The Fatal Pinch

by _pius • 12 years ago

480 198 12 years 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• 12 years ago

(Zero sarcasm) can you possibly explain, in different words, what this means?

hglaser• 12 years ago

Spend less than you make.

michaelhoffman• 12 years ago

The numbers refer to pre-decimalization British currency. To convert to modern currency:

  £19 19s 6d = £19.975
  £20  0s 6d = £20.025

gtremper• 12 years ago

Its like gold, silver, copper in fantasy RPGs

001sky2• 12 years ago

incremental net worth = growth (joy)

negative net worth = brankrupt (misery)

peteretep• 12 years 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• 12 years 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.

frandroid2• 12 years ago

AWS

Infrstructure expenses are not what sinks most companies.

mathattack• 12 years ago

And AWS always seems to grow. :-)

joshu5• 12 years 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• 12 years 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?

joshu5• 12 years 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.

paul4• 12 years 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_sloth2• 12 years ago

Presumably those were a while back?

Do you think the climate has changed since then to make it much harder?

mamcx2• 12 years ago

Probably is easier to be frugal with limited resources. With a lot, is easier to overspend at first and later get burned. Limited resources from the star could help to focus more.

I have never get investment (rarely in my country) but always thinking that I prefer a small push than a huge one.

jonathanmarcus• 12 years ago

Weebly's traction and capital efficiency are remarkably impressive.

joshu5• 12 years ago

Did they have progress when they raised again?

jameshk• 12 years ago

Maybe this is because smaller investments = early stage, and at something like YC you can get more hands-on to help the founder succeed?

loceng• 12 years ago

As I get farther along in development I realize the cost and time to becoming profitable and break-even is smaller and smaller than I originally expected. It may slow down development if taking smaller investment, however from my experience so far being forced to move slower has its benefits - perhaps including less dilution.

K2h2• 12 years ago

$450k X 97 = $43.7M. WOW! if I could just pick one of those in my lifetime.

sama• 12 years ago

on the contrary, most of my best investments have been in rounds of <$500k. i'm more afraid of startups raising megarounds as their initial round.

kenrikm3• 12 years ago

In the current climate what would you recommend the size of a seed round be? Clearly the answer is not "as much as you can get" right?

joshu5• 12 years ago

Interesting. For me, all but one that raised < $500k died.

bcx2• 12 years ago

Sam, out of curiosity, what is the average raise for a post-demo-day YC company now-a-days? (if it's public).

I wonder this 500K benchmark is still something useful to investors in the valley. My guess would be that there end up being only a few YC companies each batch raising <500K and I doubt the amount raised ends up being a good predictor of success.

lpolovets2• 12 years ago

Agreed. Here's some data that backs up what you're saying: http://tomtunguz.com/seed-followon-rates/. This is probably the blog post that I share most often with founders I talk to.

super_sloth2• 12 years 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• 12 years 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• 12 years 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.

tptacek10• 12 years 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• 12 years 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.

mamcx2• 12 years ago

In the worst case? A startup already have developers, now. Don't forget how hard is to hire.

Plus, a lot of custom work in software is not sophisticated. Customer mainly have basic needs (from the POV of software development) but many of them, in disorder.

Working for them, is more about have patience ("pls move this 1cm to the left, not right, can you also do X?, no we decide after all don't do that" etc) than the kind of "raw skills" of a uber-developer.

michaelbuckbee• 12 years ago

It would probably be fair to rephrase it as "specialized" instead of "better". If you're a company making widgets that spends $50,000 a month on Adwords - a startup building Adwords optimization products could likely build you a custom Adwords tool fasther+cheaper than an internal team.

michaelochurch6• 12 years ago

Actually, it's more like this.

There are good programmers in the enterprise (meaning, say, investment banks or large corporations or governments) but they generally fall, ambition-wise, into one of three categories:

(1) those who want to become managers or software architects (or, in finance, quants and traders) and will define and oversee work but delegate the dirty bits. This would be fixable (they could oversee a team of mediocrities, who'd be grateful just to be employed) but they generally don't have the patience for that.

(2) those who want to do highly-theoretical R&D work that doesn't necessarily solve any immediate problems of the business.

(3) those who have a specialty (say, deep neural networks) and want to be in the umbrella of a large organization that can protect it. Pull them out of their specialties and they'll try to leave.

In other words, these supposedly stodgy non-technology companies do, contrary to stereotype, have good programmers (I've worked in a few) but the ones who are at all decent have career strategies that they expect to be able to implement in their full-time work. They won't work on "just anything" and if you stick them with the random muck that comes from the line of business or zealous "product people", they'll either leave or slack in order to learn new skills on the clock, and the project will be done poorly or even abandoned mid-flight.

The appeal of the $3000-per-day consultant is that he'll work on what he's told to do and he doesn't expect you to consider his career needs. He's not going to do a shitty job and leave after 6 months because the people allocating the work don't care about his career; that's what the money (4-6x typical salary) is for. He gets his education and career advancement on his own time and dime (but earns a premium to account for his unpaid work). And while he might not be a great (2.0+) programmer, he's better than anyone in-house who could actually be assigned a bad project without political friction or high departure risk.

The average Bay Area startup programmer, like the average software consultant, isn't great; but he's far better than the corporate serfs who get sloshed around on the worst projects. He might be 1.4-1.5; so Goldman's R&D engineers and it top quant-coders will be better, but he's a relative colossus compared to the in-house peons (0.7-1.2) in back-office IT who'd get assigned to grody projects based on internal processes.

(Of course, not all the work that consultants do is undesirable. You also have the specialists and those with elite levels of skill. My point is that a "mercenary" consultant will power through the ugly projects for the pot of gold, whereas in-house people expect investment in their careers.)

In other words: yes, Goldman can hire great people. But if you want to hire someone great to do a project where 99% of the work is mediocre (and the 1% is extremely careful and requires an expert) you want the $3000/day consultant because Goldman can't get anyone good who's in-house (and not getting a consulting salary) to do the work. One might ask: why don't they pay an internal person $3000 per day, as they would a consultant? The answer is that it'd have him out-earning his boss and they'd often end up promoting someone not on traditional definitions of readiness (increasing scope, leadership) but because he took on an icky project.

sswaner• 12 years ago

This is spot on.

The last sentence is a very important point in enterprise IT shops: Lack of self-confidence in line managers is a big disincentive to hiring smarter developers. They worry that the smart developer (who often shows up with a bit of an attitude) will overshadow the manager and our point out their weaknesses.

tptacek10• 12 years ago

No, that's not what the money is for. The money compensates inventory, scheduling, and delivery risk. It does not compensate developers for working on mundane projects. If the developer in question gets a W2 paycheck, odds are they're not seeing anything like 4x what the in-house people are seeing.

And, while I do buy that all three of these developer archetypes exist in the real world, I do not buy that they are the reason that companies don't deploy talent aggressively to upgrade "support services". Rather, companies make straightforward buy-vs-build decisions based on whether projects are part of the focus of the business or not.

jisaacks• 12 years ago

Can you please explain the numbers 2.0+, 1.4-1.5, etc. when referring to a programmer's skill. I have never seen this before.

marktangotango• 12 years ago

You missed the low ambition axis:

(4) Good but insecure (at least in a financial dimension) who seek the safety and anonymity of large corps and

(5) Favor 9-5, low stress, and a steady paycheck

InclinedPlane• 12 years ago

There are a couple factors at play here. First off, the average programmer is, honestly, not very good. The can just barely make anything useful, good luck having it also be well designed and coded, secure, robust, fast, etc. Second, programming is like wizardry to most non-programmers, it's hard enough for a professional software developer to judge another, it's nigh impossible for J. Average Businessperson to do so, even if they have a dire need for software development. In the average case you might have some contract go out which ends up being won by some enterprisey line of business app development house who poops out some horrible cobbled together tool based on Excel, MS Access, and a winform app somewhere in there to glue things together, and then bills the customer for 6 or 7 figures (I'm not even joking). Compared to that, your average startup is the dream team.

And what's fantastic about funded startups from the perspective of a software muggle is that not only might they have a product already in existence that you can check out and find reviews from other customers but they've also been given the stamp of approval by investors, investors who are likely far more knowledgeable than the average software consultancy customer. Just look at the Obamacare website debacle as a case in point of how incredibly difficult it is to a: find a quality development shop who can actually deliver what you want, and b: do so within reasonable budget and time constraints. And the difference between finding a good development shop and a poor one isn't merely a better quality product, it's a factor of maybe 2x or more in development time (which is, of course, tremendously valuable) and a factor of 10-100x in cost.

proveanegative• 12 years ago

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

bcx2• 12 years 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• 12 years ago

It can't hurt.

mikeg8• 12 years 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.

danieltillett26• 12 years ago

If you can become profitable without raising funds then why raise funds?

frandroid2• 12 years 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.

patio113• 12 years ago

A very commonly heard refrain in the Valley is some variant of: "Would you rather own 100% of a company worth $1 million or 40% of a company worth $200 million?"

Money is used to purchase acceleration. It's not totally crazy, although it implies very different trade offs as compared to running one's own business without investors.

kbutler• 12 years ago

Not really. If you're ramen-profitable and looking to raise money, that means you want to spend money to get on a path to greater profitability. On the path to greater profitability, depending on your burn rate and profit growth rate, you may still experience the "fatal pinch" even if you were previously ramen profitable.

You may be able to revert to ramen profitability again, but it will be painful (cut your burn rate).

patio113• 12 years ago

So you can happily get to ramen profitable as a founding team, but when you raise your first round you are expected to grow the team size quite a bit, and the capable professionals you are hiring will not work for ramen (and should not be expected to).

Ask somebody in the Valley who sees more of them, but N months after a Series A, I'd expect to see at least 8 people on the team and probably closer to 20. That implies a salary bill in the, hmm, $100k to $200k range. Every two weeks, due like clockwork. Obviously, if you've already hit ~$500k a month in revenue, you're golden (as long as you freeze hiring), but most similarly situated companies haven't hit that yet.

applecore2• 12 years ago

The benchmark for a company raising its Series A is now $50k MRR. (This used to be closer to $100k.) You'd expect to be at $100–150k MRR six months after the Series A, assuming a 15–20% monthly growth rate.

If you're already at $500k MRR, you're in Series B territory.

jdawg77• 12 years ago

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

ChuckMcM• 12 years 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• 12 years ago

Love this description!

jdoliner2• 12 years 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• 12 years 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.

zeeshanm2• 12 years ago

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

CurtMonash• 12 years ago

Or remain on one indefinitely.

logn• 12 years ago

More like sell scuba training to passengers on the way down then use that money to pay for repairs.

meowface• 12 years ago

That is one key takeaway, but if you read the entire essay there are many other useful points.

tl;dr :: tl;drs suck

danieltillett26• 12 years 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.

tptacek10• 12 years 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.

danieltillett26• 12 years 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.

jdoliner2• 12 years 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.

tptacek10• 12 years ago

This is a meme about the evils of venture capitalists, that their expectations are so uncalibrated that it's more important to act the part than it is to play the part. It might even be true in a lot of cases, but that doesn't make the strategy any sounder, right? You should just write off those investors.

(My take on this is very secondhand, unless you count experience from 1999.)

danieltillett26• 12 years ago

Of course it is better if you can hit a 30% a month growth rate while living like a Scottish widow, the problem is that this is very difficult (impossible) to do. Something has to give here - investors either accept lower growth rates or they accept the need to put in more money.

K2h2• 12 years 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.

001sky2• 12 years 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• 12 years 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• 12 years 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• 12 years ago

They weren't getting paid enough, probably. And their vested stock will be worth nothing.

AndrewKemendo4• 12 years 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?

feverishaaron2• 12 years 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.

AndrewKemendo4• 12 years 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?

danieltillett26• 12 years 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.

Just out of curiosity why not just raise 2MM+? What value is there in this to the investor unless they have the ability to back out of the prenogociated follow-on? It seems like an expensive way to get no peace of mind?

tptacek10• 12 years ago

Isn't this just another way to say that a capital-intensive business requires lots of capital?

_sentient• 12 years ago

I don't think so. Being rich/connected is great, but there's a third option: Show early traction.

Absent other advantages, you will need to get to product-market fit pretty quickly if you want to survive.

AndrewKemendo4• 12 years ago

Being rich/connected is great, but there's a third option: Show early traction.

Isn't that the point of those companies though, that you aren't seeing traction for a while? It could be that PG is making the distinction implicitly between revenue/profit and traction.

So for example twitter, FB etc... were not profitable or getting revenue well after they had already amassed millions of users. If that is the case, then we aren't learning anything new and it doesn't help people who are trying to make new, hard, breakthrough technologies.

dluan• 12 years ago

I think one thing that rarely gets mentioned, is that startups get harder.

As in, the more traction you show, the harder it becomes to continue that traction, or alternatively, more traction is now expected of you. Combine this with the increasing complexity of a growing machine.

Maybe PG's analogy is that at first it starts off a pinch, but grows to be a very large guillotine until you finally can outrun it.

michaelrwolfe12• 12 years ago

You have to find investors who share your vision, trust your team, and are smart enough to know the business is capital intensive. I've been on 5 teams that did this successfully.

pbreit3• 12 years ago

If you're only access to capital is cold intros and no track record then you are definitely at a severe disadvantage (as you should be).

raymondgh• 12 years 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• 12 years ago

I do. Shoot me an email.

tonydiv• 12 years 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.

danieltillett26• 12 years 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• 12 years 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• 12 years ago

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

morgante• 12 years ago

Jedi mind tricks.

csallen• 12 years 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• 12 years 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• 12 years ago

Increase their ownership of the company. You're asking them for investment.

LukeFitzpatrick7• 12 years 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.

danieltillett26• 12 years 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.

LukeFitzpatrick7• 12 years ago

Yeah, they used all the money on themselves. A free learning period so to speak. But, I wouldn't want to do that with investors money, reputation might hurt them in the long run.

One of the guys is a product manager at Google now, another moved back to his home town. Only one of them is still doing the startup thing.

They definitely got a lot of experience, this only counts if they learnt from their mistakes. Which, I really hope they did.

jseliger• 12 years ago

Founders overspend once they get their first initial investment

Interestingly enough, Joel Spolsky wrote about this danger in http://www.joelonsoftware.com/articles/VC.html , where he discusses the relationship between revenue, PR, fundraising, and code. Any of those can get wonky if one substantially outpaces the others.

danieltillett26• 12 years ago

I am not sure that spending it all on yourself is the worst thing you can do with the money. If you continue to live on raman then you will be accumulating a lot of cash that you can leverage later. I am surprised that any investor would sit back and let this happen - I certainly wouldn't if I was an investor in such a company.

rdtsc• 12 years ago

Selling to big colleges is not too different than selling to large enterprises and/or to Uncle Sam. Product quality and features are much lower on the list, than lobying, networking, marketing, developing contacts. Learn to play golf (or whatever the CEOs and administrators of big institutions or companies are doing today to socialize). Or instead of hiring another programmer hire someone who was in charge of making buying decisions for the industry you are trying to sell to.

That is also the reason why many colleges, or governments, end up with crapy overpriced software. You look at it and say "I can do 10x better and sell for 10x cheaper". The problem is you are not aware of the size of the iceberg lying under the water.

LukeFitzpatrick7• 12 years ago

I think they had the options to target Universities or college students. The product connects college students to other students to for help with problems. It's mostly suited for the mathematics, engineering and computing faculties.

The big issue is, they didn't have anyone to do marketing for it or test the market to see whether it wants their service or not. They should of done a pilot system. Focused on one university in Beta mode, and then expanded. They were too fixed on selling it for 50K a piece.

Permit• 12 years ago

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.
5) They didn't do any market testing and validation = wrong product market fit.

How does this happen? How do startups receive funding without doing some level of marketing testing and validation?

I ask because in Canada it seems extremely hard to get even angel funding (beyond family members) without demonstrable traction and growth. Is that not the case in the US?

LukeFitzpatrick7• 12 years ago

The investor they got, was actually doing something similar. Running a tutoring company that became quite profitable. Two of the guys working at the tutoring company got the idea to make this service, and sold the idea to their boss at the time.

Raising money is hard work, these guys got lucky in that respect. I think they made the absolute rookie mistake, afraid to talk to as they might 'steal' their idea. They thought it was a sure thing. Especially when they received the investment.

jc123• 12 years ago

#3 doesn't sound like a problem. Seems to boil down to #5 and market size being too small, instead of a fully finished product.

LukeFitzpatrick7• 12 years ago

The market size wasn't too small, it allied to college students everywhere.

From what I know, a startup should look something like this. Build your MVP, get some traction, add on another feature, get more traction... A continually process of expanding your features and user base. Every time you add on features, you want to see growth.

The same goes for getting investment. Seed A, MVP with traction, add on a feature and go through Seed B stage etc etc. Adding on features to get more users which can lead to more investment. Investors want to see a plan for what a startup will do with that money.

JonoBB• 12 years ago

If you went out and hired 15 people before you even knew what you were building, you've created a broken company.

Funny thing is that you got your first round of investment, before you even knew what you were building.

What?

_nedR2• 12 years ago

It happens.

outworlder• 12 years 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.

tptacek10• 12 years 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.

danieltillett26• 12 years 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.

zeeshanm2• 12 years ago

Just want to say it is not too bad to have a mortgage as it may seem. It is very situational, though, depending on how you're paying off mortgage. There is definitely risk there but it can be offset. For example, you could generate some income from rent that can help you pay all your bills in addition to filling in monthly mortgage payments. Again, it depends.

aytekin• 12 years ago

That's the path we took. The consultingware products we had really slowed us down, but in the end our subscription revenues gradually built up to a point where it simply didn't make sense to continue doing consulting. So, this path can have a happy ending.

JoeAltmaier• 12 years ago

My product company turned full-time consulting when our 1st products failed to find enough market. We consulted for two years until we got a contract making somebody else's product. Now we're all that company's employees with equity, and have revenue and traction. So it can work pretty well.

zak_mc_kracken• 12 years 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• 12 years ago

There is no br every 40 chars. Instead, the whole thing is wrapped in a table cell of width 436.

escape_goat• 12 years 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• 12 years 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.

ghobbins5• 12 years 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• 12 years 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

ghobbins5• 12 years ago

Sure, shoot me an email. Check my profile for the address.

blazespin2• 12 years 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).

ghobbins5• 12 years 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.

freshflowers• 12 years ago

Please make sure it's something your team can actually get behind, and be very careful about how you put it. Because for experienced developers, any sign of pivoting to consulting is a sign to run for the exit. That's explicitly not what they signed up for when they took a chance on a start-up. Many will rather help out by cleaning the toilets than to fundamentally change the nature of their work.

It's kinda shocking that PG omitted that part, because I've seen it happen several times.

(Read michealochurch's comment further down on this page, he pretty much nails it.)

ghobbins5• 12 years ago

I think you make a good point. We need to make sure the whole company is on board. PG's comment on using consulting to find the product you want to build long term feels applicable here. Of course, the slippery slope remains. But if we can make money while finding those "narrow openings that have wide vistas beyond"

S4M• 12 years ago

Where are you based? I found out the French government has a program to help companies doing things for higher education - my own startup targets middle and high school, so unfortunately I don't think I can benefit it. The thing is detailed here [0], unfortunately it's in French. I'd be glad to help if I can, drop me an email if you're interested (address in my profile).

[0] http://www.agence-nationale-recherche.fr/fileadmin/aap/2014/...

ghobbins5• 12 years ago

We're based in Atlanta. Not sure there's anything of the sort in the states but good thought.

gcb0• 12 years ago

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

wazoox• 12 years 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• 12 years ago

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

fit2rule• 12 years 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.

The Fatal Pinch

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