The top advice from all startups that ‘survived’ seems to be, ‘don’t hire, be lean’, when almost all of them did hire and then lay off employees to get over bad times. In my view ‘not hiring good people’ during rosy times is an impossible thing to do.
Things like these are self evident only in retrospect.
The startup I was a part of in a previous life did that.
The two owners took too much money for personal stuff and couldn't pay the employees. Several times we were told to not cash our paychecks for a few days or were asked to take an unpaid day off, etc. That same year that they let 3 employees go and they each bought a new house, new vehicles, and one of them bought a $75k trailer. So between the 2 of them, we figured that that year they could barely afford to pay us they got around $800k worth of personal stuff.
Then they pushed all the extra work onto the remaining employees. 4 more left a few months after they let go of the first employees which caused them to change their business model quite a bit to retain the remaining employees.
Now looking back, the 3 employees they let go were paid less than $80k between them and were considered contractors (until the IRS was involved).
The lean stuff here burnt several of us out, and for those that remained, the thanks they got was being told there wasn't enough money for a holiday party.
I keep in contact with several of the employees. They're a successful startup in most aspects I assume, but only because they were forced to change stuff that they didn't want to. If they didn't change the business model, they would have bled more employees within a few months and probably would have went under.
It's a lesson everyone learns the hard way, which is why everyone who says it didn't do it, because you bet they'll try very hard to follow their own advice the second time around.
A good way to think about this issue: As you prepare to sell preferred shares to raise money, ask yourself "Is this product worth the next ten years of my life?"
Come up with an answer that will satisfy your parents or spouse, not just your co-founders and seed investors.
What can make it worth ten years?
1. A product with the potential to delight paying customers and make them talk to each other about how great it is. (If your revenue depends on ads, your customers are advertisers, duh.)
2. A big enough stake in your company (after you sell those shares) to give you good choices when it's time to do the next thing.
I think this is a crucial question every entrepreneur should ask his or herself before taking money with a liquidation preference - and that includes long term debt (the ultimate liquidation preference).
Whenever you take on leverage, you have to deliver a return to investors (or lenders). How long will that take? Do you really want to do this for another X years? And ten years is not a bad guess for preferred equity.
Hiring folks also increases the communication overhead. If you are a team of 3 and hire a 4th you now have a new person that needs trained, needs to learn tribal knowledge, asks the other 3 people different things and keeps them busy distracting them from what were doing - finding product market fit. Any more, I prefer lean & scrappy teams. Small teams get more done. Only scale up the other bullshit when you absolutely have to.
>Only scale up the other bullshit when you absolutely have to.
Yet scaling becomes absolutely essential for a company doing anything sufficiently complex. The question is how do you maintain that small team efficiency across an enterprise. It seems that business and engineering are very similar in this regard in that the ultimate baseline problem to be solved is managing complexity. The answer seems to be in adhering to the Unix philosophy of tiny, self contained, composable parts which can be easily reasoned about and composed with.
As the parent comment states, the biggest killer of efficiency is communication, particularly across disciplines and across domains. Reducing the overhead of communication and reporting would seem to the the skill most essential to management but generally it's the skill that is generally lacking, or indeed, absent.
The unix philosophy of composable teams can only happen when the communications are clear, concise and don't generate much, if any, overhead. I'd love to see a company with a CCO - Chief Communications Officer - who has a team responsible for making sure that the information passed among the various parts of the organisation was effective and free of bullshit or grandstanding.
Communication channels formula where n is team members: n(n-1)/2 [1]
As teams grow, not only do communication channels increase exponentially, individual contribution decreases overall and there is less ownership/responsibility so people care less i.e. a team of 100 has 99 other people to pick up slack, a team of 1 has noone else, a team of 3 has 2 people that will let the third know of slackage, where a team of 100 may never be able to apply that.
Small teams get it all done, and sometimes single people, especially language designers like Guido, Stroustrup, Ritchie, Matz, Eich, etc and especially in the beginning.
Small team strategy even in big companies is very smart and effective to get the best performance out of each contributor. Small team configuration does give some power and worth to employees though so it isn't used as much in large companies that looks at employees as resources in a machine. Employees as resources may work for established products/processes but rarely research and development or creative products.
I agree with your comment, yet I wish to pick a nit:
> n(n-1)/2
> exponentially
I see this a lot in mainstream media (who simply can't help themselves) and increasingly so on HN (where we should know better): using "exponential" as a synonym for "explosive". I'd love for all of us to stop that. n(n-1)/2 isn't exponential growth, it's quadratic, and once you're at more than 10-ish team members the difference is enormous :-)
I should have said parabolic or quadratic but was mainly focused on the project management / team aspects and how it affects individual team members of ever-increasing team sizes.
It's easy to believe that letting go of employees before finding product market fit was the right move, and maybe they never would have never been able to build and grow Twitch under the existing structure. But given that at least one of the products sold for a billion dollars, this seems like a textbook example of a company that did deserve more money based on having built a good platform but not yet having the required traction.
If investors knew the company was going to sell for over a billion dollars, would they really not have invested? Maybe this is the case, but it doesn't seem like it. Instead it seems like the investors didn't believe the company would actually sell for a billion dollars based on the growth rate to date.
I’d lean more towards their story being path dependent.
My hunch is they had to go through lean times to be able to focus harder on customers and eventually create a product that could take the company to an IPO. If you’re not lean, management is most likely distracted with the internal company and organizational overhead than you are with external customers.
No way to prove this (because we can’t recreate the exact scenario) however.
We didn’t deserve more money when things weren’t working. It’s the investors who decide who deserves more money and if you are setup to need their money you better learn their rules and figure out how to convince them to give it to you.
I think here deserve is the wrong term, semantically speaking.
Investors do not decide who "deserves" more money, they decide who GETS it.
Deserving is more a moral term and makes things confusing: a company could deserve the money but not get it because they are not good enough at fundraising, or they need the money at a time when money is very hard to get etc. And many companies get money without deserving it because some investors are stupid, or because they are way too good at looking shiny.
I realize that in practice you're very unlikely to get money without having traction. But if we're talking about which companies are deserving of money, if such a category exists, then surely the ones that go on to succeed must (in most cases) make the cut. Especially when they succeed despite having not gotten the money.
I also get what you're saying though, in terms of the companies that deserve money are the ones that can convince investors that they deserve money.
Well, at least they had a plan 'B'. Quite a few companies have none and if their current investors don't pony up then it's end-of-story really quick. It's one thing to go raising money when things are looking good, quite another when you've lost momentum.
B2B or B2C can make a huge difference here, in B2C there are some options that are much harder to come by than in B2B (see: youtube), but B2B is easier to land softly because it is far easier to monetize.
How do you reconcile this advice and position yourself if the seed round is only enough to prove out whether the product can be built at all?
As an analogy, say I had the idea for a car when everyone is still using horses. I raised a seed round to build my car but the funding is only enough to build a car prototype that goes 10mph. At 10mph, there is obviously no product/market fit since horses are still faster and cheaper. However, the prototype proved out the technical challenges, so I know with more capital I'd be able to make a car that can go 80mph, making the horses obsolete. How would your post apply in this case?
I think there are certain companies with significant upfront capital requirements that first time founders will find it almost impossible to get funded. This is unfortunate and probably reducing overall innovation but I think the revolution that has caused first time founders to get funding has been software. Software has significantly reduced the upfront capital required to get a business off the ground. I think we Founder venture further and further away from pure software companies they are going to find fundraising much more challenging.
A company that comes to my mind is Kestrel Aviation. They had a great plan up front, founder pedigree, and experience. But they got distracted by hubris and stopped executing.
Launching a new general aviation company is massively capital intensive. They raised a bunch but failed to do anything that resembled shipping. They could have made individual parts, they could have sold kits. Any number of things.
Sometimes you have to start with the small pieces, or do services engagements. These things generate revenue, attract staff, and enable you to build the kind of organization necessary to do something capital intensive.
Trying to go to Mars as step one won’t typically work. Try to find business models for the components and assemble over time. My guess is that Elon Musk’s portfolio follows this model.
I think in that case your ability to raise additional funds will be dependent on the persuasiveness of your argument. The investors would need to believe that you have a viable plan, and that you are the person who can execute it. If they don't believe you are worthy of investment others may take inspiration from your work in their attempts to make the product a reality.
I took it as a normative justification. Lots of companies out there looking to get capital, why should I give it to you? Are you going to do something useful with it or are you just going to fritter it away?
I agree with this comment. I think it’s too easy for founders to say - that shitty company over there got money so why can’t we get any. I want to reframe the conversation.
Reframing the conversation to make founders in this situation re-think their approach is very laudable, and you give very valuable and concrete advice.
I still agree with the GP post that 'deserve' is an unfortunate choice of wording. It has the potential to again mislead founders, now in a different direction.
Nobody deserves your investment (except some non-profit organizations). Fairness is no significant criterion for investors. You probably just give it to the founders with the best risk/gain ratio. The founders you want to educate might think that they now can say "I did what you suggested. Now I deserve your money". And they will again be surprised if "that shitty company over there" gets it instead.
User count. Put a big LED on your wall right above your monitor with your weekly active users in the last 7 days. Any time it goes up, play a bing noise. Eventually you'll pavlov yourself into liking that sound.
Chasing those numbers can be a fools game. I've seen money going down the drain because stakeholders wanted to stroke their egos. Instead of staying lean, and since there was money in the company to burn, a big sum was spent on ads to keep new users pouring in. It was a horrible sight.
I was at JTV during this time. We were basically churning. There was certainly a significant cohort of regular viewers, but much of our traffic owed to spikes of viewers who would come for specific content, then bounce. They didn't care about us, so long as we had the thing they wanted to see.
We spent a lot of time debating whether or not this was just the nature of "live" content (e.g. live television derives most of its value from sports and real-time events, and they defend these verticals viciously). I have no special information on Twitch, but from the outside, it is a qualitatively different audience. There's a level of commitment that just wasn't there for JTV.
The lesson is burned into my mind, because there are a lot of ways for a startup to generate deceptive "traction", and if you're not careful you can fool even yourself. You have to be brutally honest about how committed your users are, and what their actual value is. It's an easy way to become a zombie startup -- trundling along, nursing a "big" audience of users who require a lot of care and attention, but don't really care about your product in return. These kinds of audiences are worse than worthless, because they waste your time.
If what caused the layoff is a microeconomic issue - your company isn’t profitable and not a macroeconomic issue - the entire economy sucks- and you’re technical with marketable skills, it shouldn’t be an issue.
Between 2009-2011, I was working for a company that had three rounds of layoffs until the company finally shut down. We all knew the company was in dire straights, management was very up front with us. None of us who were left, jumped shipped because we liked our jobs, were working on resume building technology and we knew we could get a job relatively quickly.
Without fail, within a month of being laid off, every person who was laid off had another comparable or better job. This was true for developers, QA analysts, and L1 and L2 tech support. On our last day, when the company shut down and laid all of us off, we hung around, went to lunch, laughed, joked and called our recruiters for our next opportunity.
My biggest fear is never being unemployed, it’s being unemployable. If you keep your skills marketable in tech, finding a job or at least a contract is not hard. It’s been true for me for almost 25 years asa Developer - and I’m not on the west coast.
I’m not in IT tech, last job search a couple years ago took about a year and I’m starting another that’ll likely take as long. It’s just fantastic to me that multiple people could simultaneously find employment on short notice. It’s a world I haven’t experienced and am frankly envious of.
That’s a fine question to ask if the investor comes to you. If you are coming to the investor asking for money, you are not profitable and spending way more than your income, then I’d suggest not asking this stupid question.
I consult for VCs on a technical side and I sit in on many series A pitches. It’s funny how often when you ask a struggling startup why you, as a VC should invest millions into their business, they give the question like this back. “Why do you deserve to invest in my company?” “What are you as a VC bringing to the table?” “What kind of acceleration will you bring to my startup?”
The answer is “Millions of dollars in cash you just asked for” and in our minds we say “you stuck up asshole, you came to us.” At that point we often look for different investments. And we never go looking for companies to invest in. They always come to us.
"And we never go looking for companies to invest in. They always come to us."
Unless you're one of the ~10 most well-known VCs in the world (or in your region/niche) it stands to reason that proactive search could yield additional high quality leads. Why forego this?
There's a parallel in recruiting: applicants on your web site might include many, many candidates who don't meet the minimum requirements of the role, such that even the top 10% include some that don't warrant a phone screen. So companies target passive candidates via LinkedIn, to find the gems who aren't currently even considering a new job.
(And it's not just small companies that do this. Even companies with a top-tier employer brand, which receive many thousands of applications, will actively source candidates this way.
Why doesn't the same apply to the VC firms with which you work (wrt potential investments)?
Truth be told to get an actual answer to this you’d have to ask the partners. I do know that there are different funds within the VC and they may go seeking investments. I honestly don’t know.
What I am sure of is that they don’t go looking for investments in the part of the fund I consult for. Those potential investments come to us in huge sets that many analysts have to narrow down into viable investment options.
Could it be better? Maybe. I mean they aren’t the largest VC in the world. Nor are they the smallest. But for a small number of partners they do quite well. I guess they like their methods. They would probably say if you have a different idea and the funds for your VC, by all means go for it.
The point I was trying to make is actually entirely unrelated to the issues you've raised. My goal was not to turn the tables so much as to illustrate that the use of the word "deserve" in this context makes the question inane because it's moralistic.
In any event, the fact that beggars can't be choosers does not obviate the importance or utility of posing some form of the question to the prospective investor.
That makes sense and those are good points. I think it’s about tone all the way around. It’s entirely fine and beneficial to both parties for the startup to ask questions. But there are some distinct differences in how people ask these questions. Some really are stuck up. It’s shocking how deeply people can believe the stories they’ve made themselves about how good they really are when in fact they failing miserably.
Some of the better questions I’ve heard are prefaced with comments like “we’re aware we’re having troubles in this operational area, would you be able to offer guidance and advice to get us out of this sticky situation?” Self awareness seems to be a sign of a great and investable company.
For many of the founders I talk to would say their startup "deserves" more money because of what they have accomplished. I'm simply trying to use the same language founder use with me.
>And we never go looking for companies to invest in.
That’s pretty arrogant. I can tell you from first hand experience that the best VCs are vigilant and don’t just expect people to get referred to them. a16z rates themeselves by the % of their competitor’s deals they had seen. You don’t optimize that number just from waiting for the phone to ring.
All I can say to this is they are rather arrogant. They like the success they have with the methods that they use I guess. Ultimately, I think every VC is arrogant in their own special way!
Of course a worthwhile question. Really, the same question can be asked of any party in any transaction in a company: employees, investors, customers, vendors, and so forth. Virtually anyone exchange or transacting with the business could ask (and be asked) this kind of question.
> We let a lot of good people go and doubled down on generating the advertising dollars we needed to stay alive.
And then
> We even took all of our employees to Hawaii to celebrate
This is an interesting juxtaposition within the same paragraph. I hope I'm not out of line for reading this as, "Let's celebrate our thriftiness that led to people becoming suddenly unemployed by splurging on an extravagant vacation!"
I took it as after laying people off they were able to actually make money and a year later they were making enough to do extravagant events. With the limited context it doesn't sound the best. With different framing it's more reasonable but I probably wouldn't have included it in the article.
I'm not sure I see where this "year later" is derived from in the article.
This is what the relevant section of the article says as I read it now:
After 4 months of failed pitches (in a process we organized poorly) the only option we had left was to cut expenses and break
even (here is how to organize a good process). We let a lot of good people go and doubled down on generating the advertising
dollars we needed to stay alive. Within 2 months we went from burning $250k a month to making $100k a month and we ended the
year at $8m in revenue and $1m in profit (Suhail, co-founder of Mixpanel, describes that tactic in a great tweet). We even
took all of our employees to Hawaii to celebrate
Starting at some point in time, they spent 4 months failing then 2 months in correction, then ended the year profitable and celebrated.
If t0 was in late June, the delta between the 6-month ordeal and the celebration would have been zero. If t0 was in early January, it would've been six months. (Plus/minus a month depending on calendar/fiscal year.)
given the phrasing I’m working on the assumption that they didn’t end up >$250k net income/profit (not clear what the $100k number refers to) soon after getting in the black. Given that they were in the red before, they still had some losses to work through before they could start building towards that $1M profit. The one year timeline sounds about right
The article stated a 2 month difference toward profitability, and provided no other frame of reference for the (immediate? eventual?) Hawaii getaway. They do mention at "the end of the year" but there is no information stated about when this 6 month "get out of the tailspin" process began in the [calendar/fiscal] year, so that's non-helpful.
Without additional context, that's a single digit number of pay cycles between, "Surprise! You're laid off to save the company" to "We can afford a lifestyle of excess".
I mean, I would hope that it didn't go down this way, and the paragraph was just written awkwardly. If the author wants to make that clearer, I'd be happy to listen.
But as that blurb stands now, it reads as a casual dismissal of the "good people" let go at best, and a slap in their face at worst, which isn't a good look.
Putting aside MLM and similar companies that actively prey on employees...
I'm sure it's possible that there are people who have never heard any of the statistics about how many startups fail, who have never worked at a startup, don't know anyone who has, never talked about a coworker who left to work at a startup, and who go through the recruiting process without anyone mentioning it.
It's understood by everyone else, though, so I think that qualifies as "well understood" generally.
It should be understood by the employees. I joined a Big-whatever company because of the stability. If I was going to join a small startup, I'd be aware of the instability.
That doesn't mean it isn't bad to lay people off in a startup; it's horrible. And it means the founders did something wrong (hired too many people, didn't have a good business model, etc).
But it should be understood that the entire company can disappear in 6 months if its a new startup.
> I joined a Big-whatever company because of the stability. If I was going to join a small startup, I'd be aware of the instability.
I concur with your reasoning.
> That doesn't mean it isn't bad to lay people off in a startup; it's horrible. And it means the founders did something wrong (hired too many people, didn't have a good business model, etc).
100%
> But it should be understood that the entire company can disappear in 6 months if its a new startup.
That's fair.
But just because something should be understood, doesn't mean it necessarily is understood by all parties. Assuming "ought implies is" is how a lot of dangerous mistakes happen.
Cynical 4chan users and people without integrity, especially. Only the latter are able to write about success and corporate holidays in the same paragraph they write about how they fired many people only a few months before.
There are warning signs. The clearest one is how many customers they have. For a B2B company, if they have only a few large whales, you should be concerned.
For a B2C company, you can usually find out about the number of customers, growth rate, etc. if I am coming in on a senior level, I ask those questions.
Well not really, in the current technological climate, I really don’t worry about job stability. Jobs are a dime a dozen for developers and I get benefits through my wife.
If you have time, do you think you could edit the article to make the intent of that paragraph a little more clear? Right now it reads a bit tone-deaf, and the timeline is ambiguous.
It is defined in the linked blog post and I believe it's a pretty good definition.
“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
In other words: your growth is so astonishing that it justifies paying >30% IRR to investors rather than growing from internal cash or borrowing what you can from a bank.
Getting investment is a very subjective business. You can play it to your advantage that different VCs have different opinions. But not if you wait for them to deliver definitions to you. The first lesson to learn as founder is that you are not entitled.
(side note: that is the trouble with using the word 'deserve')
>The hardest conversation I have to have with a founder is when they’ve spent their 1-2 million dollar angel round but haven’t found product market fit.
As someone who has bootstrapped a company that found a product market fit and is profitable, I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit.
I constantly have anxiety about all of the facets of running the business. I cringe even thinking about the pressure an entrepreneur must while being in this predicament. I couldn't handle it.
> I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit.
I agree. It feels strange. Whatever people say, it was pretty uncommon for most of the time in human history that some people with a vague idea were given some million dollars to build something. Most people had to argue a lot to get this kind of money.
I think it's because money is cheap. Book money can be easily printed by banks and our currency is worth nothing and investors know that. If the price correction happens, the system could blow off and leave many people in poverty because all their wealth was based on debt. Investors are smart enough that they know that all those dollar bills are worth nothing and that the only currency for startups is attention and massive usage (talking about B2C here).
I don't think it has anything to do with lack of faith in the US Dollar, which seems to be doing just fine.
It very likely has a lot to do with interest rates being very low, and the stock market being very high. Returns on capital in typical investments are very low, and that pushes capital to other investments, including VC. Couple that with a very hot technology sector that's producing incredible amounts of value, and it's very clear why capital is chasing tech startups of all sizes.
> it was pretty uncommon for most of the time in human history that some people with a vague idea were given some million dollars to build something
I feel like that might not be true. Seems like anecdotally there's been a long history of people being funded for speculative adventures, going back centuries. The one that "discovered" the Americas being an archetypal example, but surely there were many more examples of patronage and underwriting of ideas, it's a core part of society.
> Most people had to argue a lot to get this kind of money.
That guy who found America? He lobbied for nearly a decade to get the money. See [1] and [2].
People weren't that rich back then because wealth wasn't that exorbitant in the past. We only got this wealth due to the industrial revolution and the digital revolution. Today even a slightly above-average guy in Europe is richer than most kings in the past.
> I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit.
This equates to about 18 months of operating time in SF. When you talk about it in terms of time instead of dollars, 18 months doesn't seem like long at all. Certainly not enough time to find product market fit in many cases if you start out with only a vague idea.
It's almost entirely down to the pedigree of the people asking for money. And pedigree boils down to education and/or previous wins.
It's been one of the most basic tenants at ycombinator from the early days:
> In fact, we're so sure the founders are more important than the initial idea that we're going to try something new this funding cycle. We're going to let people apply with no idea at all. If you want, you can answer the question on the application form that asks what you're going to do with "We have no idea." If you seem really good we'll accept you anyway.
I worked with a recent (at the time) Stanford grad who had applied and been selected for one of the early ycombinator cohorts. Paul didn't like his group's idea, and told them to walk around the block and come up with something better and then pitch it to him. The pervading philosophy for many investors is that the idea is less important than the team, at least in the initial investment.
This blows my mind. You’re basically betting money on an athlete before knowing what sport they’ll decide to play. It’s as if these people have run out of viable investments and are just guessing.
That said, if anyone with $1M burning a hole in their pocket has no idea what to do with it, just reach out: I accept PayPal and Bitcoin. I offer you the same 0% return!
A lot of churn in the dotcom era (iOS is trying to correct dotcom to ‘sitcom’, how appropriate) involved people quoting that stupid Kevin Costner movie where the guy hearing voices plows under his corn to build a baseball field, and then he goes and harasses Darth Vader to find out why.
“If you build it, they will come” is not exactly the most auspicious start.
This was turned into the Underpants Gnomes by South Park, which seemingly slowed down but did not eliminate the practice. I wonder if Mike Judge is having more luck, but it’s probably too soon still to say.
Is there any way I can convince you to slow down with the aphorisms and broad cross-cutting references? I find myself straining to make sense of your comments, even though I do feel they make some kind of sense.
Obviously you're free to do as you wish. I just wanted to note that it's incredibly frustrating in a way that most comments here aren't, and it seems needlessly so.
EDIT: I'm sorry, I realize this might be considered a personal attack. It's quite possible I'm just really tired. I just find it frustrating that I feel like I can't make sense from stuff that I feel does somehow make sense. It reminds me of the time I tried understanding Deleuze.
In a word: magic thinking has been with us for a long time. It was old when I got into the industry. Various personalities have lampooned this bad behavior, or still are (eg, Mike Judge with “Silicon Valley”) which seems to slow our roll, but not really fix anything.
> Unfortunately, I have to ask them a very unforgiving question: why does your company deserve more money?
This is so stupid--do VCs ever ask this question in the first place? No. By the time your board is asking this question, they've already decided you don't deserve more money. Any random justifications they make up about "deserving" is a complete distraction from the fact that these choices never have a logical basis.
Things like these are self evident only in retrospect.