Paul Graham: The Last Drop
The well-known entrepreneur, programmer and founder of Y Combinator Paul Graham seems to know everything about startups. We in Alconost translated for you his pragmatic essay on projects that were in a difficult financial situation. Although it is worth reading it, and those who have no such problems.
Many startups go through a stage a couple of months before their death, when they spend too much on substantial accounts. The revenue is either insignificant or absent. The company has, say, 6 months to remedy the situation. And if you call a spade a spade, then 6 months before bankruptcy. And such startups expect to avoid failure with the help of additional investments. [one]
')
This is where the error lies.
The founders' confidence that the investor wants to finance them additionally may well turn out to be an illusion. Although it was not easy to convince the investor for the first time, the entrepreneur still expects a positive response. But the second time, he will encounter unexpected problems:
I call this situation the “last straw”. I do not like to impose stamps, but such a name can sober up the entrepreneur a little.
The situation is made especially dangerous by the fact that businessmen themselves all aggravate. They too rely on additional funding, and therefore do not particularly try to get into the "plus" on their own. And this further reduces the chances of a successful exit from the crisis.
Now you know about the last drop problem, but what to do about it? Of course, apart from the obvious advice not to allow this. Investment company Y Combinator advises to treat investments as if this is the last infusion into your business. After all, the power of self-conviction works in the opposite direction - the less you need money from outside, the easier it is to get it.
But what if the situation has already become unenviable? First, once again weigh the likelihood of additional investment. Now I will be clairvoyant and predict that probability is zero. [2]
There are three options: you can close the company, increase profits, or reduce costs.
If you really believe in failure, then the company is better to roll. At a minimum, you will be able to return the remaining money and save energy on meaningless attempts to fix it.
In fact, truly doomed companies are not often found - I just give you another chance to admit that you have already given up.
If you do not want to close the company, then there is a way to increase profits or reduce costs. For most start-ups, costs = employees and cost reduction = layoffs. [3] Deciding to be fired is often not easy, with one exception: you already know that you need to part with this person, but simply refuse to accept it. If this is the case, then now is the time.
If this makes the company profitable, or the money saved will improve the situation - you have avoided an immediate danger.
Otherwise, three options reappear: lay off good employees, lower salaries for some or all of our colleagues for a while, or increase income.
Reducing wages cannot be called a good solution, and it will only work when things are not very bad. If the chosen business strategy does not lead to a special profit, but the company will be able to survive with a slight decrease in salaries, you can try. Otherwise, you just postpone the decision, and it will be obvious to all whom you have trimmed compensation. [four]
It remains to choose from two options: lay off good employees or earn more money. Trying to balance between them, remember the ultimate goal to build a successful grocery company. Which creates one thing for use by millions of people.
Even more actively to think about the dismissal is, if the reason for the situation in an over-bloated state. When at the start 15 people are hired, and there is no clear understanding of what you are creating, the company is doomed. First you need to determine the goal, and it’s much easier to do it with a handful of people. In addition, these 15 people may well be not those who you really need. And the decision may well be to reduce the staff and then rethink the goals and ways of development. In the end, you will do a disservice to these people if you go broke with them. They will still lose their jobs, along with the time spent at the company doomed.
In the case when only a couple of people work for you, it is better to focus on ways to increase profits. The offer to earn more may look frivolous - as if it is enough just to ask someone for money. A budding entrepreneur does what he can to sell more. But I do not propose to sell more actively, but simply recommend looking for other income options. For example, you have a whole team writing code, and only one of them is engaged in sales. Then try to bring everyone to sales. How will the abundance of code help you when a company goes bankrupt? If the code is needed to close the transaction - then go ahead. This is the attraction of programmers to sales: it is first necessary to spend energy on what will bring real income in the foreseeable future.
Another way to make money is to increase the range or try to enter the outsourcing market. I say “try” because the path from creating products to outsourcing services is long and difficult. It is better not to go so far until your products start to enjoy steady demand. But even if your product is not yet so good, then programmers will surely be better than those whom potential customers could hire. Or the team may have experience in some little-studied direction. In general, switching from the question “do you want to buy our product?” To “what can we offer this, what are you willing to pay for?” Will make earnings much easier.
At the time, you will have to become a ruthless mercenary, because you are trying to save your company from death. So, the client must pay a lot and quickly. But try to avoid the famous outsourcing traps. The ideal situation can only be if you have created a product that clearly corresponds to the needs and desires of the customer, which would make its sale simple and predictable. But you do not work with payment by the hour, and develop business.
At best, outsourcing will be transformed from an occupation necessary for survival into a thing-that-non-scalable that defines your company. Do not expect that to happen, but try not to miss small opportunities with great prospects.
The demand for private orders is large enough, and you will surely find a way to survive on this slippery slope, if you have at least some qualifications. And I did not just call the path "slippery." Endless customer inquiries will always inexorably push you down, away from the original goal. Now that survival has become more probable, it remains to survive with minimal losses and not greatly distract from the main activity.
The good news is that most startups went through a similar stage and became successful. The main thing in time to understand that you are on the verge - and if things have become bad, then it is so.
[ 1] There is a category of companies that cannot earn much in a year or two - the result of their activity takes time. For them, simply replace “revenue growth” with “progress”. Your company does not belong to such companies, unless such is discussed with investors immediately. And you will not envy such organizations, because difficulties with liquidity make them dependent on investors.
[ 2] There is a hypothetical option that your investors will go forward and allocate more money. Rather, you just decide that they will meet - although they just mentioned such a possibility. The only way to solve the problem for the remaining 8 months or less - try to get money right now. Then you either get what you expected and immediately resolve the issue, or stop being deluded about the intentions of investors.
[ 3] Of course, it is worth now to get rid of other major expenses, in addition to salaries.
[ 4] Unless, of course, the source of the problem is not that you pay too much wages to yourself. Reducing the income of entrepreneurs usually contributes to the company in the "plus". The only bad thing is that the understanding of what was said came to you only after reading the article.
And what is your experience in solving such problems? We will be glad if you share in the comments!
About the translator
The article is translated in Alconost.
Alconost is engaged in the localization of applications, games and websites in 60 languages. Language translators, linguistic testing, cloud platform with API, continuous localization, 24/7 project managers, any formats of string resources.
We also make advertising and training videos - for websites selling, image, advertising, training, teasers, expliners, trailers for Google Play and the App Store.
Read more: https://alconost.com
Many startups go through a stage a couple of months before their death, when they spend too much on substantial accounts. The revenue is either insignificant or absent. The company has, say, 6 months to remedy the situation. And if you call a spade a spade, then 6 months before bankruptcy. And such startups expect to avoid failure with the help of additional investments. [one]
')
This is where the error lies.
The founders' confidence that the investor wants to finance them additionally may well turn out to be an illusion. Although it was not easy to convince the investor for the first time, the entrepreneur still expects a positive response. But the second time, he will encounter unexpected problems:
- Now the company spends more money than with the initial financing.
- To start-ups that have already received investments, requirements are higher.
- The company is now treated as a failure. When money was given out for the first time, it was too early to predict success or failure. Now is the time to think, and usually everyone is inclined to "failure." It is logical - because the result is quite typical for a start-up company.
I call this situation the “last straw”. I do not like to impose stamps, but such a name can sober up the entrepreneur a little.
The situation is made especially dangerous by the fact that businessmen themselves all aggravate. They too rely on additional funding, and therefore do not particularly try to get into the "plus" on their own. And this further reduces the chances of a successful exit from the crisis.
“The less you need money from outside, the easier it is to get it.”
Now you know about the last drop problem, but what to do about it? Of course, apart from the obvious advice not to allow this. Investment company Y Combinator advises to treat investments as if this is the last infusion into your business. After all, the power of self-conviction works in the opposite direction - the less you need money from outside, the easier it is to get it.
But what if the situation has already become unenviable? First, once again weigh the likelihood of additional investment. Now I will be clairvoyant and predict that probability is zero. [2]
There are three options: you can close the company, increase profits, or reduce costs.
If you really believe in failure, then the company is better to roll. At a minimum, you will be able to return the remaining money and save energy on meaningless attempts to fix it.
In fact, truly doomed companies are not often found - I just give you another chance to admit that you have already given up.
If you do not want to close the company, then there is a way to increase profits or reduce costs. For most start-ups, costs = employees and cost reduction = layoffs. [3] Deciding to be fired is often not easy, with one exception: you already know that you need to part with this person, but simply refuse to accept it. If this is the case, then now is the time.
If this makes the company profitable, or the money saved will improve the situation - you have avoided an immediate danger.
Otherwise, three options reappear: lay off good employees, lower salaries for some or all of our colleagues for a while, or increase income.
Reducing wages cannot be called a good solution, and it will only work when things are not very bad. If the chosen business strategy does not lead to a special profit, but the company will be able to survive with a slight decrease in salaries, you can try. Otherwise, you just postpone the decision, and it will be obvious to all whom you have trimmed compensation. [four]
It remains to choose from two options: lay off good employees or earn more money. Trying to balance between them, remember the ultimate goal to build a successful grocery company. Which creates one thing for use by millions of people.
Even more actively to think about the dismissal is, if the reason for the situation in an over-bloated state. When at the start 15 people are hired, and there is no clear understanding of what you are creating, the company is doomed. First you need to determine the goal, and it’s much easier to do it with a handful of people. In addition, these 15 people may well be not those who you really need. And the decision may well be to reduce the staff and then rethink the goals and ways of development. In the end, you will do a disservice to these people if you go broke with them. They will still lose their jobs, along with the time spent at the company doomed.
In the case when only a couple of people work for you, it is better to focus on ways to increase profits. The offer to earn more may look frivolous - as if it is enough just to ask someone for money. A budding entrepreneur does what he can to sell more. But I do not propose to sell more actively, but simply recommend looking for other income options. For example, you have a whole team writing code, and only one of them is engaged in sales. Then try to bring everyone to sales. How will the abundance of code help you when a company goes bankrupt? If the code is needed to close the transaction - then go ahead. This is the attraction of programmers to sales: it is first necessary to spend energy on what will bring real income in the foreseeable future.
Another way to make money is to increase the range or try to enter the outsourcing market. I say “try” because the path from creating products to outsourcing services is long and difficult. It is better not to go so far until your products start to enjoy steady demand. But even if your product is not yet so good, then programmers will surely be better than those whom potential customers could hire. Or the team may have experience in some little-studied direction. In general, switching from the question “do you want to buy our product?” To “what can we offer this, what are you willing to pay for?” Will make earnings much easier.
At the time, you will have to become a ruthless mercenary, because you are trying to save your company from death. So, the client must pay a lot and quickly. But try to avoid the famous outsourcing traps. The ideal situation can only be if you have created a product that clearly corresponds to the needs and desires of the customer, which would make its sale simple and predictable. But you do not work with payment by the hour, and develop business.
At best, outsourcing will be transformed from an occupation necessary for survival into a thing-that-non-scalable that defines your company. Do not expect that to happen, but try not to miss small opportunities with great prospects.
The demand for private orders is large enough, and you will surely find a way to survive on this slippery slope, if you have at least some qualifications. And I did not just call the path "slippery." Endless customer inquiries will always inexorably push you down, away from the original goal. Now that survival has become more probable, it remains to survive with minimal losses and not greatly distract from the main activity.
The good news is that most startups went through a similar stage and became successful. The main thing in time to understand that you are on the verge - and if things have become bad, then it is so.
Notes
[ 1] There is a category of companies that cannot earn much in a year or two - the result of their activity takes time. For them, simply replace “revenue growth” with “progress”. Your company does not belong to such companies, unless such is discussed with investors immediately. And you will not envy such organizations, because difficulties with liquidity make them dependent on investors.
[ 2] There is a hypothetical option that your investors will go forward and allocate more money. Rather, you just decide that they will meet - although they just mentioned such a possibility. The only way to solve the problem for the remaining 8 months or less - try to get money right now. Then you either get what you expected and immediately resolve the issue, or stop being deluded about the intentions of investors.
[ 3] Of course, it is worth now to get rid of other major expenses, in addition to salaries.
[ 4] Unless, of course, the source of the problem is not that you pay too much wages to yourself. Reducing the income of entrepreneurs usually contributes to the company in the "plus". The only bad thing is that the understanding of what was said came to you only after reading the article.
And what is your experience in solving such problems? We will be glad if you share in the comments!
About the translator
The article is translated in Alconost.
Alconost is engaged in the localization of applications, games and websites in 60 languages. Language translators, linguistic testing, cloud platform with API, continuous localization, 24/7 project managers, any formats of string resources.
We also make advertising and training videos - for websites selling, image, advertising, training, teasers, expliners, trailers for Google Play and the App Store.
Read more: https://alconost.com
Source: https://habr.com/ru/post/292294/
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