The Fatal Pinch

Many startups go through a point a few months before they die where although they have a significant amount of money in the bank, they're also losing a lot each month, and revenue growth is either nonexistent or mediocre. The company has, say, 6 months of runway. Or to put it more brutally, 6 months before they're out of business. They expect to avoid that by raising more from investors. \[[1](#f1n)\]

That last sentence is the fatal one.

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 at this point that is the default outcome.

I'm going to call the situation I described in the first paragraph "the fatal pinch." I try to resist coining phrases, but making up a name for this situation may snap founders into realizing when they're in it.

One of the things that makes the fatal pinch so dangerous is that it's self-reinforcing. Founders overestimate their chances of raising more money, and so are slack about reaching profitability, which further decreases their chances of raising money.

Now that you know about the fatal pinch, how do you avoid it? Y Combinator tells founders who raise money to act as if it's the last they'll ever get. Because the self-reinforcing nature of this situation works the other way too: the less you need further investment, the easier it is to get.

What do you do if you're already in the fatal pinch? The first step is to re-evaluate the probability of raising more money. I will now, by an amazing feat of clairvoyance, do this for you: the probability is zero. \[[2](#f2n)\]

Three options remain: you can shut down the company, you can increase how much you make, and you can decrease how much you spend.

You should shut down the company if you're certain it will fail no matter what you do. Then at least you can give back the money you have left, and save yourself however many months you would have spent riding it down.

Companies rarely _have_ to fail though. What I'm really doing here is giving you the option of admitting you've already given up.

If you don't want to shut down the company, that leaves increasing revenues and decreasing expenses. In most startups, expenses = people, and decreasing expenses = firing people. \[[3](#f3n)\] Deciding to fire people is usually hard, but there's one case in which it shouldn't be: when there are people you already know you should fire but you're in denial about it. If so, now's the time.

If that makes you profitable, or will enable you to make it to profitability on the money you have left, you've avoided the immediate danger.

Otherwise you have three options: you either have to fire good people, get some or all of the employees to take less salary for a while, or increase revenues.

Getting people to take less salary is a weak solution that will only work when the problem isn't too bad. If your current trajectory won't quite get you to profitability but you can get over the threshold by cutting salaries a little, you might be able to make the case to everyone for doing it. Otherwise you're probably just postponing the problem, and that will be obvious to the people whose salaries you're proposing to cut. \[[4](#f4n)\]

Which leaves two options, firing good people and making more money. While trying to balance them, keep in mind the eventual goal: to be a successful product company in the sense of having a single thing lots of people use.

You should lean more toward firing people if the source of your trouble is overhiring. If you went out and hired 15 people before you even knew what you were building, you've created a broken company. You need to figure out what you're building, and it will probably be easier to do that with a handful of people than 15. Plus those 15 people might not even be the ones you need for whatever you end up building. So the solution may be to shrink and then figure out what direction to grow in. After all, you're not doing those 15 people any favors if you fly the company into ground with them aboard. They'll all lose their jobs eventually, along with all the time they expended