negative interest rate world burning money for time plays get a whole lot more attractive.

I've seen so many startups, first thing they do once they get that VC money, they move to a flashy new office, add top of the line coffee machines, craft beer on tap, fridges and catering, hire masseuse, team building coach, lease some supercars or executive cars, get some graphics designers, spend days on photo shoots praising their future product, take teams to fancy restaurants, find and fly business class to every possible conference in the tropics, meanwhile developer salaries stay the same or get cut, as company is in a "growth stage". Then people who did the most work and feel most exploited leave, they get replaced by young and energetic Udemy / boot camp taught developers and once the money gets close to run out, they get on a crunch to convince investors to pour even more money, whilst the board is thinking where to build their next house.

The need for frugality depends on where the underlying leverage of the business comes from. If your leverage involves a large capital pool - maybe you need equipment or facilities - you're gonna have to spend. And if you intend to recruit and keep top talent in the field, your spending has to bias towards keeping them happy. In those senses, you can't afford to be frugal.

But once you have the outline of the budget, you can look at it and say, "well, we aren't using that, actually". It's just really dangerous to go in doing that first thing, since it takes possibilities off the table and locks you and your staff into the logic of the balance sheet, and in businesses where growth can scale immensely, you have different ways to save at different scales.

I've observed that frugality is one of the least important values for startups and for founders. The vocation of an founder is to find product market fit and grow revenue. Frugality can be a useful tool for growing revenue. But without product market fit, it's a premature optimization, and a seductive one.

The graveyard of dead startups is littered with stillborn corpses as a result of founders who focused on frugality to feel productive rather than engaging in the necessary user research and product experimentation to validate product-market fit. If nobody wants to buy the thing you made, it doesn't matter how cheap you can make it. You won't survive long term.

If you think that someone else is wasting money, there are two possibilities:

1. They are spending money foolishly to get things that will not actually help them achieve thier priorities in their context.

2. You misunderstand their context or priorities and for them to follow your advice would be penny-wise and pound-foolish.

Monetary Frugality can waste time, trust, team performance, or all three.

The countability of money creates a special case of the https://en.wikipedia.org/wiki/Streetlight_effect.

The main distinction in investment. If you take investment, especially VC investment, no one gives a f*ck about cost savings. Your job is to provide an exit to investors are soon as possible, and you do that by growing market share.

If you are not taking investment, or otherwise get investors that are in for the long haul, and you intend to fund yourself off your revenue, then cost savings matter. This is usually appropriate for small niche markets that are too small for institutional investors. Note, such niches can still be million dollar businesses.

Depends on the finance and growth strategy being employed.

If it's heavily financed in a winner takes all environment where growth is the only metric that matters frugality is not required.

If it's boot strapped (no investment) and/or the product/market fit is not yet established then frugality is required.

I've only ever started businesses that are bootstrapped. It requires a huge amount of patience!

Replace 'frugality' with 'capital efficiency', 'cost-benefit analysis' in your search and you'll find positive articles from big names often claiming they're underrated or even only thing that matters.

Startup ecosystem just likes to create their own terminologies for things which we know is good for business and done all long.

I guess its just a matter of balance at the end of the day and finding what makes sense for your business (which is why some make it and some don't!). Its like investing. You could be conservative and sometimes that rewards you, but at the same time, you will most likely not take the risks that could return big reward.

In my opinion / experience there are two areas of frugality that are important to focus on for the types of high-growth venture-backed companies that are common topics on HN.

1. Having a non-wasteful, nonindulgent culture. I've heard culture described as "a set of rules for what you will tolerate" and you don't want to tolerate waste. If you're trying to grow fast you typically need to spend money to make money, but it's important that a culture of low-consequence spending doesn't turn into a world where you're throwing money at anything under the sun just because you have a lot of $ in the bank.

2. Having a handle on your gross and operating margins. It's really hard to dig yourself out of a whole of low/negative/declining margins, as they are often indicative of structural assumptions that get built into your business model.

Frugality is always good on things the customer can't see or doesn't add value to the customer.

Lots of great discussion here already. My own perspective is that it depends on both your goals and your source of funding. If your goal is to disrupt an existing industry, or create something brand new then speed is more important than frugality. If you are trying to create a business that solves existing problems but in a cheaper / better way (and nothing wrong with that) then frugality is more important as staying power is crucial.

In fact, staying power is IMO the most critical determinant of success. If you can stay in business then you can learn from your mistakes and pivot. In that case the discussion between frugality and speed is all about calculating your staying power, which goes back to your source of funding :)

No it is not underrated. It is just that frugal entrepreneurs are frugal about their comments too :)

Jokes aside. It is just not hip to talk about being frugal. You will get media attention if you say you spent million dollars on interior of your startup. That will not happen if you say you bought low-cost or second-hand furniture for your startup. Most long running successful startup founders are frugal. Quitely build the company with minimum financial overhead. The news about "non-frugality" from startups is mostly for PR purpose. If it is not, then it is stupidity on the part of the founder(s).

I read as "fragility", also an essential characteristic of seed stage ;)

1) Client is king : - On my domain ( 3D edit), I have seen countless startups with good financing come. They all died, not because of financing (be it too much or too little) but because all has a technology no client really wanted.

So yes at the end of the day, if you spend less (ie. being frugal), you will have more time to finalise your technology.

2) $$$ for market fit: I think the only advantage of not being frugal is only when you take the ride with your friend called Market-fit. At this stage you have to go fast. Really fast. So, having good money is very good.

The version of frugality that makes sense to me is: mind the ROI on your expenditures. Pay for the fancier equipment if it pays for itself faster somehow. hire the expensive engineers if they speed you up and that speed pays for itself. Buy equipment on ebay if the delays in returning defective equipment doesn't cost you more than you're saving.

Different people mean different things by "frugality", but "save money at all cost" doesn't make sense as an implementation.

If you are bootstrapping, certainly.

If you are a VC-funded growth company, trading money for time is often one of the smartest decisions you can make.

It’s the old saying: penny-wise, pound-foolish.

Rather than looking at costs as frugal vs expensive, I'm trying to look at costs as a subtractor or multiplier.

Spend on the multipliers, great people, good hardware, etc etc. save on the subtractors. I just spent a few grand on a laptop for a new employee, and $12 on a laptop case.

We saved a few grand a month by having an office which is outside of the city center (but same travel distance for employees).

Anybody else take this approach?

I was on an accelerator last year and am frugal. I don't think being frugal helps in the startup space. It may signify you are risk adverse.

I think people should be frugal. I don't think a company should be frugal A frugal company is like a boxer in a fight saying don't punch me.

Unfortunately, no. Frugality is almost 100% irrelevant. The only thing that matters (at least in growth businesses) is product market fit and you can see that reflected in all of the megacorps today as well, which are extremely wasteful.

You see a plethora of startups getting shiny new big offices with stocked fridges etc all whilst loss making.

This could be for many reasons. Two being; 1) To attract talent 2) The founders ego

Most VCs or Angel Investors want to see frugality.

The other day I was being frugal and ate some But Kut Teh (pork soup) that was left in room temperature for 5 hours. And then I had stomachache and lost plenty of time.

Similarly, another day I was trying to be frugal with time and didn't refactor a React component properly before building plenty of features on top of it. And now I'm facing the consequences and have to rewrite the whole thing.

Also: When I was 17 I got my first job as a full stack developer. My boss at that time was being frugal and underpaid me and so I left 3 months later. It has been 8 years since then and his start-up has somehow survived and is doing decent. But I'm pretty sure my current start-up (which doesn't underpay talents for frugality) will be way successful than his.

I believe yc has always encouraged startups to be frugal until they find product market fit, at which point then it starts to make sense to spend money to fund growth, whether it comes from vc or nkt

It depends.

In some cases, you do want to spend time to save money, while in other cases, you want to spend money to save time.

It's not as simple as optimizing money spent. It's usually "money + time" together.

No it’s not. You’ll miss the forest for the trees if you waste a second wondering if you should cut back on office snacks instead of how to grow your business.

Money is extremely cheap and easy right now.

Frugality feels like it is much more related to the movement of a washing machine, so maybe the issue is the word itself.

Frugality is underrated in businesses.

That said, not wasting too much time to save a few bucks is also underrated.

People who are mad at "frugality" would be 100% on board with "not wasting money".

Frugality is underrated even in this forum. Check out comma.ai. I think they are very frugal = smart.

yes. it can take 2-3 years longer than you think to get there, so make it stretch.