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The Fatal Pinch

480 pointsby _piusover 10 years ago

24 comments

LukeFitzpatrickover 10 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.<p>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.<p>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.<p>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.<p>3) They built a fully finished product. Their was no room to scale it or grow.<p>4) They expected that the product would just sell itself. We all know, that&#x27;s not how it works in the real world.<p>5) They didn&#x27;t do any market testing and validation = wrong product market fit.<p>The end result, they got an investment and spent it quickly, they didn&#x27;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 &#x27;pinch&#x27; on the backside.<p>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&#x27;s how you spend it.<p>Realistically, after you get through the TechCrunch &#x27;trough of sorrow&#x27; 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.<p>More on the pinch, startups shouldn&#x27;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&#x27;t need them, as this means you have done your homework and can also find the best deals.<p>Great article, and I appreciate the awesome content.
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ChuckMcMover 10 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 &#x27;zero&#x27; 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.
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joshuover 10 years ago
This is why I hate investing in startups raising $500k or less. You won&#x27;t be able to raise again unless you have significant upwards progress.
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tonydivover 10 years ago
These days, the stakes are higher for everyone. Investors expect faster growth and want a &quot;meaningful stake&quot; (15%+) early on.<p>Meanwhile, entrepreneurs generally try to raise more too. Who doesn&#x27;t want more cash if they can get it?<p>This is dangerous for those who don&#x27;t understand these dynamics. The growth trajectory needs to align with the incoming cash. The second you raise a $3M seed round, you&#x27;re on the roller coaster. You will need to show &quot;hockey stick&quot; growth in 12 months, and raise your A in 18. If not, you&#x27;re dead.
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carsongrossover 10 years ago
One way to avoid the fatal pinch is the Dickens approach:<p><i>Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.</i><p>In a world with AWS and pay-as-you go services, it&#x27;s more and more possible.
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ghobbinsover 10 years ago
First time founder. My company is in a &quot;fatal pinch.&quot;<p>Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k&#x2F;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&#x27;re doing well.<p>We&#x27;re starting to see some traction with parties that want the software custom-tailored for their need (the consulting PG speaks of). But we&#x27;re stuck in spot where we haven&#x27;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.<p>The team, product roadmap, and marketing strategy is all geared towards higher ed. But it&#x27;s clear now we can&#x27;t become profitable in 6 months in that industry. How do we operationally perform the &quot;pivot&quot; into consulting? Do you agree it&#x27;s time to do so?
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outworlderover 10 years ago
I&#x27;d argue that the &#x27;consultingish&#x27; part is as hard as the startup&#x27;s main business itself, if you add the human factor.<p>On one hand, you have your ideas, your product or whatever you&#x27;re working on – which, by definition, isn&#x27;t working all that great. On the other hand, you have a client (or more than one), who&#x27;s willing to pay <i>right now</i> (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&#x27;d make as an employee and better than going broke.<p>Somewhere down the line, you&#x27;ll get more work. Maybe from the same client, maybe it&#x27;s a referral. Do you turn them down now, that you&#x27;ve achieved the required runway? It&#x27;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.<p>The consulting (there&#x27;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.<p>It&#x27;s easier to set a goal when everyone is going broke, than when the money has started rolling in. There&#x27;s nothing in the world that&#x27;s more blinding than a bank deposit.
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AndrewKemendoover 10 years ago
<i>There are a handful of companies that can&#x27;t reasonably expect to make money for the first year or two, because what they&#x27;re building takes so long.</i><p>So if someone starts a company that is in this category, is it just dead in the water if the founders aren&#x27;t already rich&#x2F;connected?
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super_slothover 10 years ago
&quot;Although your product may not be very appealing yet, if you&#x27;re a startup your programmers will often be way better than the ones your customers have or can hire.&quot;<p>Is this really true? I&#x27;m very sceptical.<p>Does anyone have any evidence to back this up?
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graycatover 10 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.<p>So, millions of sole proprietors do that.<p>So, maybe it&#x27;s not too much to ask of venture funded entrepreneurs to do similar &#x27;budgeting&#x27;.<p>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.<p>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.
jdolinerover 10 years ago
&gt; I try to resist coining phrases<p>Is this because you feel it&#x27;s pretentious to do so?<p>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.
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K2hover 10 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&#x27;t plan or execute their way out of this fast enough.
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danielweberover 10 years ago
<i>They&#x27;ll all lose their jobs eventually, along with all the time they expended on this doomed company</i><p>They were getting paid, right? I&#x27;m not losing time I work at a company that will eventually fail.
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GreenPlasticover 10 years ago
How do you keep your employees in this market if you&#x27;re lowering salaries across the board?
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wazooxover 10 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.
fit2ruleover 10 years ago
I&#x27;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&#x27;re not doing that, and its not a principle focus for how you&#x27;re going to produce revenues, then its not business but rather an academic experiment.<p>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.<p>Too many startups conflate investor&#x2F;customer in strange ways before they realize there is actually a relevance to how much of the company is your company.
proveanegativeover 10 years ago
Is becoming ramen-profitable before you raise your first round a possible solution to this problem?
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raymondghover 10 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.
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danieltillettover 10 years ago
Isn&#x27;t the problem that the founders have to spend like drunken sailors to show &quot;traction&quot; 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.
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gcb0over 10 years ago
caveat left out: the author makes twice more money if a startup takes one round of funding instead of two :)
zak_mc_krackenover 10 years ago
Can someone tell pg that he should stop putting hard &lt;br&#x2F;&gt; every forty characters?<p>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.
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Immortalinover 10 years ago
Disappointing how few startups focuses on organic growth, most startups nowadays prefer to clamber for the attention of investors instead.
zeeshanmover 10 years ago
tl;dr :: nobody wants to board a sinking ship.
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jdawg77over 10 years ago
This is awesome. Fully agreed with the, &quot;don&#x27;t expect to raise money to figure it out.&quot; It&#x27;s why we&#x27;re consultants. :)