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The fatal pinch  

Paul Graham explains how startups that are burning through their first round of funding often don't realise they're about to die, and need to either make more money or cut expenses:

There may be nothing founders are so prone to delude themselves about as how interested investors will be in giving them additional funding. It's hard to convince investors the first time too, but founders expect that. What bites them the second time is a confluence of three forces:

  1. The company is spending more now than it did the first time it raised money.

  2. Investors have much higher standards for companies that have already raised money.

  3. The company is now starting to read as a failure. The first time it raised money, it was neither a success nor a failure; it was too early to ask. Now it's possible to ask that question, and the default answer is failure, because that is at this point the default outcome.

What is most interesting to me, though, is this paragraph:

Whereas if you only have a handful of people, it may be better to focus on trying to make more money. It may seem facile to suggest a startup make more money, as if that could be done for the asking. Usually a startup is already trying as hard as it can to sell whatever it sells. What I'm suggesting here is not so much to try harder to make money but to try to make money in a different way. For example, if you have only one person selling while the rest are writing code, consider having everyone work on selling. What good will more code do you when you're out of business? If you have to write code to close a certain deal, go ahead; that follows from everyone working on selling. But only work on whatever will get you the most revenue the soonest.

The bit in bold applies to every startup, funded or not. Which brings me to the obvious conclusion, that won't be very surprising to regular readers of this blog... why not skip the funding and go straight towards having "everyone working on sales"?

The answer is, that's not possible for some businesses. But it is possible for most businesses, despite the apparent, loud popularity of the Valley model of "raise funds first, figure out how to make money later". And, from the above sentence, I deduce that it is also possible for most Valley startups.

So the next question is, which one is better? I guess they both have pros and cons. As I've argued before, investment is a springboard, not a cushion. If you're an experienced entrepreneur, who knows how to build a business, and you want to do it faster, raising investment makes a lot of sense even if you could bootstrap the business. If you're a new entrepreneur, though, I still recommend going without, and learning the basics of how to build and run businesses before hitting the "boost" button.

What's clear is that even amongst the Valley model startups, those companies that can afford to neglect sales and other "proper" business topics are few and far between.

More from the library:
The processes that drive your business
How to find a business cofounder that doesn't suck
Startup advice by Sam Altman