The truth about a failing startup ✶
There's a pastebin text that went to the top of HN recently that is worthy of comment. I'll reproduce it below in case it gets removed from pastebin (not exactly the most reliable storage location):
Somehow, I managed to create an app that some people seemed to like. With some odd stroke of luck, an investor in the U.S saw the app, and saw something in me. He gave me a shot. Invested in me and my company.
Fast forward a couple of years, and that company still exists, but it's on it's last legs. It's dying. I've failed. I haven't been able to innovate, I guess I lost my touch. The money will run out within a couple of months, and the debts won't be able to be paid. It will all collapse.
I think the investors lost faith a few months ago. They don't contact me. They don't even follow me on Twitter anymore and if they do contact and I reply, they don't respond with answers to my questions.
It's pretty shitty to be living in a state of impending doom. You know in a month or two, your entire life will crumble apart. You've tried everything but nothing works. Doom is coming. And you have to live with it. It's a constant state of ever worsening depression.
When family asks how things are going, like all entrepreneurs, I respond with "Great!". I don't know how to tell them that I have failed.
The investors money is just about gone. My own money is non-existent.
I see articles on Hacker News about depression and entrepreneurs. Most of them are so far from reality. They don't capture the sense of impending doom, the sense of failure. The don't capture the loneliness, where you have nobody you can turn to.
If I can leave with one piece of advice to young founders. Please think really hard about taking other peoples money. If I had failed using my own money, I could live with it. But having a team of investors believe in you, only to let them down is an incredibly difficult thing to deal with. Try and finance your product yourself for as long as you can. At least until you can realise if your idea is decent (which takes a long time to figure out).
I commented on the HN post. I feel it's worth repeating that comment here and adding to it.
The idea that the (unhappy) end of a startup is depressing and filled with doom is pernicious, because it's partially true. Yes, it is a pretty difficult time, or at least it is until you finally admit to yourself that this venture has failed, and start the process on moving on.
Once you've done that, something surprising (at least the first time) happens:
You will feel an immense sense of freedom and lightness.
It's pretty obvious why: a weight is being lifted from your shoulder. Where your path was a narrow funnel leading to one specific destination, you will now have the infinity of all possible and reachable paths ahead of you. Before, you couldn't think of anything other than worrying about the startup - now you can do anything you want.
The end of a start feels very dramatic before it happens, but once it's done, you will feel a whole lot better. This is truly liberating.
One side-effect of this is that experienced founders tend to be much more willing to draw a line and call it a day. "Ok, this one isn't working. Let's figure out the next one."
Moving on cleanly and swiftly when it's time to move on (rather than 6 or 12 or 18 months later, after much, much more pain) is one of the skills that you learn from failing at your startup, that you do not learn from succeeding.
If you read this far, you should follow me on twitter here.
Process cults ✶
Alex Payne writes an insightful attack on the idea that dutifully following a process will get you a successful startup:
Process Cults form around a set of business practices that, when judiciously applied, are supposed to yield a profitable, successful business run by shiny, happy people. The startup segment of the business book market has its favorites:
- Eric Reis's lean startup and associated book.
- Steve Blank's customer development and associated book.
- 37signals' methodology, as expressed in the books Getting Real and REWORK.
I have read all of the above. I don't necessarily agree or disagree with their contents. What I disagree with is the notion that anyone should start or operate a business in the explicit mold of someone else's experience, as reduced to a couple hundred pages padded with illustrations and diagrams.
I believe processes are in fact helpful, but only when supported by a solid set of skills backed by painfully earned experience.
Importantly, a process can help you avoid some common mistakes. Processes are like recipes, but they are not recipes - they are much more open-ended. Yes, every business is different, but most businesses fail in common and avoidable ways and following a well-tested process will at least reduce the chance you fail in a boring way (though it may not increase the chance you succeed).
If you read this far, you should follow me on twitter here.
If you try to sell things to businesses (as I do in the context of GrantTree), you'll notice a split in the mindset of people who run companies.
"Can I have it for free?"
Some people are unwilling to pay for anything. No matter how appealing the product might seem, how tangible the benefits it brings, how proven, safe, secure, universally lauded the product is, some people will try to get it for free, and not buy it if they can't.
Even if you're providing a service (which, as I've argued before, has immediate tangible value in most people's minds), they will ask if you can do it for free. Or at a 90+% discount. Or maybe you can get paid later.
In the worst incarnation of the zero-cost entrepreneur, you find people who will offer you shares in their business in exchange for your work. I call this one the worst, because I feel very strongly that founders should treasure their shares like the precious life-blood they are. Also, as previously pointed out, experienced entrepreneurs know the value of equity and preserve it. If someone offers you shares in exchange for your work, they obviously don't understand the value of their own equity - or perhaps they just think their equity is worthless. In either case, their equity is indeed mostly worthless.
This zero-cost entrepreneur mindset is more likely in young businesses by new entrepreneurs, than in later efforts. As a business grows or an entrepreneur acquires experience, a seemingly magical transition occurs. Most businesses come to a point where they decide that spending money for tangible benefits is fine. Before: "no way, we're not spending anything on recruitment, where can we advertise for free?"; after: "$350 for a Stackoverflow advert is fine if it will give us a selection of good candidates".
Even more dramatically, the mindset shifts from "we want everything for free" towards "stuff that's given away for free isn't really worth anything". This is somewhat similar to the App Store mindset that free apps are worse than paid apps, so don't even bother looking at the free apps, because your time is more valuable than the $2 you might save.
GrantTree charges a refundable setup fee to get started, and while we've had people tell us they didn't want to pay it (they didn't become our clients), we've also had others telling us that if we hadn't charged them a setup fee, they wouldn't have taken seriously (they did become our clients).
So, what's the deal here? Is one mindset better than the other? Are zero-cost entrepreneurs "bad"? Should they be lumped in with people who offer up equity for bits of work that really don't deserve it?
Credit cards and paying for things
Here's an interesting parallel with the domestic world. On a personal level, people often evolve through (at least) three phases of credit-worthiness.
First, people (at least in the UK and US) often get credit cards before they're ready for them. What happens then is sadly predictable: they overspend and get in debt. A lot of people never seem to get past this stage 0 of financial responsibility by themselves. They stay in debt, let their debt balloon, maybe declare personal bankruptcy, and at that point, they're forced by the system to go to stage 1: learning to be on top of their expenses (because they can't do anything else, since they have no credit).
In stage 1, the person learns to be financially responsible, to manage their expenses tightly enough to make sure they can always pay their rent and other essentials. Finally, once a level of confidence about personal cash flow management has been built, they can progress to stage 2: responsibly using advanced financial instruments like credit cards (which is possible!).
The evolution of business owners seems similar, with perhaps fewer people stuck on stage 0, at least in the parts of the world, outside the Valley, where money is scarce (I don't have enough direct experience of SV startups to comment here, although it does seem that they are quite willing to take on large fixed expenses without any way to sustain them other than raising further investment).
Stage 0 being a willingness to spend without control, stage 1 is the time when control is built, when founders learn how important it is to keep track of cash flow, reduce fixed expenses, etc. Since this new control is a reaction to a fear of stage 0, it is often an overreaction. "Since keeping on top of expenses is difficult, let's not spend anything".
Is it unhealthy? No, I don't think so. If you don't feel confident managing your cash flow, it's very reasonable that you should cut down your expenses as much as possible. This is why investment is dangerous to new founders: it enables them to let their expenses grow without learning the hard lessons of keeping on top of cash flow. Perhaps this also explains why so many Silicon Valley VCs feel compelled to bring in a "grown-up" to manage the business more closely, when they invest a large sum into a promising startup.
At the same time, I think it's important not to think that stage 1 is the best place to be. Overreaction is not a healthy long-term lifestyle choice.
The healthy path is, as always, in the middle. You do need to be on top of your cash flow, but spending when it makes sense does, well, make sense.
If you can spend $100 and save yourself a day of work, you should not hesitate to do so. Even if your company is pre-revenue (perhaps especially so), being able to move quickly, when you know where you're going and how to get there without falling, is important and worth investing in. Learning to leverage your cash reserves to generate more income faster is as essential as learning to keep cash in the bank.
There are many things that need to happen in a business, and most of them are not critical for you to do personally. For those, you should bring in other people or products, and if you want good work out of them, you'll have to pay for them.
So, I guess the take-away from this article is:
- being out of control of your spending is bad;
- cutting down your spending to the minimum is a natural reaction to the fear of being out of control, and you should keep costs as close to zero as possible until you are in control;
- the best situation is to be in control and have the willingness and judgement to spend money where it makes sense, rather than try to keep every cost to zero forever.
If you read this far, you should follow me on twitter here.
Idea stagnation ✶
Noah Smith points out that the startup bubble can lead to stagnation of ideas:
I wonder if the Entrepreneurship Subculture isn't creating some unwarranted adverse effects. By putting entrepreneurs in such close and constant contact with each other, does the Subculture ferment creativity and cross-collaboration? Probably. But it also may inadvertently stifle creativity, by exactly the process that Steven Smith's research describes.
Noah suggests a solution: go on breaks, to the countryside or wherever is different from where you are. In his words, engineer a "change of context".
I can't disagree with that. Some of my best business ideas have occurred to me while floating about in the ocean or lying on a sunny beach. I wonder if that means I can claim my holidays as business expenses...
If you're stuck on a problem, going on a break is generally a good idea, but it's also a good idea if you're trying to generate ideas.