How did Fog Creek Software start and what was their initial strategy?

Fog Creek Software was founded in 2000 by Joel Spolsky and Michael Prior. They initially aimed to bootstrap the business by offering consulting services and not spending money until revenue was generated, taking advantage of the high demand for web development at the time.

What led to the creation of Stack Overflow?

Joel Spolsky wanted to 'kill' the 'evil' Experts Exchange website. He partnered with Jeff Atwood to create Stack Overflow, a question-and-answer site for programmers, as a 'side bet' that quickly gained significant traction.

What is the difference between a 'land grab' market and an established market for startups?

A 'land grab' market is characterized by new technology and uncaptured territory where a company can establish dominance quickly, like Uber or Amazon. An established market, like ice cream or bug trackers, already has many competitors, requiring a more patient organic growth strategy.

Why is it important to decide between 'Get Big Fast' and 'Organic Growth' early on?

Trying to straddle both strategies can be detrimental, as they require fundamentally different approaches to risk, spending, and operations. Committing to one path allows for focused execution and avoids the trauma of strategic confusion, as Joel Spolsky experienced with Juno Online Services.

How does Stack Exchange leverage network effects?

Stack Exchange benefits from strong network effects because users go to the site where they are most likely to get an answer. The platform's Q&A features, like upvotes, downvotes, and reputation, make it more valuable as more users contribute and interact.

What is Fog Creek Software's approach to profit sharing?

Fog Creek Software, as an organic growth company, distributes its profits at the end of the year among employees based on seniority, rather than to shareholders. This acts as a bonus, effectively doubling salaries for long-term employees.

What is the strategy behind Trello's launch?

Trello was launched by Fog Creek Software as a 'get big fast' land grab business, offering its service for free to reduce friction and rapidly acquire users. The long-term monetization strategy is still being figured out, but the company has the stability from Fog Bugs to fund its growth.

Key Moments

Joel Spolsky at Startup School 2012

Y Combinator

Science & Technology4 min read32 min video

Oct 25, 2013|34,943 views|329|13

Y Combinator StackExchange Startup School Fog Creek Software 2012 Joel Spolsky YC

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Key Moments

TL;DR

Joel Spolsky discusses two startup models: organic growth (Fog Creek) vs. 'get big fast' (Stack Exchange), emphasizing strategic choice.

Key Insights

Startups must choose between organic growth and 'get big fast' strategies; attempting both leads to failure.

Organic growth businesses bootstrap, prioritize survival, frugality, and slow, steady revenue.

'Get big fast' businesses target land grabs with strong network effects and often require VC funding.

Fog Creek Software exemplifies organic growth, starting with consulting and iterating on products like FogBuggs.

Stack Exchange exemplifies 'get big fast,' leveraging network effects and rapid scaling, necessitating VC funding.

Bootstrapping and deferring fundraising allows for better terms and more control when capital is eventually needed.

THE ORIGINS OF FOG CREEK SOFTWARE

Joel Spolsky, a programmer who couldn't find a desirable workplace, co-founded Fog Creek Software in 2000. Initially operating with minimal expenses from a rented office, the company focused on bootstrapping. Their early strategy involved taking on consulting work during the dot-com boom to generate immediate revenue, which proved crucial when the market crashed shortly after. This allowed them to survive without significant VC funding and pivot to product development.

THE FOGBUGGS JOURNEY AND ORGANIC GROWTH

Following the dot-com crash, Fog Creek pivoted to selling proprietary software, starting with FogBuggs, a bug-tracking tool. This marked the beginning of their organic growth model. Revenue increased slowly but steadily, enabling them to hire employees and rent a proper office. The company prioritized programmer comfort with private offices, good equipment, and shared meals, fostering a unique culture. This patient approach, focusing on building value over time, became a hallmark of their business strategy.

THE BIRTH OF STACK EXCHANGE AND 'GET BIG FAST'

Spolsky conceived Stack Exchange, with Stack Overflow as its flagship product, to compete with and 'kill' the 'evil' Experts Exchange. Recognizing the strong network effects inherent in a Q&A platform, he categorized this as a 'get big fast' business. This strategy required rapid scaling to capture market territory before competitors. Unlike Fog Creek's gradual approach, Stack Exchange's model was designed for exponential growth, necessitating external investment.

STRATEGY CHOICE: LAND GRABS AND NETWORK EFFECTS

Spolsky distinguishes between 'get big fast' businesses, characterized by land grabs in new markets with strong network effects (e.g., Facebook, Uber), and organic growth businesses, which operate in crowded markets and focus on slowly taking customers from competitors (e.g., Ben & Jerry's, traditional software). The choice depends on the market; land grab opportunities arise in capturing unexploited territory, while organic growth involves patient competition. Network effects, where a service becomes more valuable with more users, are critical for 'get big fast' success and create customer lock-in.

OPERATIONAL DIFFERENCES BETWEEN THE MODELS

Operational approaches diverge significantly between the two models. 'Get big fast' companies can afford to be less frugal, using readily available VC funding to solve problems quickly, even expensively, and embrace mistakes in their pursuit of speed. Organic growth companies, conversely, must be extremely frugal and focused on survival. Mistakes can be fatal in organic businesses, demanding careful planning and a focus on revenue generation from day one to avoid running out of cash.

FUNDRAISING AND STRATEGIC DEFERRAL

Spolsky highlights the strategic advantage of bootstrapping and delaying fundraising. By building value and a track record independently, companies increase their valuation, allowing them to raise capital on better terms with less dilution later. Stack Exchange was technically bootstrapped for two years before raising VC, enabling a smooth and quick fundraising process with their preferred investors. This approach ensures greater control and a stronger negotiating position when external funding is eventually sought.

FOG CREEK'S EVOLUTION AND TRELLO

Fog Creek continued its success as an organic growth company, with FogBuggs functioning as a reliable cash cow. Profits were distributed to employees as bonuses, fostering a unique ownership culture. Meanwhile, Fog Creek also launched Trello, identified as a 'get big fast' initiative aiming for a land grab in organization software. Employee bonuses were reinvested into Trello's development, demonstrating how an established organic business can fund a new, high-growth venture without immediately needing external VCs.

THE TRAUMA OF INDECISION: JUNO VS. AOL

Drawing from his experience at Juno Online Services, Spolsky warns against straddling the two strategic models. Juno, a bootstrapped ISP, competed against AOL, which aggressively pursued a 'get big fast' land grab strategy with strong network effects and lock-in. Juno's hesitation to spend money on aggressive tactics proved fatal, whereas AOL's commitment to its strategy allowed it to dominate. This historical example underscores the critical importance of committing to a single strategy—either organic growth or rapid scaling—to control one's destiny.

Mentioned in This Episode

●Products

●Software & Apps

●Companies

●Organizations

●Concepts

●People Referenced

Deciding Your Startup's Growth Strategy

Practical takeaways from this episode

Do This

Choose between 'Get Big Fast' or 'Organic Growth' and commit fully.

In 'Get Big Fast', aim for land grabs in markets with network effects and potential for lock-in.

In 'Organic Growth', focus on breaking even quickly, staying frugal, and surviving long-term.

For 'Organic Growth', ensure your product provides value even with a single customer.

Defer fundraising as long as possible to increase company valuation and gain leverage.

Consider bootstrapping to build momentum and a strong track record before seeking external investment.

Avoid This

Do not straddle the 'Get Big Fast' and 'Organic Growth' models, as this leads to painful outcomes.

Avoid making fatal mistakes in an 'Organic Growth' business where there's no financial cushion.

Do not pursue VC funding if your market doesn't support a 'get big fast' land grab strategy.

Don't start an 'Organic Growth' business without a product that is immediately valuable to users.

Common Questions

Joel Spolsky outlines two primary strategies: 'Get Big Fast,' which involves rapid market capture and leveraging network effects, and 'Organic Growth,' which focuses on slow, sustainable development and bootstrapping.

Topics

Business & Entrepreneurship Technology & Innovation Startup Strategy Venture Capital Growth Hacking Product Development Company Culture

Mentioned in this video

Companies

Fog Creek Software

A software company founded by Joel Spolsky and Michael Prior in 2000, initially focused on consulting and later developing bug tracking software.

Stack Exchange

A company founded by Joel Spolsky and Jeff Atwood that operates Q&A websites, including Stack Overflow, focusing on a 'get big fast' strategy.

Microsoft

A technology company that provided statistical data on the number of developers in the world to Stack Exchange.

Ben & Jerry's

An ice cream company used as an example of an organic growth business, in contrast to 'get big fast' companies.

Union Square Ventures

The venture capital firm that Joel Spolsky chose to invest in Stack Exchange, highlighting a smooth fundraising process.

Apple

Mentioned as an example of a niche where Stack Exchange has developed a site (apple.stackexchange.com) but doesn't yet dominate.

Juno Online Services

A free ISP company where Joel Spolsky and Michael Prior worked before starting Fog Creek Software.

Uber

Mentioned as an example of a company in the 'get big fast' category, engaging in land grabs.

Y Combinator

A startup accelerator mentioned in the context of the low probability of companies achieving $10 billion valuations.

Scient

A company that hired thousands of computer science students to build web pages during the dot-com boom, which later collapsed.

AOL

A competitor to Juno Online Services that utilized 'get big fast' strategies like sending out floppy discs, ultimately becoming larger.

Amazon

Cited as an example of a 'get big fast' company that engaged in land grabs.

Facebook

Used as an example to illustrate network effects and the difficulty of user migration due to social connections.

Stack Overflow

A Q&A platform central to Stack Exchange's success, utilizing features like upvotes, downvotes, and reputation to enhance user experience.

Software & Apps

Copilot

A remote desktop product launched by Fog Creek Software, which was successful and continues to provide dividends.

Google Analytics

A web analytics service used by Stack Exchange to track website traffic and unique monthly visitors.

Trello

An organizational software launched by Fog Creek Software, employing a 'get big fast' strategy with a focus on user acquisition.

Coding Horror

The blogging platform and pseudonym of Jeff Atwood, co-founder of Stack Overflow.

VBScript

The programming language used internally to write the initial version of Fog Bugs.

People

Michael Prior

Co-founder of Fog Creek Software with Joel Spolsky.

Jeff Atwood

Co-founder of Stack Overflow with Joel Spolsky, known for his 'Coding Horror' blog.

Phil Greenspan

Creator of Ars Digit, a consulting company that served as an early business model, though it collapsed after taking VC funding.

Joel Spolsky

The speaker, founder of Fog Creek Software and co-founder of Stack Exchange, discussing startup strategies.

Mark Zuckerberg

Referred to as 'Zuck', mentioned as a proponent of the 'get big fast' business model.

Concepts

Network Effects

The phenomenon where a service becomes more valuable as more users join, crucial for 'get big fast' businesses like Facebook and Stack Exchange.

bootstrapping

Funding a business through personal savings or revenue generated by the business itself, rather than external investment.

land grab

A strategy in business to quickly capture market share in a new or emerging territory before competitors can.

VC funding

Venture capital funding, which is often pursued by 'get big fast' companies but can lead to loss of control and pressure for rapid growth.

organic growth

A business growth strategy focused on slower, sustainable expansion, often through bootstrapping and reinvesting profits, as exemplified by Fog Creek Software.

get big fast

A business strategy focused on rapid expansion and market dominance, often involving significant investment and aiming for network effects.

Products

SSD

Solid State Drives, mentioned as a component used in building Jeff Atwood's optimized servers for Stack Overflow.

Organizations

Inc Magazine

A magazine for which Joel Spolsky used to write a column, where the topic of VC funding was discussed with his editor.