Common Mistakes That Start-ups Make

Competition doesn't put start-ups out of business. Rather the businesses tend to put themselves out of business by hiring the wrong people, being afraid of making money, and spending too much early on.
  • Transcript


Question: What are the common mistakes new businesses make? 

Jason Fried: When you borrow money from somebody else, you’re on their schedule, you’re renting time.  When you have your own money, or when you’re generating money through customers, you own your own time, you own your own schedule, and so you can take your time.  We can take 10 years to do something because we have revenue coming in and there’s not someone saying your loan's due in three years, you know.  So I think a lot of people struggle because they start of by borrowing money and then they’re sort of on someone else's schedule and they don’t have time to sort of get in the groove.  So there’s some of that.  I think people just typically just try too hard, actually.  That’s weird because you have to try hard to succeed, but I mean try hard on the wrong things.  You focus on the wrong things too early.  And those can range, depending on the business you’re in.  But I don’t think it’s... I guess my point is, I don’t think it’s competition that puts these businesses out of business, I think it’s the business themselves putting themselves out of business by hiring the wrong people, being afraid of making money, spending too much money early on, maybe getting a storefront that's too big if you’re a physical store.  You know.  Doing all that stuff when you really got to focus on the product first and keep it as small as you can and if you’re going to open a bakery, open it out of your house first.  Just make – I mean, that’s probably technically illegal in some place, but make some... if you want to open a cupcake bakery, make some cupcakes and sell them at the Farmer’s market for six months, for a year first, on the weekends.  See if it works.  If it works, okay, now you have some people who like your cupcakes, you’re selling out every weekend.  Now maybe you can move into something else.  Instead of saying, "I’m going to open a bakery" and go buy a storefront and some expensive machinery and stuff like that.  So I think people kind of start a little bit too quickly sometimes too and they should just make their time and starts something on the side and see where it goes. 

Question: How did 37signals transition between business models? 

Jason Fried: The big thing for us was that, we started out as a web design firm.  And we were doing client work for hire—web design work for hire.  And it was great.  We were doing really well and things were going all right.  And then we hit on this idea to make project management software.  Right?  But we didn't stop our client work business to build software.  We started building software on the side.  So we treated the new product like Base Camp, which was our first product, as a client.  So we still were doing client work.  So there was an overlap.  So we kind of treated Base Camp as a side project, as a side business and let’s see what happens.  And it turned out in a year or a year and a half later, it was making more money for us than our consulting business.  So then we could stop doing consulting—which was a great day—and sell software instead.  But we didn’t say, like we’re going to stop doing consulting and start doing software the next day because that’s very risky.  And I’m not a big fan of risk.  I know like the whole entrepreneurial myth is like you know, the risk, take on risk and the entrepreneur with the risk.  I just don’t buy that.  So I think side businesses, trying something on the side, spending a few hours a week, seeing where things go first is the right way to do it.  And especially if you have a day job.  People dream of starting their own business, I don’t recommend people quit their day job and start their business.  I think you should start your business on the side a couple of hours a night, a couple of hours a week, see what happens.  You know, use your day job salary to pay the bills, to fund your new idea, and then maybe a year later you’ll be all right and you can do that.  So, the business model shift for us was a slow and gradual shift making sure we were able to sustain ourselves on the new model before we give up the old model 

Question: What milestones should a start-up reach as it grows? 

Jason Fried: Our new business model, the model we have today is a subscription model.  So people pay us on a monthly basis to use our products.  And we had this idea that if we can make $5,000 a month on Base Camp after the first year, so $60,000 a year, that would be good because as a side project, we didn’t have this vision of changing the company. We hit that in about six weeks, I think it was that we were making $5,000 a month.  And so we realized at that point that something... there was something there.  Didn’t know how big it was going to get.  It’s gotten much better than we ever imagined.  But that’s when we sort of knew that things were going to be okay.  But at that point, we didn’t change.  And so we didn’t say, oh my god, we got to quit this thing and start something... and change our business or we’re going to be successful so let’s buy a bunch of servers and... We had one server the first year and when we needed two, we bought two, when we needed three, we bought three.  You now, it wasn’t about, "Wow, I think this is going to work, wow let’s spend money and get crazy."  It was about, "Let’s slowly grow, just like everything in nature, slowly grows."  Things get stronger and better slowly over time.  And that’s how we try to run our business.  So it’s not about the big plan, it’s about a day by day by day by day and seeing where things go and just kind of making decisions as we go. 

And the main reason why I think this is important is because people often make decisions with the wrong information.  So they make decisions far into the future, based on information they have today.  You’re better off making decisions today based on information you have today because that’s when you make your best decisions.  You make your best decisions when you have the best information.  That’s always right now. You and I know more about this interview right now then we did three months ago.  So, you can ask me a new question right now.  If you had all your questions, you have some written now, but if you had all of them written out and never changed your ideas on the questions you might want to ask, the interview wouldn’t be as good as you can say, "Jason just said something now I can ask something else."  So, that’s why... that’s the agile side of it.  So there’s a little bit of planning, but there’s the agile side of paying attention to the information you have right now.  And that’s why I don’t like the big long plans because you’re saying in two years you’re going to be here and in three years you’re going to be here.  Well you’re just saying that based on information you have today.  It’s not really going to be any good in two years.  The best information today is the information you have today and that’s the information you have to make decisions. 

Question: What advice do you have for Web developers thinking of starting a business?

Jason Fried: I think it is important if a developer is going to start a business that they understand business at some level.  And I think business should be taught in design schools, it should be taught to engineers; it should be taught at every level because a lot of people when moving into the future are going to be doing things on their own.  So I’ve seen a lot of software built by developers and they put on the market and they don’t understand about pricing, they don’t understand anything about customer service, they don’t like customers, you know, there’s all that stuff that can happen.  So... and the lucky thing about David, especially is that David actually has a great business background. So  David’s a developer with a business background so we make a lot of business decisions together and that’s a really valuable asset.  To have somebody who’s leading developers who also understands business.  So it’s not just about technology, it’s not just about code. It’s about; we’re building this because it has to do this, because we have customers that pay us and that sort of thing.  So, I would just recommend anyone that is going into business as a developer, for example, have some business background or team up with somebody who understand business

Question: How do you balance the business side with the technical side? 

Jason Fried:  I’m not technical myself.  I do design and I do business stuff.  But it’s important that I have someone like David or some other partner, some other person on the team who is making those technology decisions because I don’t know anything about that.  And so if I try to know things... if I tried to guide people who are doing the work like that, I’d probably upset them, they wouldn’t be happy and they wouldn’t do good work.  So I think it’s important to know your limits.  Know what you're good at and what you're not, and what you’re not you should find someone that can help with that because it seems like a lot of technology decisions made by people who don’t understand technology are typically bad decisions.  Now when we built Base Camp, this is actually sort of a little quick story I will tell you.  When we built Base Camp, I was learning how to code something called PHP, which is a language a lot of people use.  And we hired David to build Base Camp, and David was a PHP programmer.  But he learned about this new language called Ruby.  And it was out of Japan, it was relatively new, I think. And he said we should build Base Camp in Ruby. And I’d never heard of Ruby.  I’d heard of PHP.  And so if I was so stuck in my ways, I don’t know technology, but if I’m like "I know PHP and so PHP’s got to be the way because that’s what Yahoo uses, or that’s"—and forced David to use PHP, Base Camp wouldn’t have been as good because he wouldn’t have been as happy writing it.  And so I trusted David because he’s the one who knows technology to say, if you think Ruby is the right language, then you should use Ruby.  And that turned out to be a great thing.  Ruby on Rails came out of that and all that stuff, but the point there is that I was familiar with something and unfamiliar with something else, but I said, "Let’s go with the unfamiliar thing because the person that’s really familiar with it picked that one."  And that’s where it’s important to know what you’re really good at.  And I wasn’t really good at making that technology choice, David was and that really worked out for the better.

Recorded on July 22, 2010
Interviewed by Peter Hopkins