11 ms·

The Fatal Pinch

480 points by _pius 12y ago

carsongross 12y ago
One way to avoid the fatal pinch is the Dickens approach: Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. In a world with AWS and pay-as-you go services, it's more and more possible.
- TheBiv 12y ago
  (Zero sarcasm) can you possibly explain, in different words, what this means?
  - hglaser 12y ago
    Spend less than you make.
  - michaelhoffman 12y ago
    The numbers refer to pre-decimalization British currency. To convert to modern currency: £19 19s 6d = £19.975 £20 0s 6d = £20.025
    - to3m 12y ago
      Wikipedia has a few pages about the various systems of this kind: http://en.wikipedia.org/wiki/Pre-decimal_currency http://en.wikipedia.org/wiki/Pre-decimal_currency. Difficult to fathom why the fashion for these passed, because such systems provide so many advantages. A good example is the Spanish system of division into 34, which permits straightforward further division into not only 2 but also 17 pieces - a case very difficult to handle with the modern restrictive, awkward and inconvenient decimal systems.
      - lacksrigour 12y ago
        What is the benefit to something that Divides into 2 and 17 rather than 2, 5, 10, 25, 50, etc that existing systems of base 10 decimal use?
        jameshart 12y ago
        Well, say you're out to dinner with 16 friends, and you need to divide up the bill... the practicality should be obvious.
      - jameshart 12y ago
        It saddens me in some ways that the UK currency decimalized before mass computerization of record-keeping took off. I think I would have liked to have lived in a world where database currency columns needed to support pounds, shillings and pence (keeping in mind that pence could be divided into quarters, of course).
        jaza 12y ago
        Dealing with Olde English currency units (and other non-decimal currency units) may have been "a fun challenge" for programmers... but it does NOT sadden me that programmers have seldom had to deal with them! It would have led to a whole world of hellish pain. Have we not suffered enough pain as it is, what with character encoding, timezone handling, y2k-incompatible dates, spatial coordinate / projection systems, etc?
        to3m 12y ago
        I'm not even sure there'd be much to do: just store everything in sixteenths a of a farthing and format on output, much as people do with tenths of a penny today. If anything the numbers are actually slightly more convenient for machines with no divide instruction.
        ams6110 12y ago
        It's only recently (2001?) that US stock prices moved to decimal from previous eighths of a dollar. The origin of this was spanish "pieces of eight" but not sure why it persisted so long. Maybe because it made the spread always at least $0.125 ?
  - deleted 12y ago
    [deleted]
  - gtremper 12y ago
    Its like gold, silver, copper in fantasy RPGs
  - 001sky 12y ago
    incremental net worth = growth (joy) negative net worth = brankrupt (misery)
  - peteretep 12y ago
    The difference between living within your means or just over can be insignificant in cash amounts, but the effect on your long term happiness very significant.
  - wmeredith 12y ago
    Spending less than you make is the key to happiness. It's worth noting that this is the antithesis of the stereotypical SV startup culture.
- frandroid 12y ago
  > AWS Infrstructure expenses are not what sinks most companies.
  - mathattack 12y ago
    And AWS always seems to grow. :-)
joshu 12y ago
This is why I hate investing in startups raising $500k or less. You won't be able to raise again unless you have significant upwards progress.
- api 12y ago
  Interesting... What effect does this have on your criteria for investment? Or are you saying that raising less might in and of itself make the investment riskier by implying that they've under-estimated how much runway they might need? I've often heard the advice that "it's not much harder to raise a million than it is to raise $250k, so you might as well raise a million" or some variation thereof. Is that true in your opinion?
  - joshu 12y ago
    No, the ones that raised <$500 were raising as much as they could. Perhaps startups that COULD raise $1m but didn't are a different case.
- paul 12y ago
  Several of my best investments have been from startups raising less than $500k. Justin.tv/Twitch returned 97x my original investment, and Weebly will likely be even more.
  - super_sloth 12y ago
    Presumably those were a while back? Do you think the climate has changed since then to make it much harder?
    - paul 12y ago
      The climate has changed in that it's easier for startups to raise more, but even those that do not can still be very successful. Justin.tv or Weebly would not require any more money to start today than they did six years ago -- if anything it's gotten cheaper.
super_sloth 12y ago
"Although your product may not be very appealing yet, if you're a startup your programmers will often be way better than the ones your customers have or can hire." Is this really true? I'm very sceptical. Does anyone have any evidence to back this up?
- jplahn 12y ago
  I think, by and large, it likely is true. That's not to say that it always holds true and it might be swayed by the strength of programmers in YC, but I think it's definitely correct more often than not. It may also be based on the premise that if you're doing consultingish work, you're probably not doing it for one of the top tech companies, but more likely for a smaller company that doesn't have dedicated developers. From prior experience working at a consulting startup, this tended to be the case more often than not. Obviously, YMMV.
- netcan 12y ago
  Depends o the customers, but yes generally. This also assumes your customers are the kind that pay for custom code and have coders, which obviously only applies to a subset of startups.
- tptacek 12y ago
  Even if your customers are software companies, it's often the case that your programmers are better than the programmers that they can deploy to solve the kinds of problems you work on. For instance, if you have a clever solution to sales funnel optimization, chances are that even your savviest software customers aren't in a good position to deploy strong engineers on that problem; they're too busy making the things your customer wants to sell. This is true of a lot of business functions: marketing, sales, recruiting, integration testing, devops, project management, bug tracking, log management, reporting, email. Basically take every product anyone ever sold successfully to tech companies and there's a list of things tech companies aren't good at effectively deploying in-house talent on.
- Natsu 12y ago
  From what I've seen, "better than average" is a pretty low hurdle to clear. I've seen too much code in production that scares me. For example, have you ever seen someone statically allocate a million element array to hold ~1-2000 6-digit numbers? Did I mention the program had significant memory usage problems? Then again, after looking at that particular mass of 30-year-old goto-loving, copypasta C, maybe I should have been grateful they never once used malloc.
proveanegative 12y ago
Is becoming ramen-profitable before you raise your first round a possible solution to this problem?
- bcx 12y ago
  I think the key lesson here, is you need to be in a position where failing to raise more money does not kill your company. So if you can convince your entire team to eat ramen for an indefinite period of time between your first raise, and your second raise, you would have "solved" this problem for some definition of solved.
- lisper 12y ago
  It can't hurt.
- mikeg8 12y ago
  yes. When you are "ramen profitable" you are making enough to remain operational which means you are avoiding death and the "fatal pinch" this article is all about.
- danieltillett 12y ago
  If you can become profitable without raising funds then why raise funds?
  - frandroid 12y ago
    It's a question of speed. Do you take your 1) $100K annual profits and re-invest them in one new market every year, slowly growing every year? Or 2) you take $2M in funding and expand worldwide. The thing is, if you hit on a good idea, you want to do #2, because if you don't, someone else will take $2M in funding to copy your product and go to 20 markets in 2 years.
    - danieltillett 12y ago
      True if you choose a market that has such need for speed. Lots of markets are not like this and they have the added advantage that VC's won't put money into them.
jdawg77 12y ago
This is awesome. Fully agreed with the, "don't expect to raise money to figure it out." It's why we're consultants. :)
deleted 12y ago
[deleted]
ChuckMcM 12y ago
That is so spot on. Put another way, the seed round is a peek to see if you can do what you say you can do, series A is a bet you can make it profitably, and series B is the gas to grow the market. As soon as you know your cash and your profitability cross below the 'zero' line you calk your investors that week and you ask them, call it or push forward. They say no, then you just roll it up. And I know, that is much much easier to say than to do.
- philjr 12y ago
  Love this description!
jdoliner 12y ago
> I try to resist coining phrases Is this because you feel it's pretentious to do so? I feel like having a concise name for a concept is one of the most important steps to broad understanding of it and always try to come up with good names for concepts that I want to be able to talk to people about. You might be doing us a bit of a disservice by resisting this.
- itazula 12y ago
  "Survival of the fittest" is an example of a coined phrase gone wrong, wherein a sound bite subsumes what it is supposed to only represent.
zeeshanm 12y ago
tl;dr :: nobody wants to board a sinking ship.
- logn 12y ago
  More like sell scuba training to passengers on the way down then use that money to pay for repairs.
- CurtMonash 12y ago
  Or remain on one indefinitely.
- meowface 12y ago
  That is one key takeaway, but if you read the entire essay there are many other useful points. tl;dr :: tl;drs suck
danieltillett 12y ago
Isn't the problem that the founders have to spend like drunken sailors to show "traction" to have any chance of getting more funding while their investors give them so little money that the runway is then incredibly short? There is very little room for error here.
- tptacek 12y ago
  If you operate as if every round of financing you get is your last, it is irrational to waste investor money to fake traction. One view of the lifecycle of startups is that companies that try to do that have already lost the game; they're predicating their success on future financing rounds.
  - danieltillett 12y ago
    I wasn't suggesting companies are trying to fake traction, but they do seem to be encouraged by at least some of their investors to hit very high grow rates (say 30% a month) which are only possible if you spend a lot and so have a very short runway.
    - danenania 12y ago
      Does growth really count in VC land if you have to buy it at a loss? I would expect a smart VC to simply discount such an inherently unsustainable version of growth. Is the idea that growth at a loss is still better than nothing? If you have a good enough product to hold its own, shouldn't you be capable of getting at least a decent ROI on ads? If you can't do that, why try to grow? Spend the money on improving your product and branding instead.
- jdoliner 12y ago
  Why would you have to "spend like drunken sailors" to show traction? I think you make a much more compelling for having traction if you can continue to grow while spending like a sober sailor.
  - 12y ago
K2h 12y ago
Without some revenue, every company is on a direct course for disaster - by default. I think that the first pitfall some make is to look at investment money as revenue, cash coming in. But its a big giant fallacy.. it is not money from normal operations. Until you sell a product and have money coming in from it you are on borrowed time. This can be intentional and calculated position of building a product and bringing it to market when it is ready, but I get the impression that many don't plan or execute their way out of this fast enough.
- 001sky 12y ago
  Having money 'around' tends to make people complacent...people on the outside can't tell the difference between earnings and investment...and this tends to play tricks with people (and their minds( on the inside as well.
danielweber 12y ago
They'll all lose their jobs eventually, along with all the time they expended on this doomed company They were getting paid, right? I'm not losing time I work at a company that will eventually fail.
- njyx 12y ago
  I think it assumes you want to be a part of something which makes a long term impact. If you just want a pay check, you probably aren't at a startup (or at least not for the right reason).
- bbcbasic 12y ago
  They weren't getting paid enough, probably. And their vested stock will be worth nothing.
AndrewKemendo 12y ago
There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?
- feverishaaron 12y ago
  I know of a company that thought they would be in this category. They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. That way the expectation was set from the beginning that this company might take some time to build out their product and see traction. It's smart, because the discount for the follow-on was pre-negotiated, so investors get perhaps a more favorable discount if the company is a run-away success, and the entrepreneurs were able to buy peace of mind, and could count on the money regardless of macro-economic forces.
  - AndrewKemendo 12y ago
    They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. So my guess is that these founders were either already successful previously, were well connected or had already bootstrapped quite a bit of the technology that would underlie the product (ie patents, team, etc...). Any or all of that the case?
    - danieltillett 12y ago
      Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.
      - rjtavares 12y ago
        I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.
raymondgh 12y ago
Does anyone have tips for quickly and responsibly finding a spot on the slippery slope of consulting? We have found our few distractions so far to be too distracting.
- breck 12y ago
  I do. Shoot me an email.
max55 12y ago
Weebly story is amazing
max55 12y ago
Weebly story is amazing
tonydiv 12y ago
These days, the stakes are higher for everyone. Investors expect faster growth and want a "meaningful stake" (15%+) early on. Meanwhile, entrepreneurs generally try to raise more too. Who doesn't want more cash if they can get it? This is dangerous for those who don't understand these dynamics. The growth trajectory needs to align with the incoming cash. The second you raise a $3M seed round, you're on the roller coaster. You will need to show "hockey stick" growth in 12 months, and raise your A in 18. If not, you're dead.
- deleted 12y ago
  [deleted]
- danieltillett 12y ago
  The problem of course is that only a minority of companies can ever really meet this. This requirement seems to have driven a lot of startups to do things in a way that does not maximise the benefit to the founders [0] - investors can spread the risks over multiple investments while the founder are stuck with all their eggs in one basket [1]. 0. I don't blame the VCs for doing this as they are doing what is best for them and their partners, but as a founder you should look very carefully at what is on offer and if what you are expected to do is viable. 1. Paul's point about the fatal pinch is correct, it is just that it is occurring much earlier (at the seed round) not 6 months from the money running out.
- arbuge 12y ago
  >> The second you raise a $3M seed round, you're on the roller coaster. You will need to show "hockey stick" growth in 12 months, and raise your A in 18. If not, you're dead. Depends how much control you have, and how resourceful you are in a pinch. If you can figure out how to stay alive until you see a different way to do things without raising more money, then you're not dead. They key is being able to bunker down without investors being able to pull the plug on you... $3m could buy a lot of bunkering time for a small team.
GreenPlastic 12y ago
How do you keep your employees in this market if you're lowering salaries across the board?
- morgante 12y ago
  Jedi mind tricks.
- csallen 12y ago
  Hiring (and retention) is currently so difficult that the ability to do it well is one of the major factors separating the best founders/startups from the rest of the pack. Ideally you're extremely charismatic, resourceful, and well-connected, and your company is attractive, interesting, and promising.
- awjr 12y ago
  I'd suggest technology is a key attraction. People involved in startups are there not only because it might get big, but also because the technology they are using excites them.
- duggan 12y ago
  Increase their ownership of the company. You're asking them for investment.
LukeFitzpatrick 12y ago
I agree with this article. Founders overspend once they get their first initial investment, and rely on the next investment too much. Founders should be paying more attention to burn and churn rates. I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong. 1) Spent the whole investment on Founders salaries. They had 4 tech programmers (top notch guys), and used the money to pay for their time whilst they were building the platform. 2) They had the wrong product market fit. They expected to sell their services to Universities for 50K. In my opinion, they should of targeted college students, and add a tutoring service and take a small commission. 3) They built a fully finished product. Their was no room to scale it or grow. 4) They expected that the product would just sell itself. We all know, that's not how it works in the real world. 5) They didn't do any market testing and validation = wrong product market fit. The end result, they got an investment and spent it quickly, they didn't try to pivot, tried to get another investment and failed. The team broke up pretty quick, or as you referred to in your article, they got an unwelcoming 'pinch' on the backside. I learnt a lot from seeing my friends fail, and their failure has helped me out a lot with my startups. When startups first get their investment, they should have a 1-2 year plan for that money (burn rate). Divide the investment by a specific time period and that's how you spend it. Realistically, after you get through the TechCrunch 'trough of sorrow' as Andrew Chen puts it, you have to stay motivated and plan for the future. The future looks dim if your startup is heavily reliant on receiving additional investments to keep you alive. More on the pinch, startups shouldn't be getting an investment to keep them going. They should have this already sorted out. A very wise person once told me, you should seek investments when you don't need them, as this means you have done your homework and can also find the best deals. Great article, and I appreciate the awesome content.
- danieltillett 12y ago
  Actually I am not so sure that your friends did the wrong thing here. Sure the business failed, but if they got to transfer all the investors money to themselves while at the same time learning how to run a startup (all with someone else money) then it was pretty smart. Now they need to take the cash they saved and wisdom accumulated and bootstrap their next business up without any VC money.
outworlder 12y ago
I'd argue that the 'consultingish' part is as hard as the startup's main business itself, if you add the human factor. On one hand, you have your ideas, your product or whatever you're working on – which, by definition, isn't working all that great. On the other hand, you have a client (or more than one), who's willing to pay right now (usually you can negotiate something upfront) or at least just one invoice away. Plus you are able to charge a nice amount, certainly better than you'd make as an employee and better than going broke. Somewhere down the line, you'll get more work. Maybe from the same client, maybe it's a referral. Do you turn them down now, that you've achieved the required runway? It's hard if you are a sole founder, it is much harder if you have more than one. Harder still if they are married, or with children or, god forbid, have a mortgage. The consulting (there's no ish unless it is a somewhat minor customisation of an existing product or parts of it) path is a very slippery slope. It should not be taken unless the other option is death. And only after all founders are on the same page. It's easier to set a goal when everyone is going broke, than when the money has started rolling in. There's nothing in the world that's more blinding than a bank deposit.
- tptacek 12y ago
  Yes, that is what you do when you've cleared the runway: you start saying no to consulting clients. That is, for example, what 37signals did. I'm not sure I see the problem here.
  - danieltillett 12y ago
    But 37signals bootstrapped. The problem is once the founders take VC money they are taking on what the VC expect them to do which is play a very high risk, potentially high reward game with a very low chance of success. This strategy is almost certainly not optimal for the founders.
    - tptacek 12y ago
      So what? At this point in the story we're talking about a company on life support. That's why they're consulting and not continuing to put all their time into product. There's not a whole lot VC can do about it at this point.
zak_mc_kracken 12y ago
Can someone tell pg that he should stop putting hard <br/> every forty characters? One of the fundamental aspects of the web is that presentation is done by the client, not the publisher. Please let me reflow the text as I see fit.
- marvy 12y ago
  There is no br every 40 chars. Instead, the whole thing is wrapped in a table cell of width 436.
- escape_goat 12y ago
  Challenge accepted!! After opening the article, copy & paste the following line into the URL field: javascript:a=document.createNodeIterator(document.getElementsByTagName('table')[0],NodeFilter.SHOW_ELEMENT,{acceptNode:function(node){return(node.getAttribute('width')&&node.nodeName!=='IMG')?NodeFilter.FILTER_ACCEPT:undefined;}});while(b=a.nextNode()){b.setAttribute('width','100%')} Make sure your browser doesn't strip the "javascript:" at the beginning automatically, there's a good chance that it might; in that case, you'll have to type that in yourself.
graycat 12y ago
Of course, all across the US, crossroads, villages, and towns up to the largest cities, millions of US entrepreneurs, often sole proprietors, have to make money enough to pay suppliers, the rent, taxes, insurance, the bookkeeper, the accountant, the lawyer, employees, and take money enough home to support the family, the cable bill, the wireless bill, for dear wife, a late model SUV for her work as family taxi, the groceries, the home furnishings, and the lawn service, for junior, running shoes, a bicycle, a computer, and school clothes, for dear perfect, precious daughter, violin strings, a new iPhone 6, new school clothes, new dress up clothes, white furniture for her bedroom, a new prom dress, and save for college, retirement, etc. So, millions of sole proprietors do that. So, maybe it's not too much to ask of venture funded entrepreneurs to do similar 'budgeting'. Still, it can be easy for such entrepreneurs to be fooled by venture firm Web sites that emphasize that they have been in the shoes of entrepreneurs and know what they are going through, are committed to their entrepreneurs, through good times and bad, through thick and thin, etc. Still, the the importance of planning is old: In early aviation too many smoking holes taught the possibilities of head winds, bad weather, and mechanical problems and, thus, the importance of flight planning reserve fuel, alternate destinations, at least two of radios, each of the fire wall instruments, etc.
ghobbins 12y ago
First time founder. My company is in a "fatal pinch." Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k/year. We got investment, we built it, we sold it to a few more schools but the software is not feature-packed and mature enough to attract sales fast enough. Higher ed also moves super slow even when you're doing well. We're starting to see some traction with parties that want the software custom-tailored for their need (the consulting PG speaks of). But we're stuck in spot where we haven't gotten a check from any of these parties yet and are reluctant to pull the trigger and focus on only on the consultative sale. The team, product roadmap, and marketing strategy is all geared towards higher ed. But it's clear now we can't become profitable in 6 months in that industry. How do we operationally perform the "pivot" into consulting? Do you agree it's time to do so?
- hbhakhra 12y ago
  I'm at the prototype phase of an educational product and have shown the product to teachers and they are interested in using it in the classroom, but they have already expressed concerns in pushing sales through the school. It seems like you have had some success at least so if you could share any advice, it would be much appreciated. p.s. I can email you if you don't want to share publicly
  - ghobbins 12y ago
    Sure, shoot me an email. Check my profile for the address.
- blazespin 12y ago
  The problem with education is that you compete with a lot of non profits or at least non profit mentality. Universities, for example, view making a profit as contrary to their mission (and to be fair, it probably is).
  - ghobbins 12y ago
    We are also competing with extra-ingrained incumbents like Blackboard (publicly traded) that own the sales channels despite being bloated, hard to use software. The higher ed market values reputation and a laundry list of features that promise to fix all their issues over a solution that actually resonates with students.
deleted 12y ago
[deleted]
gcb0 12y ago
caveat left out: the author makes twice more money if a startup takes one round of funding instead of two :)
wazoox 12y ago
This is the story of the first startup I was participating into, back in 2000. The boss (and main investor) ruined himself (selling his Porsche, mortgaging his home, selling stock he should have kept...) while trying to get investors interested in a 0.1% done prototype of a project 10 years too soon (basically we were busy inventing the Cloud and Big Data). Sad story.
Immortalin 12y ago
Disappointing how few startups focuses on organic growth, most startups nowadays prefer to clamber for the attention of investors instead.
fit2rule 12y ago
I've never been one to lean on investors as a solution to problems. Its far better to build your company on the basis of the immense amounts of help and good you are doing your customers. If you're not doing that, and its not a principle focus for how you're going to produce revenues, then its not business but rather an academic experiment. Investment is very important, though, for various big-growth reasons, but mostly to extend reach beyond what the business-as-organism is capable of attaining independently. Better to grow strong by remembering who really pays the bills: true customers. Too many startups conflate investor/customer in strange ways before they realize there is actually a relevance to how much of the company is your company.

480 points by _pius 12y ago

One way to avoid the fatal pinch is the Dickens approach: Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. In a world with AWS and pay-as-you go services, it's more and more possible.

TheBiv 12y ago
(Zero sarcasm) can you possibly explain, in different words, what this means?
- hglaser 12y ago
  Spend less than you make.
- michaelhoffman 12y ago
  The numbers refer to pre-decimalization British currency. To convert to modern currency: £19 19s 6d = £19.975 £20 0s 6d = £20.025
  - to3m 12y ago
    Wikipedia has a few pages about the various systems of this kind: http://en.wikipedia.org/wiki/Pre-decimal_currency http://en.wikipedia.org/wiki/Pre-decimal_currency. Difficult to fathom why the fashion for these passed, because such systems provide so many advantages. A good example is the Spanish system of division into 34, which permits straightforward further division into not only 2 but also 17 pieces - a case very difficult to handle with the modern restrictive, awkward and inconvenient decimal systems.
    - lacksrigour 12y ago
      What is the benefit to something that Divides into 2 and 17 rather than 2, 5, 10, 25, 50, etc that existing systems of base 10 decimal use?
      - jameshart 12y ago
        Well, say you're out to dinner with 16 friends, and you need to divide up the bill... the practicality should be obvious.
    - jameshart 12y ago
      It saddens me in some ways that the UK currency decimalized before mass computerization of record-keeping took off. I think I would have liked to have lived in a world where database currency columns needed to support pounds, shillings and pence (keeping in mind that pence could be divided into quarters, of course).
      - jaza 12y ago
        Dealing with Olde English currency units (and other non-decimal currency units) may have been "a fun challenge" for programmers... but it does NOT sadden me that programmers have seldom had to deal with them! It would have led to a whole world of hellish pain. Have we not suffered enough pain as it is, what with character encoding, timezone handling, y2k-incompatible dates, spatial coordinate / projection systems, etc?
        to3m 12y ago
        I'm not even sure there'd be much to do: just store everything in sixteenths a of a farthing and format on output, much as people do with tenths of a penny today. If anything the numbers are actually slightly more convenient for machines with no divide instruction.
      - ams6110 12y ago
        It's only recently (2001?) that US stock prices moved to decimal from previous eighths of a dollar. The origin of this was spanish "pieces of eight" but not sure why it persisted so long. Maybe because it made the spread always at least $0.125 ?
- deleted 12y ago
  [deleted]
- gtremper 12y ago
  Its like gold, silver, copper in fantasy RPGs
- 001sky 12y ago
  incremental net worth = growth (joy) negative net worth = brankrupt (misery)
- peteretep 12y ago
  The difference between living within your means or just over can be insignificant in cash amounts, but the effect on your long term happiness very significant.
- wmeredith 12y ago
  Spending less than you make is the key to happiness. It's worth noting that this is the antithesis of the stereotypical SV startup culture.
frandroid 12y ago
> AWS Infrstructure expenses are not what sinks most companies.
- mathattack 12y ago
  And AWS always seems to grow. :-)

joshu 12y ago

This is why I hate investing in startups raising $500k or less. You won't be able to raise again unless you have significant upwards progress.

api 12y ago
Interesting... What effect does this have on your criteria for investment? Or are you saying that raising less might in and of itself make the investment riskier by implying that they've under-estimated how much runway they might need? I've often heard the advice that "it's not much harder to raise a million than it is to raise $250k, so you might as well raise a million" or some variation thereof. Is that true in your opinion?
- joshu 12y ago
  No, the ones that raised <$500 were raising as much as they could. Perhaps startups that COULD raise $1m but didn't are a different case.
paul 12y ago
Several of my best investments have been from startups raising less than $500k. Justin.tv/Twitch returned 97x my original investment, and Weebly will likely be even more.
- super_sloth 12y ago
  Presumably those were a while back? Do you think the climate has changed since then to make it much harder?
  - paul 12y ago
    The climate has changed in that it's easier for startups to raise more, but even those that do not can still be very successful. Justin.tv or Weebly would not require any more money to start today than they did six years ago -- if anything it's gotten cheaper.

super_sloth 12y ago

"Although your product may not be very appealing yet, if you're a startup your programmers will often be way better than the ones your customers have or can hire." Is this really true? I'm very sceptical. Does anyone have any evidence to back this up?

jplahn 12y ago
I think, by and large, it likely is true. That's not to say that it always holds true and it might be swayed by the strength of programmers in YC, but I think it's definitely correct more often than not. It may also be based on the premise that if you're doing consultingish work, you're probably not doing it for one of the top tech companies, but more likely for a smaller company that doesn't have dedicated developers. From prior experience working at a consulting startup, this tended to be the case more often than not. Obviously, YMMV.
netcan 12y ago
Depends o the customers, but yes generally. This also assumes your customers are the kind that pay for custom code and have coders, which obviously only applies to a subset of startups.
tptacek 12y ago
Even if your customers are software companies, it's often the case that your programmers are better than the programmers that they can deploy to solve the kinds of problems you work on. For instance, if you have a clever solution to sales funnel optimization, chances are that even your savviest software customers aren't in a good position to deploy strong engineers on that problem; they're too busy making the things your customer wants to sell. This is true of a lot of business functions: marketing, sales, recruiting, integration testing, devops, project management, bug tracking, log management, reporting, email. Basically take every product anyone ever sold successfully to tech companies and there's a list of things tech companies aren't good at effectively deploying in-house talent on.
Natsu 12y ago
From what I've seen, "better than average" is a pretty low hurdle to clear. I've seen too much code in production that scares me. For example, have you ever seen someone statically allocate a million element array to hold ~1-2000 6-digit numbers? Did I mention the program had significant memory usage problems? Then again, after looking at that particular mass of 30-year-old goto-loving, copypasta C, maybe I should have been grateful they never once used malloc.

proveanegative 12y ago

Is becoming ramen-profitable before you raise your first round a possible solution to this problem?

bcx 12y ago
I think the key lesson here, is you need to be in a position where failing to raise more money does not kill your company. So if you can convince your entire team to eat ramen for an indefinite period of time between your first raise, and your second raise, you would have "solved" this problem for some definition of solved.
lisper 12y ago
It can't hurt.
mikeg8 12y ago
yes. When you are "ramen profitable" you are making enough to remain operational which means you are avoiding death and the "fatal pinch" this article is all about.
danieltillett 12y ago
If you can become profitable without raising funds then why raise funds?
- frandroid 12y ago
  It's a question of speed. Do you take your 1) $100K annual profits and re-invest them in one new market every year, slowly growing every year? Or 2) you take $2M in funding and expand worldwide. The thing is, if you hit on a good idea, you want to do #2, because if you don't, someone else will take $2M in funding to copy your product and go to 20 markets in 2 years.
  - danieltillett 12y ago
    True if you choose a market that has such need for speed. Lots of markets are not like this and they have the added advantage that VC's won't put money into them.

jdawg77 12y ago

This is awesome. Fully agreed with the, "don't expect to raise money to figure it out." It's why we're consultants. :)

deleted 12y ago

[deleted]

ChuckMcM 12y ago

That is so spot on. Put another way, the seed round is a peek to see if you can do what you say you can do, series A is a bet you can make it profitably, and series B is the gas to grow the market. As soon as you know your cash and your profitability cross below the 'zero' line you calk your investors that week and you ask them, call it or push forward. They say no, then you just roll it up. And I know, that is much much easier to say than to do.

philjr 12y ago
Love this description!

jdoliner 12y ago

> I try to resist coining phrases Is this because you feel it's pretentious to do so? I feel like having a concise name for a concept is one of the most important steps to broad understanding of it and always try to come up with good names for concepts that I want to be able to talk to people about. You might be doing us a bit of a disservice by resisting this.

itazula 12y ago
"Survival of the fittest" is an example of a coined phrase gone wrong, wherein a sound bite subsumes what it is supposed to only represent.

zeeshanm 12y ago

tl;dr :: nobody wants to board a sinking ship.

logn 12y ago
More like sell scuba training to passengers on the way down then use that money to pay for repairs.
CurtMonash 12y ago
Or remain on one indefinitely.
meowface 12y ago
That is one key takeaway, but if you read the entire essay there are many other useful points. tl;dr :: tl;drs suck

danieltillett 12y ago

Isn't the problem that the founders have to spend like drunken sailors to show "traction" to have any chance of getting more funding while their investors give them so little money that the runway is then incredibly short? There is very little room for error here.

tptacek 12y ago
If you operate as if every round of financing you get is your last, it is irrational to waste investor money to fake traction. One view of the lifecycle of startups is that companies that try to do that have already lost the game; they're predicating their success on future financing rounds.
- danieltillett 12y ago
  I wasn't suggesting companies are trying to fake traction, but they do seem to be encouraged by at least some of their investors to hit very high grow rates (say 30% a month) which are only possible if you spend a lot and so have a very short runway.
  - danenania 12y ago
    Does growth really count in VC land if you have to buy it at a loss? I would expect a smart VC to simply discount such an inherently unsustainable version of growth. Is the idea that growth at a loss is still better than nothing? If you have a good enough product to hold its own, shouldn't you be capable of getting at least a decent ROI on ads? If you can't do that, why try to grow? Spend the money on improving your product and branding instead.
jdoliner 12y ago
Why would you have to "spend like drunken sailors" to show traction? I think you make a much more compelling for having traction if you can continue to grow while spending like a sober sailor.
- 12y ago

K2h 12y ago

Without some revenue, every company is on a direct course for disaster - by default. I think that the first pitfall some make is to look at investment money as revenue, cash coming in. But its a big giant fallacy.. it is not money from normal operations. Until you sell a product and have money coming in from it you are on borrowed time. This can be intentional and calculated position of building a product and bringing it to market when it is ready, but I get the impression that many don't plan or execute their way out of this fast enough.

001sky 12y ago
Having money 'around' tends to make people complacent...people on the outside can't tell the difference between earnings and investment...and this tends to play tricks with people (and their minds( on the inside as well.

danielweber 12y ago

They'll all lose their jobs eventually, along with all the time they expended on this doomed company They were getting paid, right? I'm not losing time I work at a company that will eventually fail.

njyx 12y ago
I think it assumes you want to be a part of something which makes a long term impact. If you just want a pay check, you probably aren't at a startup (or at least not for the right reason).
bbcbasic 12y ago
They weren't getting paid enough, probably. And their vested stock will be worth nothing.

AndrewKemendo 12y ago

There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?

feverishaaron 12y ago
I know of a company that thought they would be in this category. They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. That way the expectation was set from the beginning that this company might take some time to build out their product and see traction. It's smart, because the discount for the follow-on was pre-negotiated, so investors get perhaps a more favorable discount if the company is a run-away success, and the entrepreneurs were able to buy peace of mind, and could count on the money regardless of macro-economic forces.
- AndrewKemendo 12y ago
  They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. So my guess is that these founders were either already successful previously, were well connected or had already bootstrapped quite a bit of the technology that would underlie the product (ie patents, team, etc...). Any or all of that the case?
  - danieltillett 12y ago
    Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.
    - rjtavares 12y ago
      I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.

raymondgh 12y ago

Does anyone have tips for quickly and responsibly finding a spot on the slippery slope of consulting? We have found our few distractions so far to be too distracting.

breck 12y ago
I do. Shoot me an email.

max55 12y ago

Weebly story is amazing

max55 12y ago

Weebly story is amazing

tonydiv 12y ago

These days, the stakes are higher for everyone. Investors expect faster growth and want a "meaningful stake" (15%+) early on. Meanwhile, entrepreneurs generally try to raise more too. Who doesn't want more cash if they can get it? This is dangerous for those who don't understand these dynamics. The growth trajectory needs to align with the incoming cash. The second you raise a $3M seed round, you're on the roller coaster. You will need to show "hockey stick" growth in 12 months, and raise your A in 18. If not, you're dead.

deleted 12y ago
[deleted]
danieltillett 12y ago
The problem of course is that only a minority of companies can ever really meet this. This requirement seems to have driven a lot of startups to do things in a way that does not maximise the benefit to the founders [0] - investors can spread the risks over multiple investments while the founder are stuck with all their eggs in one basket [1]. 0. I don't blame the VCs for doing this as they are doing what is best for them and their partners, but as a founder you should look very carefully at what is on offer and if what you are expected to do is viable. 1. Paul's point about the fatal pinch is correct, it is just that it is occurring much earlier (at the seed round) not 6 months from the money running out.
arbuge 12y ago
>> The second you raise a $3M seed round, you're on the roller coaster. You will need to show "hockey stick" growth in 12 months, and raise your A in 18. If not, you're dead. Depends how much control you have, and how resourceful you are in a pinch. If you can figure out how to stay alive until you see a different way to do things without raising more money, then you're not dead. They key is being able to bunker down without investors being able to pull the plug on you... $3m could buy a lot of bunkering time for a small team.

GreenPlastic 12y ago

How do you keep your employees in this market if you're lowering salaries across the board?

morgante 12y ago
Jedi mind tricks.
csallen 12y ago
Hiring (and retention) is currently so difficult that the ability to do it well is one of the major factors separating the best founders/startups from the rest of the pack. Ideally you're extremely charismatic, resourceful, and well-connected, and your company is attractive, interesting, and promising.
awjr 12y ago
I'd suggest technology is a key attraction. People involved in startups are there not only because it might get big, but also because the technology they are using excites them.
duggan 12y ago
Increase their ownership of the company. You're asking them for investment.

LukeFitzpatrick 12y ago

I agree with this article. Founders overspend once they get their first initial investment, and rely on the next investment too much. Founders should be paying more attention to burn and churn rates. I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong. 1) Spent the whole investment on Founders salaries. They had 4 tech programmers (top notch guys), and used the money to pay for their time whilst they were building the platform. 2) They had the wrong product market fit. They expected to sell their services to Universities for 50K. In my opinion, they should of targeted college students, and add a tutoring service and take a small commission. 3) They built a fully finished product. Their was no room to scale it or grow. 4) They expected that the product would just sell itself. We all know, that's not how it works in the real world. 5) They didn't do any market testing and validation = wrong product market fit. The end result, they got an investment and spent it quickly, they didn't try to pivot, tried to get another investment and failed. The team broke up pretty quick, or as you referred to in your article, they got an unwelcoming 'pinch' on the backside. I learnt a lot from seeing my friends fail, and their failure has helped me out a lot with my startups. When startups first get their investment, they should have a 1-2 year plan for that money (burn rate). Divide the investment by a specific time period and that's how you spend it. Realistically, after you get through the TechCrunch 'trough of sorrow' as Andrew Chen puts it, you have to stay motivated and plan for the future. The future looks dim if your startup is heavily reliant on receiving additional investments to keep you alive. More on the pinch, startups shouldn't be getting an investment to keep them going. They should have this already sorted out. A very wise person once told me, you should seek investments when you don't need them, as this means you have done your homework and can also find the best deals. Great article, and I appreciate the awesome content.

danieltillett 12y ago
Actually I am not so sure that your friends did the wrong thing here. Sure the business failed, but if they got to transfer all the investors money to themselves while at the same time learning how to run a startup (all with someone else money) then it was pretty smart. Now they need to take the cash they saved and wisdom accumulated and bootstrap their next business up without any VC money.

outworlder 12y ago

I'd argue that the 'consultingish' part is as hard as the startup's main business itself, if you add the human factor. On one hand, you have your ideas, your product or whatever you're working on – which, by definition, isn't working all that great. On the other hand, you have a client (or more than one), who's willing to pay right now (usually you can negotiate something upfront) or at least just one invoice away. Plus you are able to charge a nice amount, certainly better than you'd make as an employee and better than going broke. Somewhere down the line, you'll get more work. Maybe from the same client, maybe it's a referral. Do you turn them down now, that you've achieved the required runway? It's hard if you are a sole founder, it is much harder if you have more than one. Harder still if they are married, or with children or, god forbid, have a mortgage. The consulting (there's no ish unless it is a somewhat minor customisation of an existing product or parts of it) path is a very slippery slope. It should not be taken unless the other option is death. And only after all founders are on the same page. It's easier to set a goal when everyone is going broke, than when the money has started rolling in. There's nothing in the world that's more blinding than a bank deposit.

tptacek 12y ago
Yes, that is what you do when you've cleared the runway: you start saying no to consulting clients. That is, for example, what 37signals did. I'm not sure I see the problem here.
- danieltillett 12y ago
  But 37signals bootstrapped. The problem is once the founders take VC money they are taking on what the VC expect them to do which is play a very high risk, potentially high reward game with a very low chance of success. This strategy is almost certainly not optimal for the founders.
  - tptacek 12y ago
    So what? At this point in the story we're talking about a company on life support. That's why they're consulting and not continuing to put all their time into product. There's not a whole lot VC can do about it at this point.

zak_mc_kracken 12y ago

Can someone tell pg that he should stop putting hard <br/> every forty characters? One of the fundamental aspects of the web is that presentation is done by the client, not the publisher. Please let me reflow the text as I see fit.

marvy 12y ago
There is no br every 40 chars. Instead, the whole thing is wrapped in a table cell of width 436.
escape_goat 12y ago
Challenge accepted!! After opening the article, copy & paste the following line into the URL field: javascript:a=document.createNodeIterator(document.getElementsByTagName('table')[0],NodeFilter.SHOW_ELEMENT,{acceptNode:function(node){return(node.getAttribute('width')&&node.nodeName!=='IMG')?NodeFilter.FILTER_ACCEPT:undefined;}});while(b=a.nextNode()){b.setAttribute('width','100%')} Make sure your browser doesn't strip the "javascript:" at the beginning automatically, there's a good chance that it might; in that case, you'll have to type that in yourself.

graycat 12y ago

Of course, all across the US, crossroads, villages, and towns up to the largest cities, millions of US entrepreneurs, often sole proprietors, have to make money enough to pay suppliers, the rent, taxes, insurance, the bookkeeper, the accountant, the lawyer, employees, and take money enough home to support the family, the cable bill, the wireless bill, for dear wife, a late model SUV for her work as family taxi, the groceries, the home furnishings, and the lawn service, for junior, running shoes, a bicycle, a computer, and school clothes, for dear perfect, precious daughter, violin strings, a new iPhone 6, new school clothes, new dress up clothes, white furniture for her bedroom, a new prom dress, and save for college, retirement, etc. So, millions of sole proprietors do that. So, maybe it's not too much to ask of venture funded entrepreneurs to do similar 'budgeting'. Still, it can be easy for such entrepreneurs to be fooled by venture firm Web sites that emphasize that they have been in the shoes of entrepreneurs and know what they are going through, are committed to their entrepreneurs, through good times and bad, through thick and thin, etc. Still, the the importance of planning is old: In early aviation too many smoking holes taught the possibilities of head winds, bad weather, and mechanical problems and, thus, the importance of flight planning reserve fuel, alternate destinations, at least two of radios, each of the fire wall instruments, etc.

ghobbins 12y ago

First time founder. My company is in a "fatal pinch." Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k/year. We got investment, we built it, we sold it to a few more schools but the software is not feature-packed and mature enough to attract sales fast enough. Higher ed also moves super slow even when you're doing well. We're starting to see some traction with parties that want the software custom-tailored for their need (the consulting PG speaks of). But we're stuck in spot where we haven't gotten a check from any of these parties yet and are reluctant to pull the trigger and focus on only on the consultative sale. The team, product roadmap, and marketing strategy is all geared towards higher ed. But it's clear now we can't become profitable in 6 months in that industry. How do we operationally perform the "pivot" into consulting? Do you agree it's time to do so?

hbhakhra 12y ago
I'm at the prototype phase of an educational product and have shown the product to teachers and they are interested in using it in the classroom, but they have already expressed concerns in pushing sales through the school. It seems like you have had some success at least so if you could share any advice, it would be much appreciated. p.s. I can email you if you don't want to share publicly
- ghobbins 12y ago
  Sure, shoot me an email. Check my profile for the address.
blazespin 12y ago
The problem with education is that you compete with a lot of non profits or at least non profit mentality. Universities, for example, view making a profit as contrary to their mission (and to be fair, it probably is).
- ghobbins 12y ago
  We are also competing with extra-ingrained incumbents like Blackboard (publicly traded) that own the sales channels despite being bloated, hard to use software. The higher ed market values reputation and a laundry list of features that promise to fix all their issues over a solution that actually resonates with students.

deleted 12y ago

[deleted]

gcb0 12y ago

caveat left out: the author makes twice more money if a startup takes one round of funding instead of two :)

wazoox 12y ago

This is the story of the first startup I was participating into, back in 2000. The boss (and main investor) ruined himself (selling his Porsche, mortgaging his home, selling stock he should have kept...) while trying to get investors interested in a 0.1% done prototype of a project 10 years too soon (basically we were busy inventing the Cloud and Big Data). Sad story.

Immortalin 12y ago

Disappointing how few startups focuses on organic growth, most startups nowadays prefer to clamber for the attention of investors instead.

fit2rule 12y ago

I've never been one to lean on investors as a solution to problems. Its far better to build your company on the basis of the immense amounts of help and good you are doing your customers. If you're not doing that, and its not a principle focus for how you're going to produce revenues, then its not business but rather an academic experiment. Investment is very important, though, for various big-growth reasons, but mostly to extend reach beyond what the business-as-organism is capable of attaining independently. Better to grow strong by remembering who really pays the bills: true customers. Too many startups conflate investor/customer in strange ways before they realize there is actually a relevance to how much of the company is your company.