Revenue, head count, PR, and quality--if one gets ahead of the others, you're screwed.
When you build a company, you have to choose between two very different ways of growing. When my co-founder, Michael Pryor, and I started Fog Creek Software, we made a conscious decision to bootstrap. Our goal has always been to grow slowly, organically, steadily, and profitably. By contrast, a lot of the flashy companies you read about in magazines, especially high-tech companies, believe in the "big bang" model, with very fast growth fueled by lots and lots of outside investment.
Bootstrapped companies start on somebody's credit card. And in their early months and years, they do whatever it takes to break even, even if it means they have to take a few diversions along the way. It might be nice to build a giant ice cream company that will someday have millions in sales, but for now you're going to have to settle for opening a little shop in Vermont, hope that it's profitable, and, if it is, reinvest the profits to expand steadily.
When you bootstrap, things move very slowly and in sync. Your revenue grows only about as fast as you can hire skilled workers. The degree to which customers are aware of your business never outstrips the quality of the goods or services you are able to provide to them. The highly scientific charts on this page show the rate at which these four variables progress in the typical bootstrapped company.
In our case, we always wanted to be a software company, selling off-the-shelf software to thousands of customers at a low price. But that kind of company takes a while to get going--it takes years to write code and build a large customer base. So in the early months, to pay the bills, we took consulting engagements that brought in a quick and regular supply of cash. Those gigs bought us the time we needed to establish the off-the-shelf business.
One of the benefits of this model is that it's pretty cheap. According to the company history published on the website of Ben and Jerry's, the partners started with a $12,000 investment, in 1978. By 2000, when Michael and I started Fog Creek, the cost of getting a company off the ground was a little higher. I put $62,000 of my own money into the business so we could pay a couple of salaries while we waited for our first consulting checks to arrive.
Compare our humble way of doing business with the approach of big-bang, high-burn-rate companies that raise money almost as quickly as anyone on their staffs can spend it. They are in a terrible rush. If they are in a new field with no competitors, they feel as if they are in a land grab and that they have to get big superfast. Every minute matters. And there are lots of fun ways to spend money to try to speed things up. Having trouble hiring quickly? Offer BMWs as starting bonuses.
Can't wait for a landlord to build out office space? For between five and 10 times the market rate for empty space, you can be in fully furnished offices tomorrow!
But in the rush to win a land grab, one thing that usually gets left behind is a company's culture. And I believe building the right culture is one of the raisons d'être of any company. Ben and Jerry's exists because of the socially conscious values of its founders. Fog Creek Software exists because we believe in treating programmers well and developing friendly software using highly reliable engineering practices.
Our corporate culture includes all kinds of techniques for writing great software. These techniques are not trivial; they must be learned over a period of time. As a new programmer is learning our way of doing things, he or she needs to be mentored and coached by someone more experienced. We can't add programmers too fast; otherwise that mentoring can't happen, and we'll wind up with a bunch of programmers who are no better than the industry average. Our entire competitive advantage would be lost.
If you run a bootstrapped company, you should be able to regulate growth so that revenue, head count, PR, and quality increase at roughly the same rate. Unless you raise infusions of cash from outsiders, you can't hire any faster than your revenue will support. And your revenue won't grow any faster than the natural growth of your marketplace, because you have no money to pay for a big national advertising campaign. You're lucky if you have time to call on a few prospects each week. Besides which, the first version of your product is probably rather limited in capability, so the potential market is going to be small until you get a chance to build version 2.0.
If you raise capital and go for the big bang, however, you can take steps that throw the curves on my chart out of whack. All sorts of growing pains will ensue. For example:
1. Let's say revenue grows faster than the rate at which you can hire. The result: poor customer service. Your staff members will probably become overworked and demoralized. They will take days to get back to prospective customers, by which time those prospective customers will have gone to one of your competitors. Think of a flashy new restaurant that gets a rave review during its opening week, gets flooded with happy yuppies, and melts down because the staff just can't keep up. Meals take two hours to arrive, the wait staff struggles to mollify diners, and nobody ever comes back to give the restaurant a second chance.
2. What if you hire employees faster than you can reasonably expect the quality of your product to improve? The result: New hires don't have a chance to learn the company culture and the founder's values from experienced hands, so the quality of work they do and the quality of service they provide are inferior. The fastest you should hire employees is the rate at which they can learn to do their jobs.
3. And if PR grows faster than the quality of your product? Because you haven't worked out the kinks, a lot of people who are interested in your business become tire kickers rather than paying customers. Many of these customers will be permanently convinced that your product is simple and inadequate, even if you improve it drastically later on. I've taken to calling this the Marimba Phenomenon, after a 1996 software start-up founded by a few key creators of the original Java programming language. In those days, Java was getting massive amounts of publicity, which put the spotlight on Marimba. The start-up's first two products were released hastily, and honestly, they were remarkably simplistic and basic and didn't do much of anything. But Marimba's CEO, Kim Polese, one of the rare female CEOs in Silicon Valley, managed to leverage the Java hype brilliantly to get an incredible amount of press.
Millions of software developers downloaded the first products and found them to be unhelpful. Over the next several years, the products became better and better, but I suspect few developers ever bothered to give them a second chance. All I remembered at the time was how overhyped the initial versions were. The fact that the company garnered a lot of publicity early on probably hurt its prospects among developers long term.
It's even worse to get publicity before there's a product people can buy, because then, when the product really comes out, the news outlets don't want to do the story again. I call this the Segway Phenomenon, after the two-wheeled standup scooter that got a ton of attention before its release, so much so that it was an old story by the time the product actually came out. While your business is still young, don't advertise so heavily that your resources are stretched thin: Let your reputation spread by word of mouth. Save your marketing dollars for when your company is mature and in a position to blow people away. The point is, any misalignment in the rate of growth at a small company can create huge problems. Meanwhile, a business growing at a natural pace has a reasonable chance of keeping these things in balance. Raising too much money--whether it is venture capital or private equity or from a strategic investor--is often the key deciding factor in whether a company grows at a natural pace or gets misaligned. Typically, companies that bring on outside investors will use the capital in one of two places: advertising and PR or hiring new employees. Either investment throws off those four curves I described above.
Even if you have a lot of money with which to promote your products, it is hard to improve their quality at the same pace, because that takes time--especially with high-tech products. Similarly, when it comes to hiring, it will take any new employee time to learn your business and how to play his or her role correctly. It takes years for a restaurant to build up enough repeat customers to keep the tables full on weeknights, and it takes programmers years to learn the ins and outs of a piece of software. It probably even takes new people at Ben and Jerry's years to fully understand the ice cream. Which means that, paradoxically, a company that lands a big investment too early is often worse off, not better. It often finds itself in a situation where it is much harder to make that investment pay off.
It may seem odd to say no to opportunities that promise your company a great leap forward. But if the result is that your business is easier to manage and more likely to please its customers, how can you afford not to?
Joel Spolsky is the co-founder and CEO of Fog Creek Software in New York City and the host of the popular Joel on Software blog.