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The Fatal Pinch

paulgraham.com

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Re: The Fatal Pinch

#121

Post by patio11 »

danieltillett wrote: post #62
proveanegative wrote: post #23

Is becoming ramen-profitable before you raise your first round a possible solution to this problem?

If you can become profitable without raising funds then why raise funds?

A very commonly heard refrain in the Valley is some variant of: "Would you rather own 100% of a company worth $1 million or 40% of a company worth $200 million?"

Money is used to purchase acceleration. It's not totally crazy, although it implies very different trade offs as compared to running one's own business without investors.

Re: The Fatal Pinch

#122

Post by dluan »

_sentient wrote: post #70
AndrewKemendo wrote: post #60

There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?

I don't think so. Being rich/connected is great, but there's a third option: Show early traction. Absent other advantages, you will need to get to product-market fit pretty quickly if you want to survive.

I think one thing that rarely gets mentioned, is that startups get harder.

As in, the more traction you show, the harder it becomes to continue that traction, or alternatively, more traction is now expected of you. Combine this with the increasing complexity of a growing machine.

Maybe PG's analogy is that at first it starts off a pinch, but grows to be a very large guillotine until you finally can outrun it.

Re: The Fatal Pinch

#123

Post by danieltillett »

tptacek wrote: post #120
danieltillett wrote: post #118

Earlier quoted context omitted.

But 37signals bootstrapped. The problem is once the founders take VC money they are taking on what the VC expect them to do which is play a very high risk, potentially high reward game with a very low chance of success. This strategy is almost certainly not optimal for the founders.

So what? At this point in the story we're talking about a company on life support. That's why they're consulting and not continuing to put all their time into product. There's not a whole lot VC can do about it at this point.

>There's not a whole lot VC can do about it at this point.

Except ask for their money back :)

If you think you can get away with running a sane growth company (100% Y/Y) and don't have to worry about the VCs asking for their money back, then the most rational thing to do is take the seed money and run the business as a "slow growth" business with an enormous runway. Unfortunately most VC's are aware of this and will not be too happy if you try :(

Re: The Fatal Pinch

#124

Post by kenrikm »

patio11 wrote: post #108
applecore wrote: post #107

Earlier quoted context omitted.

The benchmark for a company raising its Series A is now $50k MRR. (This used to be closer to $100k.) You'd expect to be at $100–150k MRR six months after the Series A, assuming a 15–20% monthly growth rate. If you're already at $500k MRR, you're in Series B territory.

Egads.

dadgum.. 500k MRR seems low for a Series B.

Re: The Fatal Pinch

#125

Post by lacksrigour »

to3m wrote: post #83
michaelhoffman wrote: post #11

Earlier quoted context omitted.

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 restricti…

What is the benefit to something that Divides into 2 and 17 rather than 2, 5, 10, 25, 50, etc that existing systems of base 10 decimal use?

Re: The Fatal Pinch

#126

Post by danieltillett »

LukeFitzpatrick wrote: post #82

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 prog…

Actually I am not so sure that your friends did the wrong thing here. Sure the business failed, but if they got to transfer all the investors money to themselves while at the same time learning how to run a startup (all with someone else money) then it was pretty smart.

Now they need to take the cash they saved and wisdom accumulated and bootstrap their next business up without any VC money.

Re: The Fatal Pinch

#127

Post by jameshart »

lacksrigour wrote: post #125
to3m wrote: post #83

Earlier quoted context omitted.

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 restricti…

What is the benefit to something that Divides into 2 and 17 rather than 2, 5, 10, 25, 50, etc that existing systems of base 10 decimal use?

Well, say you're out to dinner with 16 friends, and you need to divide up the bill... the practicality should be obvious.

Re: The Fatal Pinch

#128

Post by danieltillett »

X-Istence wrote: post #114
danieltillett wrote: post #80

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. Just out of curiosity why not just raise 2MM+? What value is there in this to the investor unless they have the ability to back out of the prenogociated follow-on? It seems like an expensive way to get no peace of mind?

Maybe because the founders are not required to take the follow-up 1MM if they don't need it, and thus don't need to hand over equity worth that 1MM.

They could always agree to return the cash if they didn't need it. I guess it would depend on the agreement signed.

Re: The Fatal Pinch

#129

Post by csallen »

GreenPlastic wrote: post #79

How do you keep your employees in this market if you're lowering salaries across the board?

Hiring (and retention) is currently so difficult that the ability to do it well is one of the major factors separating the best founders/startups from the rest of the pack. Ideally you're extremely charismatic, resourceful, and well-connected, and your company is attractive, interesting, and promising.

Re: The Fatal Pinch

#130

Post by zeeshanm »

outworlder wrote: post #99

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. P…

Just want to say it is not too bad to have a mortgage as it may seem. It is very situational, though, depending on how you're paying off mortgage. There is definitely risk there but it can be offset. For example, you could generate some income from rent that can help you pay all your bills in addition to filling in monthly mortgage payments. Again, it depends.
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