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The Fatal Pinch

paulgraham.com

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Re: The Fatal Pinch

#81

Post by danieltillett »

AndrewKemendo wrote: post #73
feverishaaron wrote: post #65

Earlier quoted context omitted.

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…

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?

Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.

Re: The Fatal Pinch

#82

Post by LukeFitzpatrick »

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.

Re: The Fatal Pinch

#83

Post by to3m »

michaelhoffman wrote: post #11
TheBiv wrote: post #3

Earlier quoted context omitted.

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

The numbers refer to pre-decimalization British currency. To convert to modern currency: £19 19s 6d = £19.975 £20 0s 6d = £20.025

Wikipedia has a few pages about the various systems of this kind: http://en.wikipedia.org/wiki/Pre-decimal_currency.

Difficult to fathom why the fashion for these passed, because such systems provide so many advantages. A good example is the Spanish system of division into 34, which permits straightforward further division into not only 2 but also 17 pieces - a case very difficult to handle with the modern restrictive, awkward and inconvenient decimal systems.

Re: The Fatal Pinch

#84

Post by 001sky »

TheBiv wrote: post #3
carsongross wrote: post #2

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.

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

incremental net worth = growth (joy)

negative net worth = brankrupt (misery)

Re: The Fatal Pinch

#85

Post by [deleted] »

tonydiv wrote: post #72

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 coa…

[deleted]

Re: The Fatal Pinch

#86

Post by rjtavares »

danieltillett wrote: post #81
AndrewKemendo wrote: post #73

Earlier quoted context omitted.

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?

Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.

I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.

Re: The Fatal Pinch

#87

Post by danieltillett »

tptacek wrote: post #78
danieltillett wrote: post #75

Earlier quoted context omitted.

>Investors are looking for a particular curve. The slow burn, 7-figure exit that founders want is almost useless to VCs. The model requires that the winners pay for the losers. The VC has a finite number of at-bats every year, and each one needs to potentially be an out-of-the-park home run. A company that deliberately bunts is costing the VC an opportunity to recoup their losses on failures, which is the majority of…

No, founders are accepting the amount of funding VCs give them. I don't love VCs, but it's weird to blame them for this phenomenon. The VC model can't work differently. Most companies fail, and the winners have to pay for the losers.

I am not blaming VCs, I am blaming founders for taking VC money when the model they are giving it to you under is fundamentally flawed.

It is debatable if VC model couldn't be made to work better, but if this is how they are going to play the game then you are better off not playing and get on with bootstrapping.

Re: The Fatal Pinch

#88

Post by 001sky »

K2h wrote: post #49

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 bringin…

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.

Re: The Fatal Pinch

#90

Post by danieltillett »

rjtavares wrote: post #86
danieltillett wrote: post #81

Earlier quoted context omitted.

Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.

I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.

I an not too sure about this. The debatable issue is should any investor give them any money or not? Since I doubt it almost never happens we probably don't have the data to know if it would work or not.
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