Be frugal, not cheap. And know the difference.

Marco Xu

Startups of the mid-to-late 2000s and into the early 2010s were (in)famous for splashing cash on multi-million dollar offices, complete with foosball tables and free vending machines galore, often before making their first dollar of profit.

TechCrunch even had a series called TC Cribs in which they toured startup offices in the style of MTV Cribs. Remember that show? “This is where the magic happens” and all that. All this spending was, ostensibly, to attract ‘top engineers’ to startups.

The problem with the approach is that top engineers generally want two things:

  1. A great problem to help solve (and to satisfy their ego)
  2. To work on a product that will have a tangible impact on their lives

These typically go hand in hand with the organic development of a brand and the acquisition of engaged users who help shape the future of the product. Startup founders soon realised, or perhaps were repeatedly told, that neither of those can be bought with a flashy office.

Enter the fetishisation of the “lean startup”…

The trouble with lean

In theory, the concepts behind being a lean startup are great. That’s even more true if the company in question is bootstrapping. However, as the title of this post suggests, crossing the thin line between being frugal and being cheap can cost your company dramatically.

Right now there’s a new class of entrepreneurs trying to be frugal (but actually being cheap) and, in the process, stifling the growth of their companies and frustrating their employees. Both of which lead to less competitive organisations.

It’s fantastic news for investors that founders are no longer racing to the bottom of their latest series of funding to build a fancier office than the startup on the floor above them and distract their employees from, y’know, actually doing work.

BUT, as we’ll see below, obsessively focusing on how much longer a funding round can last if they don’t “waste” money can lead to cutting corners that end up being much costlier in the long run.

Case study: The cheap startup founder

A cheap startup founder spends as little as possible wherever they can. They buy $300 laptops for most staff members and, if the engineers are lucky, spend $600 on slightly higher spec laptops for them.

They buy cheap office desks and chairs from IKEA – that’s not to say that you can’t find good stuff at IKEA, but not if you’re spending the absolute bare minimum – and AmazonBasics keyboards and mice for designers. I kid you not, I’ve seen this done.

This leads to a demotivated team. People know when their computer can’t build their project quickly it’s because they have crappy equipment. They’re uncomfortable because of a lack of ergonomic desks and chairs so they have to get up more often. They take longer breaks and never commit fully to projects.

And why would they? Their founder hasn’t fully committed to them.

Case study: The frugal startup founder

A frugal startup founder spends meaningfully. They buy expensive hardware for their engineers because they understand that paying engineers is expensive and, if the more expensive hardware makes the engineer even 1% more efficient or lasts longer, the cost is justified. They invest in high quality desks and chairs for the same reason.

The trick to being frugal is doing everything you need to enable your employees to do their job and be productive. Reliable high speed internet, plentiful office supplies, a comfortable break room in which to grab lunch etc etc.

Frugality breeds a culture of frugality. Spending where it will have an impact, and not where it delivers no or limited value, demonstrates to your team that you don’t cut corners but you’re not wasteful either. They’ll follow your lead.

Being cheap WILL cost you more

There’s an irony in the fact that being cheap costs more than being frugal, even though it might not seem that way when you sit down and compare the receipts on day one. But try comparing them again on day 75, or day 320.

Being cheap means you have to replace equipment more often. It means your engineers are being paid to not be productive, and go make yet another cup of coffee while they wait for their project to export.

If you’re employing engineers at $120,000+, you owe it to yourself to spend the money necessary to make them more efficient. It will keep them motivated and ensure they know the work they do matters.

When your employees are engaged, performing at their best and producing solid output, that’s when you can you start worrying about which Olympic size ping pong table looks best in the breakroom.

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