How to Start a Startup -Paul Graham:

This is by far the best article I have ever read related to a Startup. It's a tad big, but it's worth taking a look at. Shown below are excerpts from the article. The complete article is available at the link above -Rahul

You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible. Most startups that fail do it because they fail at one of these. A startup that does all three will probably succeed.

What matters is not ideas, but the people who have them. Good people can fix bad ideas, but good ideas can't save bad people. What do I mean by good people? One of the best tricks I learned during our startup was a rule for deciding who to hire. Could you describe the person as an animal? It means someone who takes their work a little too seriously; someone who does what they do so well that they pass right through professional and cross over into obsessive. Call the person's image to mind and imagine the sentence "so-and-so is an animal." If you laugh, they're not.

For programmers we had three additional tests. Was the person genuinely smart? If so, could they actually get things done? And finally, since a few good hackers have unbearable personalities, could we stand to have them around? That last test filters out surprisingly few people. We could bear any amount of nerdiness if someone was truly smart. What we couldn't stand were people with a lot of attitude.When nerds are unbearable it's usually because they're trying too hard to seem smart. But the smarter they are, the less pressure they feel to act smart. So as a rule you can recognize genuinely smart people by their ability to say things like "I don't know," "Maybe you're right," and "I don't understand x well enough."

Like most startups, ours began with a group of friends, and it was through personal contacts that we got most of the people we hired. This is a crucial difference between startups and big companies. Being friends with someone for even a couple days will tell you more than companies could ever learn in interviews.It's no coincidence that startups start around universities, because that's where smart people meet. It's not what people learn in classes at MIT and Stanford that has made technology companies spring up around them. What you should do in college is work on your own projects. Don't force things; just work on stuff you like with people you like.

Ideally you want between two and four founders. It would be hard to start with just one. One person would find the moral weight of starting a company hard to bear. Even Bill Gates, who seems to be able to bear a good deal of moral weight, had to have a co-founder. But you don't want so many founders that the company starts to look like a group photo. Partly because you don't need a lot of people at first, but mainly because the more founders you have, the worse disagreements you'll have. When there are just two or three founders, you know you have to resolve disputes immediately or perish. If there are seven or eight, disagreements can linger and harden into factions. You don't want mere voting; you need unanimity.

In a technology startup, which most startups are, the founders should include technical people. Business people are bad at deciding what to do with technology, because they don't know what the options are, or which kinds of problems are hard and which are easy.Do the founders of a startup have to include business people? what I discovered was that business was no great mystery. It's not something like physics or medicine that requires extensive study. You just try to get people to pay you for stuff.

I think the reason I made such a mystery of business was that I was disgusted by the idea of doing it. I wanted to work in the pure, intellectual world of software, not deal with customers' mundane problems. People who don't want to get dragged into some kind of work often develop a protective incompetence at it.

f you work your way down the Forbes 400 making an x next to the name of each person with an MBA, you'll learn something important about business school. You don't even hit an MBA till number 22, Phil Knight, the CEO of Nike. There are only four MBAs in the top 50. What you notice in the Forbes 400 are a lot of people with technical backgrounds. Bill Gates, Steve Jobs, Larry Ellison, Michael Dell, Jeff Bezos, Gordon Moore. The rulers of the technology business tend to come from technology, not business. So if you want to invest two years in something that will help you succeed in business, the evidence suggests you'd do better to learn how to hack than get an MBA.

Look at restaurants. A large percentage fail, about a quarter in the first year. But can you think of one restaurant that had really good food and went out of business? In nearly every failed startup, the real problem was that customers didn't want the product. The only way to make something customers want is to get a prototype in front of them and refine it based on their reactions.In a startup, your initial plans are almost certain to be wrong in some way, and your first priority should be to figure out where. The only way to do that is to try implementing them.

It's worth trying very, very hard to make technology easy to use. Hackers are so used to computers that they have no idea how horrifying software seems to normal people. Stephen Hawking's editor told him that every equation he included in his book would cut sales in half. When you work on making technology easier to use, you're riding that curve up instead of down. A 10% improvement in ease of use doesn't just increase your sales 10%. It's more likely to double your sales.

When most people think of startups, they think of companies like Apple or Google. Everyone knows these, because they're big consumer brands. But for every startup like that, there are twenty more that operate in niche markets or live quietly down in the infrastructure. So if you start a successful startup, odds are you'll start one of those. Another way to say that is, if you try to start the kind of startup that has to be a big consumer brand, the odds against succeeding are steeper. The best odds are in niche markets. Since startups make money by offering people something better than they had before, the best opportunities are where things suck most. You would not believe the amount of money companies spend on software, and the crap they get in return. This imbalance equals opportunity.

In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling. Sun did this to mainframes, and Intel is doing it to Sun. Microsoft Word did it to desktop publishing software like Interleaf and Framemaker. Mass-market digital cameras are doing it to the expensive models made for professionals.

At sales I was not very good. I was persistent, but I didn't have the smoothness of a good salesman.My message to potential customers was: you'd be stupid not to sell online, and if you sell online you'd be stupid to use anyone else's software. Both statements were true, but that's not the way to convince people.

I was great at customer support though. Imagine talking to a customer support person who not only knew everything about the product, but would apologize abjectly if there was a bug, and then fix it immediately, while you were on the phone with them. Customers loved us. And we loved them, because when you're growing slow by word of mouth, your first batch of users are the ones who were smart enough to find you by themselves. There is nothing more valuable, in the early stages of a startup, than smart users. If you listen to them, they'll tell you exactly how to make a winning product. And not only will they give you this advice for free, they'll pay you.

Google understands a few other things most Web companies still don't. The most important is that you should put users before advertisers, even though the advertisers are paying and users aren't. "Get all the users, and the advertisers will follow." More generally, design your product to please users first, and then think about how to make money from it. If you don't put users first, you leave a gap for competitors who do.

The other reason to spend money slowly is to encourage a culture of cheapness. That's something Yahoo did understand. David Filo's title was "Chief Yahoo," but he was proud that his unofficial title was "Cheap Yahoo." Soon after we arrived at Yahoo, we got an email from Filo, who had been crawling around our directory hierarchy, asking if it was really necessary to store so much of our data on expensive RAID drives. I was impressed by that. Yahoo's market cap then was already in the billions, and they were still worrying about wasting a few gigs of disk space. When you get a couple million dollars from a VC firm, you tend to feel rich. It's important to realize you're not. A rich company is one with large revenues. This money isn't revenue. It's money investors have given you in the hope you'll be able to generate revenues. So despite those millions in the bank, you're still poor.

The most important way to not spend money is by not hiring people. They slow you down: instead of sticking your head in someone's office and checking out an idea with them, eight people have to have a meeting about it. So the fewer people you can hire, the better.During the Bubble a lot of startups had the opposite policy. They wanted to get "staffed up" as soon as possible, as if you couldn't get anything done unless there was someone with the corresponding job title.The only reason to hire someone is to do something you'd like to do but can't.If hiring unnecessary people is expensive and slows you down, why do nearly all companies do it? I think the main reason is that people like the idea of having a lot of people working for them. This weakness often extends right up to the CEO.

So who should start a startup? Someone who is a good hacker, between about 23 and 38, and who wants to solve the money problem in one shot instead of getting paid gradually over a conventional working life. I put the lower bound at 23 not because there's something that doesn't happen to your brain till then, but because you need to see what it's like in an existing business before you try running your own.The other reason it's hard to start a company before 23 is that people won't take you seriously.The other cutoff, 38, has a lot more play in it. One reason I put it there is that I don't think many people have the physical stamina much past that age. Also, startups are a big risk financially. If you try something that blows up and leaves you broke at 26, big deal; a lot of 26 year olds are broke. By 38 you can't take so many risks-- especially if you have kids.

I don't think the amount of bullshit you have to deal with in a startup is more than you'd endure in an ordinary working life. It's probably less, in fact; it just seems like a lot because it's compressed into a short period. So mainly what a startup buys you is time. That's the way to think about it if you're trying to decide whether to start one. If you're the sort of person who would like to solve the money problem once and for all instead of working for a salary for 40 years, then a startup makes sense.

If you want to do it, do it. Starting a startup is not the great mystery it seems from outside. It's not something you have to know about "business" to do. Build something users love, and spend less than you make. How hard is that?