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Since Bill Gurley made headlines about startup burn rates and risk in September of last year, there has been a near unanimous chorus of VCs and entrepreneurs agreeing that keeping it lean and minimizing outsized risk is the way to go.
That said, Silicon Valley (and U.S. tech in general) is an incredibly competitive atmosphere, with engineers and data scientists taking top dollar and great benefits to ensure their loyalty. So how do you keep things lean while building a great team that will get things done?
As cofounder of UpWest Labs, a Silicon Valley-based Israeli-American accelerator, I’ve had the privilege of working one-on-one with nearly four dozen entrepreneurs, and I’ve learned a number of lessons from them about running a lean company, and about the importance of celebrating grit and hustle over a glamorous lifestyle.
Here are some of those lessons:
1. Promote a Culture of Survival
For early companies, all employees should be viewed (and view themselves) as entrepreneurs — not just the CEO and founders. Employees should feel the same pressure to succeed. Pressure creates stress, but it’s also how diamonds are formed. It increases focus and helps identify what is important faster. A “culture of survival” — in which there is a high level of focus and decisions are made as though the company’s survival depends on it — is important in establishing a team dynamic in which everyone is dedicated and in it together. Those who don’t fit in with such a culture should walk the plank.
CEOs and founders must clearly articulate not only the direction of the company but also very specific milestones and wins that should be achieved and celebrated. Doing this will allow the entire team to rally and take ownership of getting those wins, whether that means attracting particular customers, reaching a certain number of users, or implementing a new, much needed product feature. This transparency in terms of what the team is working towards allows them to go beyond joining a company to joining an aspirational mission.
2. Recruit for Loyalty
The Israeli entrepreneurs we work with are lucky to be able to recruit their technical teams in Israel, where competition is far lower. The common misconception in the U.S. is that you need the best engineers and that they should be located in Silicon Valley. Obviously, it’s impossible to compete with Facebook and Google for the very best talent if your “carrots” consist only of perks and benefits. What you need is an engineering team that you can rely on, that seeks to grow with the company, and that will stick with you through the difficult times. Find engineers who share your vision and would be willing to come in below their market rate to help the vision become a reality. The first people you hire should join because they desire to build something innovative and impactful.
In addition, while it’s incredibly important to have the business arm of your company close to Silicon Valley, technical talent can come from anywhere. It’s difficult, but don’t be afraid of running a split, or geographically distributed company. For example, Waze kept its business office in Palo Alto, while its R&D was in Israel. What would Waze’s burn rate have been if not just 10 but ALL of its 150 employees were located in Palo Alto? The company most likely would not have been able to attract and retain the same talent, and it may have folded before the right acquisition offer came along. Increasingly, investors are starting to pay closer attention to companies that can run distributed teams successfully and keep their burn rate low. Technology and team communication products are increasingly making this possible.
3. Entrepreneurship is Not About a Lifestyle – It’s Your Life
High burn rates are not just a symptom of competition for customers and talent — they also show that a cadre of entrepreneurs in the Valley are getting too caught up in generating growth, publicity, and showing off a lifestyle. Many startups are seeking to look like a successful company before they’ve generated a single cent in revenue. This is not the way of Silicon Valley. Entrepreneurs should instead be practicing austerity and making more with less. Think of Jan Koum of WhatsApp: He should be our model of humility and tenacity, someone who is both fearless in everyday decisions but also scared enough in the long term to understand that he had to move quickly. Unless you’re a unicorn company, investors will be looking ever more closely at work ethic and hustle over how nice your office furniture is.
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Other unnecessary spending comes in the form of conferences, and (misplaced) incentives, and real estate. Real estate is probably the leading issue when it comes to spending too much, too early. And you do not need to attend and fly to every noisy conference. Stick to the conferences that really matter and where your key potential customers will be, and do it on the cheap — it’s usually not worth your money to pay for a booth or speaking spot. In addition, do not create monetary incentives that cannot be sustained if things slow down on the business front. High salaries not only tend to recruit people who are in it for the money, but when things start getting tough, those are the folks who will leave you in the dust.
Shuly Galili is cofounding partner at UpWest Labs, an accelerator that helps Israeli startups come to Silicon Valley.