Startups play by a different set of rules than established and profitable firms; understand those differences and take full advantage of them.
Established and profitable firms with predictable cash flows have finance teams who spend their days guiding the firm towards its ideal debt/equity mix. Low prevailing interest rates can make it profitable to invest in projects with shockingly low internal rates of return.
But as a startup, your effective cost of capital is often something approaching infinity. Startups use the finite capital they attract to prove a point and raise another round, or they use it to become profitable and go on to choose their own destiny. Time is precious. A startup’s burn rate and the opportunity costs incurred by its founder(s) make it critical to focus exclusively on the things which will allow the firm to carry out its most important mission – often that means demonstrating product-market fit. Equity financing in a startup context often comes at a high cost – early stage investors expect a reward commensurate with the risk they take, and they also become another group of stakeholders to consider in decision-making.
Capital gets significantly cheaper as firms mature. Strategic technical debt comes from a conscious and considered decision to defer technology investment.
Established firms need processes that will function with millions of users. Startups need a process that will work for their first user. That might mean you don’t need to write any software quite yet. And you certainly don’t need an implementation that lets you scale to a user base the size of Facebook’s.
Established firms have brands that become less valuable when software blows up in an embarrassing way. Startups have a brand with a value too low to appraise. Even Twitter’s “fail whale” is now merely a distant memory.
Established firms need to meet their long-term commitments to their customers in a cost-effective way. Vendor lock-in and systems with high operating costs are very real concerns. Startups don’t suffer those challenges.
None of this excuses sloppy software design. None of this excuses under-investment in technology by a firm that doesn’t have management strong enough to properly analyze the total cost of a decision.
Inexperienced engineers often don’t have the skills and background to truly understand the impact of their decisions. They don’t yet understand the universe of problems of which they remain blissfully unaware.
Experienced engineers command high salaries. But that doesn’t always make them more expensive – as long as they have the discipline to avoid the siren call of over-investment in technology (it is often intellectually rewarding to solve a complex technical problem even if the solution has little business value). The cost associated with high-quality talent is often a solid investment.
If you are lucky, the problems worth solving at your startup are such that it’s hard to get yourself into a serious technical mess. But sadly, estimating the difficulty of the problems you are trying to solve is itself a problem that requires experience. You need someone you trust who can come up with a reasonable approximation of the difficulty of the problems you should solve.
Choose to take on technical debt when it’s cheaper than financial debt. That probably means you’ll do so often. Brand new firms get to take on as much technical debt as they wish. Most of the technical debt you take on you won’t even need to pay back. Something will probably happen to your business model or your technology stack that will make it pointless to ever pay off most of your technical debt.
When you find technical debt that’s actually worth fixing, celebrate the success of your business. And celebrate the fact that you’ve got a business case for investing in technology that will improve your firm’s financial performance.
Use technical debt to improve the health of your startup’s balance sheet. You can afford it in ways that established firms often cannot.