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The Fatal Pinch

paulgraham.com

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Re: The Fatal Pinch

#91

Post by AndrewKemendo »

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.

Define validate. That is kind of the crux of my question. If it means "profitability" then that is a different threshold than "users." I am trying to figure out what PG is trying to describe.

Re: The Fatal Pinch

#92

Post by peteretep »

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?

The difference between living within your means or just over can be insignificant in cash amounts, but the effect on your long term happiness very significant.

Re: The Fatal Pinch

#93

Post by bbcbasic »

danielweber wrote: post #59

They'll all lose their jobs eventually, along with all the time they expended on this doomed company They were getting paid, right? I'm not losing time I work at a company that will eventually fail.

They weren't getting paid enough, probably. And their vested stock will be worth nothing.

Re: The Fatal Pinch

#94

Post by lpolovets »

joshu wrote: post #6

This is why I hate investing in startups raising $500k or less. You won't be able to raise again unless you have significant upwards progress.

Agreed. Here's some data that backs up what you're saying: http://tomtunguz.com/seed-followon-rates/. This is probably the blog post that I share most often with founders I talk to.

Re: The Fatal Pinch

#95

Post by lpolovets »

kenrikm wrote: post #28
sama wrote: post #22

Earlier quoted context omitted.

on the contrary, most of my best investments have been in rounds of <$500k. i'm more afraid of startups raising megarounds as their initial round.

In the current climate what would you recommend the size of a seed round be? Clearly the answer is not "as much as you can get" right?

If you're trying to maximize your chances of raising a Series A (which may not be the ideal metric), then $600k+ is pretty good and $900k+ is great. (Based on this post: http://tomtunguz.com/seed-followon-rates/)

Re: The Fatal Pinch

#96

Post by davidu »

danieltillett wrote: post #55
paul wrote: post #37

Earlier quoted context omitted.

For some definition of progress, certainly, but neither company was an obvious winner in the first couple of years. The key is to stay very lean until you have definite product/market fit and can raise a huge growth round.

Will investors let companies do this? Is it going to be OK if you only grow 100% per year because you are living within your means or aiming to become profitable as soon as possible?

If you have a SaaS business, growing 100% Y/Y is just fine until you hit $100m ARR.

-David

Re: The Fatal Pinch

#97

Post by gotothrowaway »

paul wrote: post #44
kenrikm wrote: post #30

Earlier quoted context omitted.

I remember David from Weebly noting that they narrowly avoided the pinch by becoming profitable (circa 2009?) Now AFAIK they are kicking ass.

Yes, the Weebly story is amazing. He covered part of it at Startup School a few years ago: https://www.youtube.com/watch?v=l_b228qEVi8

Weebles wobble, but they don't fall down.

Re: The Fatal Pinch

#98

Post by michaelochurch »

tptacek wrote: post #46
michaelochurch wrote: post #38

Earlier quoted context omitted.

Actually, it's more like this. There are good programmers in the enterprise (meaning, say, investment banks or large corporations or governments) but they generally fall, ambition-wise, into one of three categories: (1) those who want to become managers or software architects (or, in finance, quants and traders) and will define and oversee work but delegate the dirty bits. This would be fixable (they could oversee a…

No, that's not what the money is for. The money compensates inventory, scheduling, and delivery risk. It does not compensate developers for working on mundane projects. If the developer in question gets a W2 paycheck, odds are they're not seeing anything like 4x what the in-house people are seeing. And, while I do buy that all three of these developer archetypes exist in the real world, I do not buy that they are the…

It does not compensate developers for working on mundane projects.

It does. That's not the sole reason why consultants make more, but that's a factor.

If you're a full-time employee, you expect your health insurance, HR, work supplies, 401k, office space, finding of work, and your career growth and promotion planning to be taken care of, and you're likely to leave if you're not getting it. If you're a consultant, you're taking on those responsibilities for yourself. That's a big part of why you charge a higher hourly rate. It's to include buying your own health insurance and having to manage your own career with no expectation that the people giving you work give a damn about your vector.

That's not to say that typical middle managers or companies actually care about the careers of most people under them, but they at least pretend to, and some actually do. It's part of the social contract that exists for an employee and not for a consultant. Of course, after being an employee for a while and seeing that part of the social contract ignored, many people decide that the job is too important not to do themselves and start managing their own careers... and some become consultants.

Re: The Fatal Pinch

#99

Post by outworlder »

I'd argue that the 'consultingish' part is as hard as the startup's main business itself, if you add the human factor.

On one hand, you have your ideas, your product or whatever you're working on – which, by definition, isn't working all that great. On the other hand, you have a client (or more than one), who's willing to pay right now (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'd make as an employee and better than going broke.

Somewhere down the line, you'll get more work. Maybe from the same client, maybe it's a referral. Do you turn them down now, that you've achieved the required runway? It'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.

The consulting (there'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.

It's easier to set a goal when everyone is going broke, than when the money has started rolling in. There's nothing in the world that's more blinding than a bank deposit.

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