Start-ups can be a vice grip of stress. At first you don’t have money, and so when you finally do, it’s feels like a victory. You are funded at last. So much effort goes into fundraising that it feels psychologically like you’ve made it.
You haven’t.
Within six months of raising venture capital, something goes wrong. It always does. You quickly realize you’ve added a huge new source of stress: getting a return for major shareholders who define winning as building a huge business. That goes on top of the formidable baseline stress of building a great product, delighting your customers, and providing stable and meaningful jobs to your team.
The new capital is different than the angels who invested previously. They came in for the love of the game and owned a tiny stake. The venture capital is a different ballgame. These folks are fiduciaries whose own jobs are on the line, and they probably own at least 10% of your business, and on frequently more.
You don’t want to let them down. So why did you feel a sense of accomplishment when the capital came in, when you really were just getting started?
It’s a paradox that because the process of raising venture capital is hard, it feels like an ending when it’s really a new beginning. The goal was never the fundraising, it was the innovation that fundraising enables.
So now what? The core business isn’t producing. The thesis of the investment isn’t panning out. You’ve got capital. But you’re not deploying that capital into growing your business effectively.
The narrative is gonna be you raised money against something that showed promise and could have been great, you took dilution and raised the stakes with pricey valuation, and now you’ve screwed the whole thing up because you couldn’t translate that capital into growth.
The pressure to grow increases as you miss numbers. You know it, your board knows it, your team knows it: growth is the lifeblood of a start-up. Your current investors can’t put more money in if there aren’t new investors who want in. Fresh blood is required. And the romance phase with your VCs moves into the marriage phase. Will it end in divorce?
You thought not having money was more stressful than having it. Now you’ve got it, and you realize you are even more stressed than you were before when it was just you in the garage.
What do you do when you have cash but no productive use of it? Drugs.
Crack
Advertising, or paid marketing, is one way out. You spend money, you make money. You spend more money, you make more money. The only problem is the money you are “making” is showing up on the top-line and not the bottom-line.
Once the dust settles, as you look more closely, you will find you are acquiring worse and worse cohorts of customers. In many cases, to make the advertising really sing, you are running promotions and deals that erode your margin and your brand.
Now everyone is hooked on the top-line growth. The revenue expansion is driving a (private market) valuation that you need to keep “up and to the right” to raise capital. You must avoid the dreaded down round at all costs.
With supreme intellectual dishonesty, everyone marches on, temporarily intoxicated by the envisioned share price appreciation that comes from growing your top-line. Founders are usually the most guilty of this delusion. If you don’t have honest investors around you to tell you the truth, god help you.
What does advertising have to do with this? It’s the crack. It becomes more and more addictive as you use it. As one of my lead investors — the Oracle — once told me:
Spending a lot of money on paid marketing is a great way to scale a bad business.
Once you start, it’s like building a time bomb into your P&L which pushes out your break-even. It cannot be shut off without shutting off growth. Your investors may get liquid along the way, but if you really care about this company, you as the entrepreneur are screwed because your company’s never going to win.
How does this happen? Everyone wants to see that the advertising works, so they look for the confirmation bias of good news: more advertising equals more growth. What they don’t do is the more nuanced (hard) work of looking at how the marginal cohorts are declining in value. What they don’t look at is the detailed impact on the quality of that growth, aka the margins and repeat transactions attached to it.
Why don’t they do this?
Part of it is the systems to look at the data are rarely very good in a start-up. Part of it is you’ll need really talented analysts, a precious resource and often a luxury at the early stage where most people are zapped just keeping the trains running on time. Part of it is even if the systems are pristine and the data is rapidly returned by ready analysts to business (which I’ve not seen three for three at any start-up), it can take twelve to eighteen to twenty-four months to have confidence in where the cohorts are going.
In startup lifetime, that’s an eternity, and you’ve already burned through cash for a business which might be cash flow negative even pre-marketing dollars. You’re ready to raise your next round, because you need to, and you don’t even know if your growth is good.
Something stinks, but no one has an incentive to look under the hood because the bad news could preclude the next round.
A paradox is that it can be worse if you actually get the money raised without addressing the problem. You may have your conviction furthered in using crack to scale by the new capital coming in. Worse still is when founders get liquidity as part of these “hit the crack-pipe” rounds. Founders take huge sums of money off the table before employees or other investors have made a penny. The stomach turning part is that non-founder shareholders may never become liquid due to this top-line expansion/death spiral valuation fallacy.
So what to do now? Your whole company is hooked on crack. You are, your board is, even your internal team culture and organizational structure is architected to it. The very people you have in chairs is structured to deliver that shot in the arm.
What are you going to do? I don’t know exactly. What I do know it is likely to involve emotional turmoil and that ultimately nobody cares.
Speaking of which, can we get Ben Horowitz posting up in here?
What I can do is tell you what I did. When I do, the word did will become a link.
What I can do is tell you is that if you’re not going to pivot, you’ll need lead bullets and little bets.
Ecstasy
Founders have a gift for imagining a future that might be and then endeavoring to make it so.
By definition if you make it past the first few years, you have a track record of envisioning the future, attracting resources to that envisioned future, and in fact creating it.
This track record of success in achieving something likely thought contrarian when you began — otherwise everyone would be doing it — is both the reason for the company’s being and a threat to its existence.
The former we all get. Why the latter?
Mostly because the act of scaling a company once created is very different from the act of creation itself.
Scaling a company requires focus and execution. Starting a company requires imagination and being driven to distraction by life so much so that your imagination becomes your reality.
When the time comes for imagination vs. execution to do battle within your own company, it won’t be clear who is right. As the founder you will have history on your side (we made it here by following me, didn’t we), persuasive ability on your side (you wouldn’t be in the chair if you couldn’t attract talent and capital), and one of the most powerful home court advantages in humanity going for you (everyone is there because of you).
This doesn’t mean you will be right about what to do, which will be tricky for you, internally. Deep down you know you don’t know the future, and so you may end embodying a quote from Reinhold Niebuhr:
Frantic orthodoxy is most often rooted in doubt.
According to a little Harvard Business Review ditty called The Founder’s Dilemma, 30% of founders are gone in three years, 50% in five years, and 90% in ten years. I believe the fundamental reason is because creating something and scaling something are different jobs.
Yet the paradox is that the biggest companies are created by founders who can grow into becoming CEOs. I don’t have much to add on why this is, as Andreessen Horowitz pretty much wrote the book on it.
What I can say is that start-ups which become big companies are a survivorship bias of rocketships. Rocketships are start-ups which grow so fast that the founder has the luxury of learning on the job because they’re viewed as geniuses, or are indispensable in the early innings. That genius attracts a lot of capital, and capital plus indispensability plus strong growth equals plenty of founder time to evolve from founder to CEO, and to over time hire a leadership team that can cover for their weaknesses. As time heals all wounds in life, growth solves all problems in start-ups.
Perhaps I spare too much credit though for the rocketship founders, which leads me to this: most founding CEO are better at focus and saying no than I have been over the past six years. Particularly under duress, I find myself coming up with new ideas and getting excited about shiny new objects. The really good founding CEOs I’ve seen are much, much better at saying no.
Hope is not a strategy.
Prior to a lobotomy I just underwent which removed shiny new object syndrome (SNOS) from my brain, I was both an asset and a threat to my own company.
The company is trying to do one thing, and I would come up with another. I can’t tell you how dangerous this is. If the founder doesn’t know what the company is doing, the company won’t either.
In some cases the shiny new object you come up with saves the company. In other cases it sinks it. If it’s the former, they will call it a pivot and hail you as brilliant. If it’s ends up being a distraction or taking the company off course, they will call you delusional and un-focussed.
So which will it be? The evolution of the company that creates an awesome core business? Or a hope-fueled delusional fantasy of what the future might bring that creates the accurate narrative that the founder screwed the whole thing up?
I’ve attempted both. One thing has worked so well it might change retail forever. The other thing went so poorly I literally can’t understand the self that thought it possible.
When something isn’t working, there are two strategies. One is do more of what isn’t working. That’s crack. The other is do something totally different. That’s ecstasy.
If you have to make a radical pivot, do it. It’s the equivalent of leaving South America on a man-made raft to sail to Africa. You might make it, you probably won’t, but if it’s more hopeful than staying the course, then go for it.
In all other cases, there is a third path which I have come to believe is better: let’s call it LB squared, which stands for lead bullets and little bets.
Little Bets + Lead Bullets = LB Squared
There are no silver bullets for this, only lead bullets.
First, you just have to do the hard work of fixing what’s broken about what you began in the first place. A lead bullet is this: just fix it. Do whatever you have to do, but fix it.The godfather lays it all out here.
Once you’re on the lead bullets track to fix the core, it’s time to make some boundarized little bets to expand the horizon for what the company might become, and this is critical — without de-railing the core endeavor which is in the lead bullet itself.
In the words of the author of the man who wrote the book on it, Peter Sims:
We all want to make big bets. That’s a Silicon Valley mantra. Be bold. Go big. But I think ingenious ideas are over-rated and that people routinely bet big on ideas that aren’t solving the right problems.
A little bet is this: you take your pivot idea or an aspect of it, and treat it not as a game change but as an experiment. You might even be able to run a couple little bets in a year while you focus on fixing the core, the lead bullet. Remember: don’t make any little bets which are too big to fail.
If they’re too big to fail, you’re actually attempting a pivot.
It’s critical that the company understands whether the experiment is a pivot or a little bet. They need to know where the lion share of the company’s energy is going. They need to know if what they’re doing is fixing the existing business or moving into a new business.
Sound like fun? This job largely isn’t. It’s one of the great myths of starting a company that it’s fun. It’s like being with an infant. It’s really hard work, it’s often miserable, it’s frequently stressful, it’s incredibly meaningful, and it’s sometimes fun.
Start-ups are my favorite thing in the world because they are the direct collision of fantasy and reality.
Charisma will get you capital. It won’t get you a business. Imagination will attract people. But it won’t give your employees the lasting sense of purpose that winning will.
Getting to a real business from something that is a twinkle in your eye is a long journey. If you really want to build a P&L vs. just sell your top-line user or revenue growth story to an acquirer, be prepared to buckle in for ten years at least.
When it gets hard, and it will, avoid drugs. They’re temporary relief but as they do in real life for addicts — they only make the recovery harder, the lead heavier, the stakes of the little bets higher.
The stakes are high enough already.
The magic of a founder in times of duress is that you have the imagination and the moral authority to lead people through the scary parts of the journey. The scary part is that the very personality traits that enabled you to start the company could ruin the company if you can’t rein yourself in and become a CEO.
