Doomed to destruction: is your startup alive or knowingly dead?

When I talk to the founders of startups that have existed for more than 8 or 9 months, I always want to know the same thing. Suppose that their spending remains unchanged, and the growth of their income remains the same as in the past few months. Will they get profitability on the money they have left? Or, speaking more dramatically, are they alive or are they obviously dead?



It scares how often the founders themselves do not know this. Half of the founders do not know whether their projects are alive or already dead beforehand.



If you are one of them, then use Trevor Blackwell's handy calculator (Trevor Blackwell) to figure it out.

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My interest in the fact that a startup is dead or alive is due to the fact that all further conversation depends on the answer. If the company is alive, then we can talk about new, ambitious things that they could do. If she is dead now, then we should probably discuss how to save her. We know what the real trajectory of its movement will lead to. How can they wind up with this trajectory?



Why do so few founders know if the project is alive or not? It seems to me mainly because they are not used to such issues. This is not a question that is wise to ask in the early stages - just as it would be foolish to ask a three-year-old child what he is going to make a living. But when the company gets older, the question turns their senseless into vital. This metamorphosis often takes people by surprise.



I propose the following solution: instead of coming to this question too late, start asking yourself too soon. It is difficult to determine exactly when a question changes polarity. But perhaps it’s not so dangerous to start early to worry about the fact that you are dead by default. At the same time, it is very dangerous if you ask this question too late.



The reason for this is the phenomenon that I wrote about earlier - this is a fatal investment. Fatal investments for a project become when it is obviously dead + slow growth + not enough time to fix it. And the founders get on this path, not knowing where she leads them.



There is another reason why the founders do not ask themselves whether their project is alive or dead now: they think it will be easy to raise more money. But this belief is often deceptive, moreover: the more you are dependent on such a belief, the more deceptive it will be.



Perhaps this will help you to separate the facts from the hopes. Instead of looking into the future with unclear optimism, clearly separate the components. Say: "We are knowingly dead, but we expect that investors will save us." Perhaps, as soon as you acknowledge this, this thought in your head will begin to “sound the alarm” - the same as in mine already now. And if you start sounding the alarm relatively early, you may be able to avoid fatal investments from the outside.



If you could count on the fact that you will be saved by investors, then it is not terrible to be and obviously dead. As a rule, they are interested in growth function. If you have a sharp increase in revenue, say six times a year, then you can begin to expect investors to become interested in you, even though you are not profitable (see note 1 at the end of the post). But investors are so inconstant that you can only hope for their help - no more. Sometimes something in your business can scare them away, even despite your magnificent revenue growth. Therefore, no matter how good this indicator is, you should never consider raising funds more than what is indicated in Plan A. You should always have Plan B: you should know (like two and two) what needs to be done for your survival. business, if you can not raise more funds, and you must clearly understand at what point switch to plan B, if plan A does not work.



In any case, rapid development and cheap work are not as far from each other as many start-up founders believe. In practice, we see a surprisingly small connection between the waste of a startup and its growth. The rapid growth of the company is usually due to the fact that the product "hit the bull's eye", that is, it satisfies some needs of a large market. Usually a startup spends a lot because the product is expensive to develop or sell, or simply because the founders are wasting money.



If you carefully read the article, now is the time to ask not only how to avoid fatal investments, but also how to avoid a deliberate death. The answer is simple: do not hire workers too soon. This is one of the most important killers of startups that receive funding (see note 2 at the end of the post).



The founders convince themselves that they need to hire workers to grow. But most of them are mistaken: people rather overestimate this need, rather than underestimate. Why? Partly because a lot of work needs to be done. The naive founders believe that somehow everything will work out if they hire people. In part, they think so because successful startups have large teams, so it may seem necessary for newcomers to succeed. In fact, huge start-up teams are more likely a consequence of growth, but not its cause. And partly the founders' self-deception is based on the fact that they often don’t want to admit the true reason for their small growth: the product is not attractive enough.



In addition, the founders, who only received funds, are often inspired to recruit excess staff with business angels who sponsor them. The strategy "whatever happens" is optimal for investors, because they are protected by the "portfolio effect". They want to blow up your startup - in a good or bad way. But you are the founder, and you are led by other promptings. First of all, you want to survive (see note 3 at the end of the post).



Typically, the death of startups occurs in the following scenario. They develop something more or less attractive and achieve good initial growth. They get their first round of funding quite easily, because the founders seem reasonable and the idea attractive. But the product is attractive more or less, that's why the growth is not remarkable, although you can't call it bad. The founders convince themselves that the arrival of new employees will provoke a growth spurt. Their investors agree. But (do not forget that the product is only “moderately attractive”) more growth does not come. And now their runway is about to end. They hope that additional investments will save them. But they are no longer interesting for investors, because they had high expenses with slow growth. They are not able to raise funds, and their company dies.







What the company should do is one of the main problems: the product is only more or less attractive. Hiring new employees can rarely fix this. Most often this complicates this task. At this early stage, the project needs more evolution than a “full development”, and this is usually easier to achieve with a small number of people (see note 4 at the end of the post).



If you ask yourself if your project is alive or knowingly dead, then you can be saved from it. Alarms may keep you from hiring new employees. Instead, you'll be looking for other ways to grow your startup. For example, doing something that does not scale, or changing the product as soon as the founders can do it. And for many, (if not most) startups, these paths to growth are really effective.



Airbnb after collecting funds for Y Combinator for another 4 months did not hire people. By that time, the company's founders were terribly overworked. But they were overwhelmed, ensuring the evolution of Airbnb into a tremendously successful organism, which is now a company.

Notes

[1] The sharp increase in users will also attract investors. Revenue will ultimately be a value dependent on the number of users. Thus, the increase in the number of users by X% promises an increase in profits of X%. But in practice, investors hardly appreciate the promised profit, so if you show the number of users, then you need to show a high growth rate to impress investors.



[2] Startups that do not collect investments are protected from unreasonable hiring of staff, as they cannot afford it. But this does not mean that you should not raise money to avoid this problem - total abstinence from alcohol is not the only way to combat alcoholism.



[3] I would not be surprised if it turned out that the tendency of investors to push startups to unnecessary hiring of staff does not even relate to their own interests. They do not know how many companies killed by their excessive capital could become successful if they survived. I suppose this figure will be impressive.



[4] After reading the draft of this article, Sam Altman wrote:

“I think that you should speak more sharply about the problem of hiring staff. It seems to me that I would not be mistaken in saying that the most successful companies that received capital on YC never hurried to hire people, and one of the qualities of a successful founder is the ability to resist this temptation. ”

Paul Buckheit added:

“A related problem that I often observe is premature scaling. The founders take their small business that does not work in the best way and then scale it, wanting to get impressive growth. This is similar to the problem of over-hiring of staff in that such an approach complicates business setup - the larger the company, the harder it is to correct its shortcomings. In addition, big business requires more money - and you lose it very quickly. "

Thanks for helping us prepare the article for Sam Altman, Paul Buchheit, Joe Gebbia, Jessica Livingston, and Geoff Ralston.