8 ms·

Surviving the Series A Crunch

165 points by sethbannon 12y ago

cykho 12y ago
This is a real wakeup call - raise bigger seed rounds to last until you're a breakout success.
dchuk 12y ago
If anyone from 42Floors is reading this: your link to your own site with the anchor text "office space" is a relative link and therefore broken: <a href="42floors.com">office space</a> You need to make that http://42floors.com http://42floors.com or it's not going to work for users (and search engines ;) )
- jaf12duke 12y ago
  Thanks! Fixing it now.
  - nodesocket 12y ago
    Also, all your images are loaded over http, when you are serving from https, resulting in: Mixed Content: The page at 'https://42floors.com/' was loaded over HTTPS, but requested an insecure image 'http://images.42floors.com/8ede644d63d36e5e26d7a394ee5061d07e87389d.jpg?s=75x48%23'. This content should also be served over HTTPS.
nodesocket 12y ago
While $50,000 a month is nice revenue, a growth rate of 9% month over month does seem quite low. Was the majority of the $50,000 front-loaded? I'd really be curious to hear what market they are in? Seems hard to believe given their pedigree (YC), monthly revenue 50K, and lean team (8 people), they can't find a VC to bite. If they are charging monthly, what about blasting all paying customers with an upgrade to yearly promotion (20% off). That would bring in a lump sum of cash upfront which should provide additional runway.
- kenferry 12y ago
  I was surprised that 9% month over month growth rate is a bad number, given numbers in http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html. I suppose the difference is "during YC" vs "leading up to a Series A"? What are good numbers?
  - dchuk 12y ago
    Well pg is talking about weekly growth, not monthly: "A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing."
    - kenferry 12y ago
      Oop, yep, thanks!
  - applecore 12y ago
    Founders should aim for 15%+ monthly growth in MRR if they want to raise a Series A within a reasonable time after raising seed capital.
3pt14159 12y ago
Haha, I know so many people in this boat. I even know of one startup that was walking the line between B2B and B2C, and just temporarily made a slight turn to B2C to see some easy (non-paying) user growth just to raise the A, only to go back to their B2B route that they are confident will succeed in the long run. I'm sure this story is not going to be popular amongst the investor crowd, but it's much harder to raise an A once there is actual margins involved.
peterjancelis 12y ago
If the founder can get the 90K cost constant and keep the rev growing at 9% per month, there is only a $10K shortage by month 7 (and cash runs out in month 6 only). This can easily be solved with some annual prepayments. Source: https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqKvaJiF4BgYfO-rvh0btojRkg/edit?usp=sharing https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqK...
- nodesocket 12y ago
  Cool spreadsheet. This will come in handy later in life. Thanks.
- blazespin 12y ago
  Mo money mo problems, unfortunately. Hard to keep that overhead constant.
  - peterjancelis 12y ago
    Yes this also assumes the 9% growth is word of mouth and not ad spend driven.
    - gideon_b 12y ago
      Assuming half the costs are fixed (office, salaries, etc) and half the costs grow with revenue (Sales, Marketing, Servers etc.) than the situation becomes a little more bleak: https://docs.google.com/spreadsheets/d/1YoPnpFzmcpdZQh6HZ_2fbJDqOgSqrNVZuLkt0g0wKnA/edit?usp=sharing https://docs.google.com/spreadsheets/d/1YoPnpFzmcpdZQh6HZ_2f... EDIT: they would hit breakeven at 22 months - not bad actually.
- limejuice 12y ago
  Yea, I was running the numbers in my head as I read the article, and thinking this company is not in that bad a predicament. They look to be very close to turning the corner. Without knowing more about the business, it's hard to say if 9% month/month growth is bad or not. Some of these Saas business start out slow and then they take off once they get some critical mass.
yesimahuman 12y ago
Really great post, and not just for founders but for early stage investors as well. This is definitely why we are seeing so many more bridge rounds, but I'm not sure if those are really as bad as they've been made out to be, or just a new reality (for example, I know startups that have done a "damaging" bridge round only to then raise a huge A). Either way, even more reason for founders to bootstrap for longer if they haven't hit that huge growth curve yet, or just bootstrap forever!
asanwal 12y ago
Great advice and solid post. Some data on how long companies typically wait between Seed and Series A rounds. The median is 349 days so raising for 18 months is smart. https://www.cbinsights.com/blog/days-between-funding-rounds/ https://www.cbinsights.com/blog/days-between-funding-rounds/ A couple of other notes: - Might want to look at revenue-based financing. More of a debt instrument but if you can't raise or are getting bent over by equity investors, it is an option. - I wish the funding is required to grow quick meme would die. Our company is revenue funded and growing at a very good clip. If you can make your customers your de facto "investors", life can be very good.
- DevX101 12y ago
  What are some financial institutions willing to work with startups via revenue financing? Mind sharing some stats on the typical repayment rates & approval requirements? This sounds like a great way to finance B2B/enterprise type startups with revenue coming in the door from day 1. Not giving up any equity doesn't hurt either.
  - asanwal 12y ago
    There are a bunch. I know of a couple but don't know how good/bad they are so don't want to "recommend" anyone. But quick google search of revenue-based funding SaaS should turn them up. I've heard they generally work like this: - Will lend you money equivalent to 1/4 to 1/2 your monthly or annual revenue/billings - Take a % of revenue every month as repayment. Your repayment goes up or down with revenue which is a good feature. - Take some warrant coverage as well (1/3 to 1/5 of the loan value) Some will want to be hooked into your payment solution to take money right as it comes in but as we've not done it ourselves (have only looked at superficially), I'm not sure if that's all that common. For B2B SaaS startups who can customer-fund to traction, this is the way of the future IMO. Unfortunately, the revenue-based financing guys aren't doing a great job marketing themselves primarily cuz their funds are quite small so far. Hope that helps.
    - NickSharp 12y ago
      That sounds like Paypal Working Capital, which they have been "suggesting" to me rather aggressively. It makes a lot of sense. If you use Paypal for your business they have a good sense of your revenue, and they can be sure they're first in line for repayment. https://www.paypal.com/webapps/workingcapital/ https://www.paypal.com/webapps/workingcapital/
notastartup 12y ago
i dont get why you have 8 engineers when you can't afford it. does raising money give you a false sense of optimism? I've seen a startup where they just broke even year after year for the past 6 years. they just increase the revenue for the sake of higher valuation but what ended up happening was, it created a toxic working environment, highest attrition rate (because they simply fire people and replace it), eventually a year came around when they started bleeding. eventually the founding members were fired. now the company is getting outdone by the competition, A list clients have jumped ship, and business is dwindling.
michaelochurch 12y ago
The real problem is that this game is controlled by ADD children who can't differentiate between 9% monthly growth in something of quality and 15-30% "viral" monthly growth in Snapchat-for-cats (the original Snapchat was idiotic, and give cats some credit because they have way better taste than sexting tweens) bullshit.
- jacques_chester 12y ago
  I treasure the occasions on which you and I agree.
- AndrewKemendo 12y ago
  Nobody cares about quality, they care about bottom line and how quickly they can return their investment. No news there.
debacle 12y ago
So the plan of action when you can't raise more money is "Try pretty much everything and hope it works?" I realize you have to provide advice that might apply to all startups, but in this specific case cutting the burn to 60k (maybe losing a bit of equity to keep employees happy) and trying really hard to hit 60k in revenue and bam, you're suddenly at breakeven and your runway can start to grow, you can breathe, etc. Raising money is always good, but it's hard, and if you've received a lot of nos, it's not going to get easier. Planning for the acquihire is pretty much admitting defeat.
AndrewKemendo 12y ago
any entrepreneur able to build a prototype can get an idea funded Except this is not true and I don't know where people are getting this idea. Maybe it's just SV or YC that has money but Angels and VC's in D.C. and NY at least are looking for solid traction before even bringing up the word term sheet. At a recent Cooley pitch event a friend of mine who is already revenue positive came up from Ohio to pitch his startup. He told me not a single investor had followed up with him about a term sheet despite multiple discussions after the pitch. Another friend in CO is in the same boat, being revenue positive but with no interest from angels or anyone else. I think stating that anyone can get money is a dangerous thing to say because it gives the wrong impression about availability of dollars. That post about things being frothy is so insanely different than the reality here on the east coast that it's staggering and totally unbelievable (not saying that I don't believe it by the way).
- rdlecler1 12y ago
  Agreed. I don't know the world where investors are throwing $1.5M at you, and you somehow had the option to raise twice that. Most of us can't even raise the first $1.5M. These are first world problems.
  - Rambunctious 12y ago
    To be more precise, these are first world YCombinator problems :). Unless there is something great cooking behind the scenes, raising $3MM in seed is not really a piece of cake.
- davidw 12y ago
  > Except this is not true and I don't know where people are getting this idea. It's a bit of casual hyperbole that can feel kind of bad to read if someone is not part of the crowd that can get money. That said, there is a lot of seed funding out there these days.
  - rexreed 12y ago
    Where? More specifically, where is it easily available in the quantities and for the types of pre-revenue startups discussed by the OP? In my experience, most startups have a tough time raising that first seed round, let alone doubling down on that round.
nandemo 12y ago
> (...) preparing severance packages (...) Do US startups typically pay severance packages?
- been_fired 12y ago
  I've never been in a position to receive one from a startup, but I have received one from a well established company before. Most of the time severance is used as a vehicle to establish good relations with the person being fired (so they don't bad mouth the company), and as a way to get former employees to sign a document stating they wont sue for any reason.
wensing 12y ago
This resonates. We raised just under $2m through a seed round and then were fortunate enough to be able to raise a bridge that deferred any crunch. But then we did 2 other things: we focused our sales, marketing, and product design on the greatest pain within a single industry (instead of 3) and we reduced expenses. Now growth is great and we are very close to being able to say that raising money is completely optional indefinitely, and no matter what investors do or don't decide, we will be fine. A wonderful feeling but the challenge to get to that next level has also been nearly inexplicable. Great post-mortem.
beatpanda 12y ago
I remember when I first started reading HN, when having a business model on the table from day one, bootstrapping, and literally running your company out of a garage was all the rage. Easy money really ruined all that. I hope we end up back there some day.
- mercer 12y ago
  Yeah. While I'm happy to read about these kinds of things, they're far from my own interests (for now). I much prefer the 'bootstrapping' approach for all kinds of reasons, so obviously I also prefer reading about other people's experiences and observations taking the same, more conventional approach. That said, I understand that the demographics of a site can change, and that's not always a bad thing. And there's still enough variety to keep me here. Would you (or anyone else reading this) know of online communities similar to HN that are more bootstrappy in their focus?
  - B-Scan 12y ago
    Not an active member, but when I read it from time to time they are offering solid advice: http://discuss.bootstrapped.fm/ http://discuss.bootstrapped.fm/
    - mercer 12y ago
      That looks interesting. Thanks!
- sergiosgc 12y ago
  That option is still there, but does not make headlines. Lots of companies, namely those not in the Valley, go for the organic growth route. It is very fulfilling, but won't make you the next Bezos or Shuttleworth. The VC route is a high risk high reward game. The organic route lowers risk and reward. What I mean is that absence from the media is not non-existence.
  - slowing13 12y ago

165 points by sethbannon 12y ago

cykho 12y ago

This is a real wakeup call - raise bigger seed rounds to last until you're a breakout success.

dchuk 12y ago

If anyone from 42Floors is reading this: your link to your own site with the anchor text "office space" is a relative link and therefore broken: <a href="42floors.com">office space</a> You need to make that http://42floors.com http://42floors.com or it's not going to work for users (and search engines ;) )

jaf12duke 12y ago
Thanks! Fixing it now.
- nodesocket 12y ago
  Also, all your images are loaded over http, when you are serving from https, resulting in: Mixed Content: The page at 'https://42floors.com/' was loaded over HTTPS, but requested an insecure image 'http://images.42floors.com/8ede644d63d36e5e26d7a394ee5061d07e87389d.jpg?s=75x48%23'. This content should also be served over HTTPS.

nodesocket 12y ago

While $50,000 a month is nice revenue, a growth rate of 9% month over month does seem quite low. Was the majority of the $50,000 front-loaded? I'd really be curious to hear what market they are in? Seems hard to believe given their pedigree (YC), monthly revenue 50K, and lean team (8 people), they can't find a VC to bite. If they are charging monthly, what about blasting all paying customers with an upgrade to yearly promotion (20% off). That would bring in a lump sum of cash upfront which should provide additional runway.

kenferry 12y ago
I was surprised that 9% month over month growth rate is a bad number, given numbers in http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html. I suppose the difference is "during YC" vs "leading up to a Series A"? What are good numbers?
- dchuk 12y ago
  Well pg is talking about weekly growth, not monthly: "A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing."
  - kenferry 12y ago
    Oop, yep, thanks!
- applecore 12y ago
  Founders should aim for 15%+ monthly growth in MRR if they want to raise a Series A within a reasonable time after raising seed capital.

3pt14159 12y ago

Haha, I know so many people in this boat. I even know of one startup that was walking the line between B2B and B2C, and just temporarily made a slight turn to B2C to see some easy (non-paying) user growth just to raise the A, only to go back to their B2B route that they are confident will succeed in the long run. I'm sure this story is not going to be popular amongst the investor crowd, but it's much harder to raise an A once there is actual margins involved.

peterjancelis 12y ago

If the founder can get the 90K cost constant and keep the rev growing at 9% per month, there is only a $10K shortage by month 7 (and cash runs out in month 6 only). This can easily be solved with some annual prepayments. Source: https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqKvaJiF4BgYfO-rvh0btojRkg/edit?usp=sharing https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqK...

nodesocket 12y ago
Cool spreadsheet. This will come in handy later in life. Thanks.
blazespin 12y ago
Mo money mo problems, unfortunately. Hard to keep that overhead constant.
- peterjancelis 12y ago
  Yes this also assumes the 9% growth is word of mouth and not ad spend driven.
  - gideon_b 12y ago
    Assuming half the costs are fixed (office, salaries, etc) and half the costs grow with revenue (Sales, Marketing, Servers etc.) than the situation becomes a little more bleak: https://docs.google.com/spreadsheets/d/1YoPnpFzmcpdZQh6HZ_2fbJDqOgSqrNVZuLkt0g0wKnA/edit?usp=sharing https://docs.google.com/spreadsheets/d/1YoPnpFzmcpdZQh6HZ_2f... EDIT: they would hit breakeven at 22 months - not bad actually.
limejuice 12y ago
Yea, I was running the numbers in my head as I read the article, and thinking this company is not in that bad a predicament. They look to be very close to turning the corner. Without knowing more about the business, it's hard to say if 9% month/month growth is bad or not. Some of these Saas business start out slow and then they take off once they get some critical mass.

yesimahuman 12y ago

Really great post, and not just for founders but for early stage investors as well. This is definitely why we are seeing so many more bridge rounds, but I'm not sure if those are really as bad as they've been made out to be, or just a new reality (for example, I know startups that have done a "damaging" bridge round only to then raise a huge A). Either way, even more reason for founders to bootstrap for longer if they haven't hit that huge growth curve yet, or just bootstrap forever!

asanwal 12y ago

Great advice and solid post. Some data on how long companies typically wait between Seed and Series A rounds. The median is 349 days so raising for 18 months is smart. https://www.cbinsights.com/blog/days-between-funding-rounds/ https://www.cbinsights.com/blog/days-between-funding-rounds/ A couple of other notes: - Might want to look at revenue-based financing. More of a debt instrument but if you can't raise or are getting bent over by equity investors, it is an option. - I wish the funding is required to grow quick meme would die. Our company is revenue funded and growing at a very good clip. If you can make your customers your de facto "investors", life can be very good.

DevX101 12y ago
What are some financial institutions willing to work with startups via revenue financing? Mind sharing some stats on the typical repayment rates & approval requirements? This sounds like a great way to finance B2B/enterprise type startups with revenue coming in the door from day 1. Not giving up any equity doesn't hurt either.
- asanwal 12y ago
  There are a bunch. I know of a couple but don't know how good/bad they are so don't want to "recommend" anyone. But quick google search of revenue-based funding SaaS should turn them up. I've heard they generally work like this: - Will lend you money equivalent to 1/4 to 1/2 your monthly or annual revenue/billings - Take a % of revenue every month as repayment. Your repayment goes up or down with revenue which is a good feature. - Take some warrant coverage as well (1/3 to 1/5 of the loan value) Some will want to be hooked into your payment solution to take money right as it comes in but as we've not done it ourselves (have only looked at superficially), I'm not sure if that's all that common. For B2B SaaS startups who can customer-fund to traction, this is the way of the future IMO. Unfortunately, the revenue-based financing guys aren't doing a great job marketing themselves primarily cuz their funds are quite small so far. Hope that helps.
  - NickSharp 12y ago
    That sounds like Paypal Working Capital, which they have been "suggesting" to me rather aggressively. It makes a lot of sense. If you use Paypal for your business they have a good sense of your revenue, and they can be sure they're first in line for repayment. https://www.paypal.com/webapps/workingcapital/ https://www.paypal.com/webapps/workingcapital/

notastartup 12y ago

i dont get why you have 8 engineers when you can't afford it. does raising money give you a false sense of optimism? I've seen a startup where they just broke even year after year for the past 6 years. they just increase the revenue for the sake of higher valuation but what ended up happening was, it created a toxic working environment, highest attrition rate (because they simply fire people and replace it), eventually a year came around when they started bleeding. eventually the founding members were fired. now the company is getting outdone by the competition, A list clients have jumped ship, and business is dwindling.

michaelochurch 12y ago

The real problem is that this game is controlled by ADD children who can't differentiate between 9% monthly growth in something of quality and 15-30% "viral" monthly growth in Snapchat-for-cats (the original Snapchat was idiotic, and give cats some credit because they have way better taste than sexting tweens) bullshit.

jacques_chester 12y ago
I treasure the occasions on which you and I agree.
AndrewKemendo 12y ago
Nobody cares about quality, they care about bottom line and how quickly they can return their investment. No news there.

debacle 12y ago

So the plan of action when you can't raise more money is "Try pretty much everything and hope it works?" I realize you have to provide advice that might apply to all startups, but in this specific case cutting the burn to 60k (maybe losing a bit of equity to keep employees happy) and trying really hard to hit 60k in revenue and bam, you're suddenly at breakeven and your runway can start to grow, you can breathe, etc. Raising money is always good, but it's hard, and if you've received a lot of nos, it's not going to get easier. Planning for the acquihire is pretty much admitting defeat.

AndrewKemendo 12y ago

any entrepreneur able to build a prototype can get an idea funded Except this is not true and I don't know where people are getting this idea. Maybe it's just SV or YC that has money but Angels and VC's in D.C. and NY at least are looking for solid traction before even bringing up the word term sheet. At a recent Cooley pitch event a friend of mine who is already revenue positive came up from Ohio to pitch his startup. He told me not a single investor had followed up with him about a term sheet despite multiple discussions after the pitch. Another friend in CO is in the same boat, being revenue positive but with no interest from angels or anyone else. I think stating that anyone can get money is a dangerous thing to say because it gives the wrong impression about availability of dollars. That post about things being frothy is so insanely different than the reality here on the east coast that it's staggering and totally unbelievable (not saying that I don't believe it by the way).

rdlecler1 12y ago
Agreed. I don't know the world where investors are throwing $1.5M at you, and you somehow had the option to raise twice that. Most of us can't even raise the first $1.5M. These are first world problems.
- Rambunctious 12y ago
  To be more precise, these are first world YCombinator problems :). Unless there is something great cooking behind the scenes, raising $3MM in seed is not really a piece of cake.
davidw 12y ago
> Except this is not true and I don't know where people are getting this idea. It's a bit of casual hyperbole that can feel kind of bad to read if someone is not part of the crowd that can get money. That said, there is a lot of seed funding out there these days.
- rexreed 12y ago
  Where? More specifically, where is it easily available in the quantities and for the types of pre-revenue startups discussed by the OP? In my experience, most startups have a tough time raising that first seed round, let alone doubling down on that round.

nandemo 12y ago

> (...) preparing severance packages (...) Do US startups typically pay severance packages?

been_fired 12y ago
I've never been in a position to receive one from a startup, but I have received one from a well established company before. Most of the time severance is used as a vehicle to establish good relations with the person being fired (so they don't bad mouth the company), and as a way to get former employees to sign a document stating they wont sue for any reason.

wensing 12y ago

This resonates. We raised just under $2m through a seed round and then were fortunate enough to be able to raise a bridge that deferred any crunch. But then we did 2 other things: we focused our sales, marketing, and product design on the greatest pain within a single industry (instead of 3) and we reduced expenses. Now growth is great and we are very close to being able to say that raising money is completely optional indefinitely, and no matter what investors do or don't decide, we will be fine. A wonderful feeling but the challenge to get to that next level has also been nearly inexplicable. Great post-mortem.

beatpanda 12y ago

I remember when I first started reading HN, when having a business model on the table from day one, bootstrapping, and literally running your company out of a garage was all the rage. Easy money really ruined all that. I hope we end up back there some day.

mercer 12y ago
Yeah. While I'm happy to read about these kinds of things, they're far from my own interests (for now). I much prefer the 'bootstrapping' approach for all kinds of reasons, so obviously I also prefer reading about other people's experiences and observations taking the same, more conventional approach. That said, I understand that the demographics of a site can change, and that's not always a bad thing. And there's still enough variety to keep me here. Would you (or anyone else reading this) know of online communities similar to HN that are more bootstrappy in their focus?
- B-Scan 12y ago
  Not an active member, but when I read it from time to time they are offering solid advice: http://discuss.bootstrapped.fm/ http://discuss.bootstrapped.fm/
  - mercer 12y ago
    That looks interesting. Thanks!
sergiosgc 12y ago
That option is still there, but does not make headlines. Lots of companies, namely those not in the Valley, go for the organic growth route. It is very fulfilling, but won't make you the next Bezos or Shuttleworth. The VC route is a high risk high reward game. The organic route lowers risk and reward. What I mean is that absence from the media is not non-existence.
- slowing13 12y ago