Paul Graham: How Startups Get Powerful
Making Startups Powerful
In this essay, Paul Graham shares a key heuristic from his office hours: ask what would make a company more powerful, not just more profitable. He explains how to gain power by owning the customer relationship, making money flow through you, creating network effects, going full stack, selling to early-stage customers, and being generous. He also warns against markets dominated by 'mafia' players like record labels and PBMs.
Being generous makes you more powerful. As Tim O'Reilly said, you should create more value than you capture. Many hard-headed business types would write this off as idealistic hippy stuff, but in fact this is the route to becoming really rich.
- CM30
There is some really good advice here. Honestly, I think this might be one of the most important takeaways you can have as a startup founder/CEO in general:
> It's exciting when you notice users "misusing" your product to do something you hadn't intended. This means there's something they want so desperately that they'll not only use any solution you offer, but even use things that aren't meant to be solutions. When you see something like that, don't be annoyed that your users are using your product wrong; listen for the message they're sending, because it could be valuable.
A lot of very specialist businesses seem to fail this test, and lose out on the potential for a huge market because of it. Like it sounds ridiculous as hell, but I remember when GoAnimate had a huge audience among kids and teens looking to make silly videos for sites like YouTube. I also remember the company feeling uncomfortable that they were getting known for that online, and trying to refocus their product/service towards business users instead.
Maybe they should have not done that, and realised that the periphery demographic was a potential customerbase that could have used a slightly different, perhaps more focused product with features relevant to their usecases.
Similarly, I remember an example of a business creating software meant for designing signs for road and metro systems being surprised that toy train and simulation game enthusiasts were using the software for other uses. Again, feels like […]
- dqh
> Being generous makes you more powerful. As Tim O'Reilly said, you should create more value than you capture. Many hard-headed business types would write this off as idealistic hippy stuff, but in fact this is the route to becoming really rich.
> Hired CEOS take the power of the companies they run for granted, whereas founders remember the days when the company was so weak that it had to delight users to survive.
I've always instinctively followed the generosity path, and have experienced that when customers are delighted and that when frictions are removed (or not added in the first place), good things will follow.
However, I have not always been able to convince others to trust in and follow this path. Can anyone offer any advice or experiences on talking people out of trying to prematurely squeeze out every last penny?
- bob1029
> There's a variant of going full stack where you eat your way gradually through the customer by doing all their hardest work for them.
One of my clients provisions front office applications for banks and the conversation has come up more than once regarding the client evolving into a bank themselves and building up operations around the capabilities of the product stack.
One good multi-regional partner and it could be a radically different animal. Providing software to one very big customer tends to be a lot simpler than providing it to 20+ smaller customers.
- austin-cheney
> Another thing I'm always looking for is tails that could wag the dog. The history of startups is full of these. Paypal started out doing security for hand-held devices. They created Paypal as a demo of their security software. But then eBay sellers started using it to take payments, and after a couple months the founders acknowledged that this was the business they were now in, even though they hadn't meant to be. So whenever founders build something peripheral to the main product I always ask: could this be the real product?
Reminds me of Slack. https://techcrunch.com/2019/05/30/the-slack-origin-story/
I never understood why anybody would pay for Slack when its based on IRC and IRC is free, but whatever. I guess when you are spending other people's money and all your employees are super insecure these kinds of things pay for themselves... maybe?
- fhub
The comments here are taking a very uncharitable definition of “power”. If I take that definition I can see how people are being so negative. But just a slightly more positive definition and this all seems like reasonable dialogue to have with an early stage startup.
- sublinear
> Since startups make the best stuff, they're strongest on level playing fields. They're weakest in markets dominated by companies you'd describe as mafia. Record labels are mafia. PBMs are mafia. In these worlds you don't win by having the best product. Indeed you may only even exist for as long as the mafia chooses to allow you to. Which is not to say they can't be defeated. They probably can be, but you'd have to do it by coming in from the side — by somehow making them irrelevant, rather than by frontal attack. Then you wouldn't depend on beating them to succeed; it would be an ancillary benefit of winning in another dimension.
I think this is the strongest point being made here. It so accurately describes the situation in every category of software that it almost makes the rest of the post obsolete advice.
- danvoell
I feel like the basis of this post is that in the current state of software development, SaaS alone holds very limited power.
- smashburger
Is open source still viable these days for a business model that relies on a single large customer and anyone else that also happens to need that solution?