Paul Graham Why is it profitable for a startup to be generous?

Original author: Paul Graham
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fatcatI recently received a letter from the founder that helped me understand something important: it is beneficial for startups to be good people.

I grew up with a cartoony image of a very successful businessman: greedy, smoking cigars, noisy, overbearing and not too picky about the means. As I wrote earlier, one of the things that surprises me the most about startups is that some of the most successful creators are nice people. Maybe successful people in other industries look like this cartoony image, I don’t know, but not startups.

Many people think that successful startup founders are obsessed with money. In fact, the secret weapon of the most successful creators is that they are not like that. The most successful founders are driven primarily by their company as a project.

I came to this empirically, but I never saw theoretical evidence for this before I received a letter from this startup. In it, he spoke of concern about his principled kindness, because of which he does too much for free, and believes that he needs to be a little tougher.

I told him that you should not worry about this, because his behavior helps the rapid growth of his startup. If he was focused on maximizing the profit from his business, the growth would be somewhat smaller, but the growth schedule would be exactly the same form.

As an example, consider a situation where your company currently brings $ 1000 per month, and you do something so cool that you grow by 5% per week. Two years later, you will earn about $ 160 thousand per month.

Now suppose that you are not so greedy and take half of what you could take from your customers. This means that two years later you will earn $ 80 thousand per month instead of $ 160 thousand. How far are you behind? How long does it take to get to the same income level? Only 15 weeks. After two years, a generous startup in just 3.5 months will catch up with the income level of the greedy businessman himself (ceteris paribus).

If you're planning on optimizing numbers, the only way is to increase your growth rate.. Suppose that, as before, you take half as much as possible for your services, but such generosity increases your growth rate to 6% per week instead of 5%. Compare the income levels of a generous and greedy strategy after two years of running a business? The first is already giving $ 214 thousand per month, compared with $ 160 thousand at an accelerated pace. For another year, you can earn $ 4.4 million per month against the greedy founder with $ 2 million.

Obviously, greed only takes place when its manifestation provides rapid growth. Unlike many other industries, this rule does not apply to startups. Startups usually win by doing something so cool that people recommend them to their friends, as a result, greed will not only not help you with this, but it will probably bring additional problems.

Another reason for pumping money out of clients is that, as a rule, startups lose money at the beginning of their activities, and increasing profitability at the expense of the client makes it easier to achieve profitability before the initial funding runs out. At the same time, the high mortality rate for startups lies in the lack of funds, caused, as a rule, by slow growth or excessive costs, while insufficient efforts to extract client funds have nothing to do with this.

So if you are a startup, here is a deal you can make with yourself. She will make you happy, and your company successful. Tell yourself that you can be good for as long as you want, working hard at your growth rate to compensate. Most successful startups come to this compromise unconsciously. Maybe if you make it consciously you will be even more successful.

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