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Dear Startups: Here’s How to Stay Alive

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Re: Dear Startups: Here’s How to Stay Alive

#61

Post by morgante »

roymurdock wrote: post #52
morgante wrote: post #38

Earlier quoted context omitted.

Can you really not tell the difference between the corner laundromat (a profitable small business) and Atlassian (a startup which was profitable for most of its history)? Startups are companies designed to grow fast. [1] Frequently, that means spending more than comes in but it's definitely not a prerequisite. Likewise, there are plenty of small businesses which take years to reach profitability (some never do)—that…

You're leaving out all of the companies between the two extreme poles that you just set down. What about a small, 5% gross margin software "startup" that takes on small investments with decent YoY growth that never makes TC news. Or a chain of coffee shops that experiences huge growth and raises high-visibility funding rounds, such as Philz Coffee? What is Palantir? Companies that are designed to grow fast by swappin…

> You're leaving out all of the companies between the two extreme poles that you just set down.

Of course there are lots of nuances. I wouldn't say that Atlassian is an extreme pole though—it actually contradicts a lot of the narratives people tell about startups.

> What about a small, 5% gross margin software "startup" that takes on small investments with decent YoY growth that never makes TC news.

TC is absolutely not a prerequisite for being a startup (it's essentially a fashion show, which is relatively orthogonal to business). If this 5% margin software business has a realistic plan to grow into a large company and has strong growth then it absolutely is a startup, even if it's not fashionable.

> Or a chain of coffee shops that experiences huge growth and raises high-visibility funding rounds, such as Philz Coffee? What is Palantir?

Both are absolutely startups, their business model just isn't selling ads. They were both designed to grow big and used funding to get there.

> The investor is looking for less risky, less high-growth oriented companies - aka slow startups.

Yes, the investor is becoming more risk-adverse. That doesn't mean they're suddenly a bank looking to fund small businesses. I could walk up to her with a plan for opening a laundromat which was guaranteed to turn a profit in year 1, but I guaranteed she'd still be uninterested. Likewise, banks are generally uninterested in funding my tech endeavors even if they have a pretty reasonable path to profitability.

"Slow startups" is a much better term than small businesses. They still intend to be big some day, but aren't rushing as fast to get there.

> The hostility is unnecessary.

I apologize for coming off as overly hostile. I'm mostly just frustrated with people muddling terminology, and you certainly don't deserve the blame for that.

Re: Dear Startups: Here’s How to Stay Alive

#62

Post by mindcrime »

BinaryIdiot wrote: post #51
jorgecurio wrote: post #15

> You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrep…

That practically triggers PTSD from some of my experiences with similar types of people. I know in start-ups making revenue is a bit of a dirty word but that's what the business is ultimately supposed to do anyway! Why the hell not build to support the revenue model(s) early so you can turn them on and test them as soon as possible? better to test your bets early before you're laying off hundreds of people because yo…

I know in start-ups making revenue is a bit of a dirty word but that's what the business is ultimately supposed to do anyway!

I keep a note to myself positioned prominently nearby, titled "The Most Important Question". I wrote down something for "Question One" when I first put it up, but shortly after I went back and wrote in "Question Zero".

"What is the single most important thing I can be doing right now, to get us to revenue?"

(And no, "posting on HN" isn't a very good answer to that question, so shame on me). Hey, I won't claim to manage to adhere to 100% absolute razor-sharp focus on that point, but I keep coming back to it. When I find myself starting to bikeshed or work on some "cool but speculative" idea, I remind myself "work on what's going to bring dollars in the door first".

Re: Dear Startups: Here’s How to Stay Alive

#63

Post by lowglow »

dsugarman wrote: post #57

> If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealth…

I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.

Re: Dear Startups: Here’s How to Stay Alive

#64

Post by cubano »

tdaltonc wrote: post #27
tarr11 wrote: post #3

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.

Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?

This seems pretty objective, to me at least. [1]

"The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than is necessary to be prudent in this environment," said PitchBook analyst Garrett Black. "

[1]http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-p...

Re: Dear Startups: Here’s How to Stay Alive

#65

Post by AndrewKemendo »

lowglow wrote: post #63
dsugarman wrote: post #57

> If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealth…

I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.

So basically any startup with an iOS only product (disclaimer our's is iOS only).

Re: Dear Startups: Here’s How to Stay Alive

#66

Post by mmaunder »

So the above is obviously written through a VC lens. Through an entrepreneur's lens - who also survived the dot-com bust (at etoys.com) and has since run several failed and now successful businesses - I'd add the following:

The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote:

"Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem."

http://pmarchive.com/guide_to_big_companies_part2.html

In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening.

Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers.

Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc.

When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash.

Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over.

If I was early stage in this environment I'd do the following:

Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once.

Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.

Re: Dear Startups: Here’s How to Stay Alive

#67

Post by twic »

bkjelden wrote: post #14
arielm wrote: post #8

I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now. Companies should be built with revenue (and profit) in mind, and in most cases those are the ones…

Scaling without revenue makes sense if you're in an industry with strong network externalities or large economies of scale. In those cases, expensive customer acquisition is okay because customers have a very high lifetime value. During the "unicorn boom", I think we all had this belief that network externalities were very common in tech - a belief driven by the rise of facebook, google, and others. But now we're rea…

So how common have network externalities that affect revenue turned out to be?

The classic Metcalfe's law stuff means that a messaging service or marketplace with more people is more attractive to users than one with fewer, but not that those users will spend significantly more money or time on it. Certainly not linearly more.

How does the number of Uber cars in a city affect the frequency with which passengers use them?

And how many network externalities are there that don't rest on advertising dollars?

Re: Dear Startups: Here’s How to Stay Alive

#68

Post by malisper »

cubano wrote: post #64
tdaltonc wrote: post #27

Earlier quoted context omitted.

Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?

This seems pretty objective, to me at least. [1] "The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than…

> VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter.

How is the first quarter of 2016 measured? We're only half way through it.

Re: Dear Startups: Here’s How to Stay Alive

#69

Post by roymurdock »

morgante wrote: post #61
roymurdock wrote: post #52

Earlier quoted context omitted.

You're leaving out all of the companies between the two extreme poles that you just set down. What about a small, 5% gross margin software "startup" that takes on small investments with decent YoY growth that never makes TC news. Or a chain of coffee shops that experiences huge growth and raises high-visibility funding rounds, such as Philz Coffee? What is Palantir? Companies that are designed to grow fast by swappin…

> You're leaving out all of the companies between the two extreme poles that you just set down. Of course there are lots of nuances. I wouldn't say that Atlassian is an extreme pole though—it actually contradicts a lot of the narratives people tell about startups. > What about a small, 5% gross margin software "startup" that takes on small investments with decent YoY growth that never makes TC news. TC is absolutely…

I see your thesis - that "startup" implies a desire to be big some day. I'd assume that most small business owners intend to do the best they can and make their companies as successful as possible. But who can really know these things.

Maybe we can agree on "slow startups" as a good way to describe companies slogging through this new investment environment.

Re: Dear Startups: Here’s How to Stay Alive

#70

Post by frankthedog »

lowglow wrote: post #63
dsugarman wrote: post #57

> If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealth…

I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.

This shouldn't be taken as a negative per se. If that is your target market and your business can become sustainable only serving this tranche of consumers, good on you. There is a lot of money to be made serving the top decile of earners.
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