Financial Minimalism In Life, Investing, And Startups

Cyrus Yari

23rd February 2021

Part 1: My journey to minimalism

Part 2: Minimalism in life and work

Part 3: Capital allocation for startup founders

Part 1: My journey to minimalism

I left Iran and arrived in the UK aged five. Growing up as an immigrant without life's luxuries led to the drive I still have to this day in the pursuit of avoiding mediocrity.

As a teenager from a lower socioeconomic background, I had various jobs and side hustles including an e-commerce store. One of these side-hustles was running the largest London-based events business for pre-university students that brought in significant income for a teenager. I remember coming home from one event with so much cash, I couldn’t fit it all in my pockets. My mum was convinced I was dealing drugs!

Once I started making money I made all the obvious financial mistakes. Aged 18 I copped a BMW 3-series convertible and was covered in designer drip head to toe. You'd confuse me for a member of the Migos.

Me at 18 vs 28:

Why? Well, looking back, this was probably me making up for the lack of nice things growing up. Little did I know of the mistakes I was making at the time.

Coming from an Iranian heritage, when you "make it" in the West, you're supposed to have the German cars, the McMansion with marble flooring, and baroque furniture. Every Iranian uncle has a gold Rolex. I was modelling myself on uncles.

Later I went into the world of high finance, and being stuck in the perpetual rat race and lifestyle inflation caused me to snap out of this phase of groupthink. Materialism gets boring really quickly.

Today, I'd consider myself somewhat the minimalist. Give me a billion dollars and I'd still be sitting behind this desk working on the same projects and skills.

"Oh live a little, you were young it's fine". Well, let me present to you my friend Stevan Popovic and his website showmethemoney.club (a free personal finance calculator you should all use). Here he shows the stark difference in wealth creation by age 50, were one to start investing at age 19 vs age 29. Just £1,000 a month (using monthly compounding and 8% average growth) results in a £1.78MM return when starting aged 19, or £721k starting age 29. Mind you, I’m being conservative here and haven’t even considered salary uplift or other variables over time.

At least an extra million by just starting a decade earlier.

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”—Albert Einstein

This also explains Warren Buffett's success. >99% of his net worth has been accumulated after the age of 50, simply due to starting so early. Charlie Munger often says the reason Buffett is so much wealthier is because he started much earlier. When he was just 11!

"The first rule of compounding is to never interrupt it unnecessarily.”—Charlie Munger

Okay, so what?

There are a few elements to building a successful company. Keith Rabois of Founders Fund (helped build PayPal, LinkedIn, Square, et al.) states: "At a startup, you can be tricked into thinking you’re building a technology company, so you focus a lot on the product. But ultimately, you’re really building a team to build the product and then the company. It is the team you build that will dictate the outcome. This belief should lead you to focus more on the quality of the people than anything else."

Vinod Khosla agrees with Keith Rabois. And so do I.

However, just as fundamental to building the team, is the psychology of the team's leader...

In particular, the founder's psychology towards money and subsequently their capital allocation skills.

A huge part of being a successful VC-backed founder is capital allocation and resourcefulness. Founder decisions here directly impact employees, VCs, LPs and so on.

My view is that your personal finance habits and mental frameworks for money management are the same as those that you apply to your VC-backed startup and resource management. Many founders unknowingly have a capital management and capital allocation problem (applying their poor personal financial habits) in their startups. Much to the disadvantage of their investors and employees, who are clueless in some cases as to what's going on.

Part 2: Minimalism in life and work

As briefly touched on earlier, Buffett made his wealth by starting early. But there's something else that's made Buffett and Munger household names.

Minimalism.

Minimalism is one of the core components of a successful psychology towards money.

Yes, you may be sick of the influx of hipster millennial and Gen Z content by now on minimalism (shout out Matt D'Avella - love his content), but bear with me.

Buffett has lived in the same Omaha residence he bought in 1958 for $31,500, the equivalent of c. $300k today. He drives the same car for several years; still driving the Cadillac XTS he purchased in 2014. This is no accident. This is a mindset most will never develop, especially in today's society which is exacerbated by the damage of dopamine receptors. This is particularly prevalent with millennials and Gen Zs, and their need for instant gratification (combined with the need for validation and approval on social media), rather than the pursuit of mastery over many decades.

When people say they are minimalists - this does not bode well with the societal and environmental pressure to keep up with your neighbour. It's going to be hard to find people who want to be minimalists.

Morgan Housel explains this phenomenon in his book “The Psychology of Money”. In particular, he defines the following three differences between wealth-building and being rich that minimalists understand well:

Freedom:

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. Money’s greatest intrinsic value...is its ability to give you control over your time.

Wealth is what you don't see:

Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car.
Wealth is financial assets that haven’t yet been converted into the stuff you see.
When people say they want to be millionaires, what it really means is that they want to spend a million dollars.
Spending a million dollars is “literally the opposite of being a millionaire.”
Difference between wealthy and rich: People who live in big homes and drive fancy cars are rich. People with big incomes are rich. They display the fact that they are rich. Wealth is hidden. Wealth is income that is saved, not spent. Wealth is optionality, flexibility and growth. Wealth is the ability to purchase stuff if you needed to.

Never enough:

Comparing ourselves to others is often the culprit. Capitalism is good at generating both wealth and envy. I am a capitalist myself, but social comparison is a process without end: there’s always someone higher up on the ladder. Enough doesn’t mean you have to go without. Enough means you know when to avoid doing something you will regret. Many things are not worth the risk, regardless of the gains. A short list: reputation, freedom, love, happiness, family and friends.

It's the bank's boat, car, and house. Not the asshole using it. $2.5million in assets and $2.5million in debts. You can't see it because it's all pretty and glittery.

“Your unlimited desires are clouding your peace.”—Naval Ravikant

2/2: This doesn't mean settle for mediocrity.

In fact, the opposite.

You spend your time + mental energy on meaningful work (or work you enjoy), while striving to be the best version of yourself.

The sands in the hourglass are running out. Don't spend it on shallow bullshit.
— Cyrus Yari 📈 (@CyrusYari) January 7, 2021

Genetically, biologically, psychologically, we know that humans are attracted to other humans with resources (attraction in almost every sense: business, friendship, sexual) - humans are programmed to look for other people with resources.

This stems from our cavemen ancestors who would live in tribes of 150 people. Typically two or three cavemen would lead the tribe, the "alphas". In the startup world ("alpha" being gender-neutral, credit to David Deida), these other top 2 or 3 people are your co-founders, you look for those with the most resources OR the most resourceful guy/gal and what they bring to the table (intellect, skills, potential, drive, hustle, ambition, etc).

As a minimalist you take the path less travelled, and totally not advertised, if not mocked and ridiculed in life, by the normies, conformies, and inferiors in life. "You're not supposed to say those things" - sorry (but not sorry) for keeping it authentic and saying how I truly feel.

I had more personal growth in the six-month period after leaving the corporate world than I did in the 4 years in the corporate world. Leaving the corporate world, having monetary skin in the game (bootstrapped companies), facing the true (and harsh) realities of life, being in various circles, and more importantly, spending time in solitude, all helped tremendously.

As you get older, energy goes down. You lose interest in many of the activities you partook in in your 20s. You begin to enjoy the simpler pleasures of life: reading, good coffee, hiking, weight lifting, etc.

I can reasonably see how the closer we study ourselves scientifically and understand what makes us happiest neurochemically, we return to simpler pleasures: gardening, swimming, walking, dancing, talking by a fire, playing with dogs.
— Eric Jorgenson 🛠🏔 (@EricJorgenson) February 2, 2021

I know people who have budgeting issues because their spouse just won't stop spending the money. As Charlie Munger says: who you marry is the most important decision in life. When assessing founders, one of the many things I do research on is their spouse/partner, friendship circle, etc (digging deep into google search and social media will usually tell you enough).

Eventually, who you hang out with is who you become.

I have accountants and lenders in my circle. They all tell me the same thing. They see the accounts and loans on purchases. Their clients who SEEM the wealthiest, are in fact the LEAST asset rich. Irrational desire for prestige, status, and validation to fill a void.

Many men and women don’t think twice before choosing a career, a co-founder, a spouse, and having kids (great article by Andrew Mitson on premature optimisation and how to screw up your life). Reminds me of the many bankers who've had multiple divorces, paying alimony and child support while juggling a new marriage, buying more McMansions and cars on credit, staying in roles they despise to keep up with the lifestyle inflation and poor decision making. Zero personal growth. Zero enjoyment of life or time spent advancing humanity. Drowning their miseries with an "after work beverage" or six.

Is this life? For what? To be stuck in the same perpetual cycle of doing shit you don't want to do in order to earn money to keep buying shit you don't need to keep impressing people you don't even like?

“Unhappy people don’t have good judgment. What are the consequences of this? You won’t sleep well. You’re much more likely to react with anger and dig yourself into a hole you have to dig out of. Your decisions are emotional and impetuous. You’re more likely to get caught in the busy trap—busy all the time and running from one thing to another because you can’t mentally prioritise. When you don’t have peace of mind, it’s difficult to make judgments because you have too many threads going through your head. You don’t have time to devote to making those judgments.”—Naval Ravikant

Derek Sivers explains this Stoic practice on a podcast and how he started to hit strides in life when he realised he could just live on $500 a month, and spend his time working on all the things that matter to him. By the way, Derek exited his business 'CD Baby' in 2008 for $22million and gave most of the proceeds away to charity. People like Derek do it for the process and personal growth. NOT for the materials. He's achieved a level of happiness and growth most can't fathom.

Even the world's richest man got sick of managing possessions and decided to sell it all:

I am selling almost all physical possessions. Will own no house.
— Elon Musk (@elonmusk) May 1, 2020

If you're truly passionate about driving change and achieving results, you can't be having all these headaches around you. Even if you want them around you, they get boring REALLY quickly.

We are all time allocators before we are capital allocators. Master your time and capital will follow. Time and attention are the only capital we have full control over from the start. Yet many fail to give any proper thought to their allocation. If your time is dedicated to your "assets" that require maintenance (a lot more than you think) and general materialism, how do you have enough time and attention to allocate to your startup or what you're truly striving for?

"People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom." - @naval
— Naval Ravikant Bot (@NavalBot) February 4, 2021

Part 3: Capital allocation for startup founders

“What the fuck does this have to do with startups?”

Everything.

Doesn't matter if you're a grey-haired banker or a VC-backed startup founder. Human behaviour is human behaviour, and these actions are driven from the same limbic system and frontal lobes of the brain. Humans have repeated the same behaviour, mistakes, and cognitive biases for eternity.

We are all animals and we compete for resources and power because of our instinct to survive. The whole point of minimalism is that you don't need much resource. Resources you don't need to consume.

I've seen A LOT of poor decision making in an endless number of startups. Doing a startup and raising funding has become the new investment banking in the 90s and blowing through (misallocating) your pay. I'd assume <10% of founders are well-trained capital allocators, but it's not their fault. It's the culture and society we've been raised in.

You don't want to emulate this behaviour in your startup, and unfortunately there are VC-backed founders out there with such a mindset.

I recall being asked on several occasions when I had a bootstrapped SaaS startup: "how big is your office?", "which building is your office in?", "how big is your team?"

God forbid someone asks for meaningful KPIs or free cash flow or revenue per employee. I have literally been told by some VC-backed founders in the past that they were so sick of people asking them about their team size and office location as a determinant ("social proof") of success, that they just decided to pull the trigger and made all the mistakes, eventually resulting in bloated teams in expensive offices, only to later fire much of the team and downgrade the office.

Quibi is an extreme example. Raised $2billion before launching a damn product, didn't even launch and closed down permanently in less than 12 months. Techbros were quick to jump to Quibi's defence with: "iT's HaRd To BuiLD a BiZnAsS U kNoW".

Your goal should be to be free and work on what you want. If you are investing in a founder, it's hard to tell if they are "free" - maybe it's their first startup. In that case, a great way to gauge the founder is to see if their startup solves a problem they have been facing. With this, you measure their emotional commitment to the project, not just their financial drive. They have "emotional skin in the game".

Paul Graham has also shared his views on the most successful founders being ones scratching their own itch.

“The way to get startup ideas is not to try to think of startup ideas. It's to look for problems, preferably problems you have yourself. The very best startup ideas tend to have three things in common: they're something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.”—Paul Graham

So how do you apply minimalism to company building?

“Over time, the skill with which a company’s manager allocates capital has an enormous impact on the Enterprise Value.”—Warren Buffett

Buffett is right. Many CEOs and Founders were never taught a rational, first-principles approach to capital allocation prior to getting their job. As Buffett highlights in his 1987 letter, most people who reach top management positions do so due to functional expertise and may not have experience of capital allocation. They may overemphasise their functional skills and may take miscalculated bets e.g. a person with great marketing experience may feel they can create a brand in any category regardless of the CAPEX commitment required.

And if we were to think from first principles, much of this skill stems from your own financial habits and psychology towards money. Fortunately, with a determined focus on improving in this area, you can change bad habits.

There are several things you can do to minimise burn and maximise runway, allowing you to pivot if/when necessary to dial product-market fit and effectively increase your startup's chances of success.

DON’T:

DON’T lease a fancy office (or sink capital into unnecessary CAPEX) until you have some runway. Heck, Jeff Bezos still operated Amazon out of their garage when they were several dozen employees, and held meetings at Barnes & Noble's coffee shop (the irony)
DON’T get in bed with an investor who pressures you to make poor short-term decisions at the expense of your company's longevity (i.e. inorganic expensive customer acquisition), only for them to see a "mark-up" in an upcoming round of fundraising; ensure their incentives are aligned with increasing the long-term intrinsic value per share of your company - you can be a minimalist, but if their mind-frame is broken (as are some VCs today, who want you to grow at any cost) then your minimalism and financial habits can mean nothing - you can start by checking for VC reviews at vcguide.co and asking reputable sources
DON’T celebrate your raise too much - the raise is just the beginning - your focus should be purely on how to turn that money into a lot more money (the money is not yours - you have a fiduciary duty to investors - if you don’t like the idea of this then consider bootstrapping)
DON’T focus on vanity metrics; focus on sanity, i.e. what you can actually eat on (such as net revenue or true bottom-line), rather than what you can’t eat on (gross merchandise volume)
DON’T make up BS projections like many founders - figure out realistic numbers, time, and effort to model those projections - think about your inputs that lead to those outputs (i.e. how many leads do you actually have to talk to every month, how many to convert, cost of each lead, etc)
DON’T forget that the best source of non-dilutive capital comes from retention of your customers - going back to our product management fundamentals (as outlined in the presentation Iman and I did at the McKinsey event) - constant communication with your users is a priority to survive; don’t get sidetracked by shiny object syndrome or tinkering with bugs and code especially in the early days
DON’T rely just on spreadsheets as spreadsheets alone are not the truth, but don’t rely on intuition alone either
DON’T think you are going to consistently buy back shares in the future to offset dilution from stock options
DON’T confuse conventional with conservative; just because something is a common practice at a point in time, does not make it the best decision or a safe one
DON’T assume that because others agree with you that you are right (as a CEO, you will likely have some "yes-men" around you); have strong voices constructively challenge your views before decisions are made
DON’T make decisions following biased advisors or other players in the industry even though it may make little sense (FOMO, social proofing)
DON’T take actions unless they make sense from first principles, regardless of who else is doing them

DO:

DO prioritise employee pay over all else - take a leaf out of Reed Hastings and Patty McCord’s playbook on Netflix hiring "A-players" and being very clear on expectations (you must read Patty McCord's 'Powerful') - remember, again, going back to Keith Rabois' very valid point: your people make the company and the product, and this is the only area you're allowed to not be cheap
DO monitor your finances like a hawk; as a CEO, there's only so many things you're good at - fortunately, there's been a surge in the use of 'CFO-as-a-Service' offerings - you pay a monthly subscription fee (anywhere from $500 to $3000) to a company or individual who spends a few hours every month monitoring your finances, books, operating plan, etc (usually ex MBB/banking/big-4 folk who've spent several years in Excel and PowerPoint and have since helped several VC-backed startups); being on top of your inflows and outflows, KPIs, unit economics, etc will go a long way with current or future investors (and for your own mental clarity)
DO focus on getting ‘default alive’ (a rare phenomenon in today’s startup land): make money and get to a point where you can survive without having to raise more money - if you can get profitable, you can often start cash flowing and reinvesting in your own business without ever raising more money (avoiding further dilution) - how to get there faster? Reduction in both unnecessary workforce and expenses - if you have to make cuts do it just once and do it properly - as deeply and as humanely as possible, slow down, increase efficiency, reassess and figure out a plan that’s realistic and attainable (as Garry Tan outlines)
DO consider an alternative to just leaving your funds raised in a low-interest bank account; even a measly 2% interest vs 1% can make a notable difference on a $1million round raised - that's an extra $10k which can be deployed towards hiring the external CFO for around a year, or better hardware/Macs for your 'A-player' engineers - tightly monitor and control every single penny
DO negotiate all of your contracts up front and when due for renewal - see if you can get a significant discount if paid up front (and makes viable sense in your position) - if you can't make sense of it, ask your CFO for help
DO consider opportunity costs with every decision made - all possible uses of capital should serve as an opportunity cost for every other use - “will I get paid back, how and when?” should be the question you ask for every penny spent
DO seek out the mentorship of other CEOs who are already proven capital allocators
DO learn to think independently (as Paul Graham outlines here)
DO consider sources of funding other than VC funding

Capital allocation decisions are part art and part science. Managing human biases is equally difficult for well-intentioned CEOs and CFOs who take major capital allocation decisions. The future is always uncertain, and every effort should be made to recognise the various behavioural biases that might impact your decisions. How? I've listed some books/resources at the end that may help improve this.

All sound very simple? Yes.

Minimalism is fundamentally a byproduct of simplicity; simplicity in thought and simplicity in action.

Some of the most rational and successful people in history follow these simple steps. To go back to Buffett's capital allocation strategy, it’s telling that even Jeff Bezos once asked Buffett why no one could replicate his strategy, even though it was "extremely simple". Unfortunately, or fortunately, there is still radicalism in rationality.