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December 2014  
  
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.   
  
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.   
  
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.  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.   
  
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 on this doomed
company.  
  
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.  
  
Another way to make money differently is to sell different things, and in
particular to do more consultingish work. I say consultingish because there is
a long slippery slope from making products to pure consulting, and you don't
have to go far down it before you start to offer something really attractive
to customers. Although your product may not be very appealing yet, if you're a
startup your programmers will often be way better than the ones your customers
have. Or you may have expertise in some new field they don't understand. So if
you change your sales conversations just a little from "do you want to buy our
product?" to "what do you need that you'd pay a lot for?" you may find it's
suddenly a lot easier to extract money from customers.  
  
Be ruthlessly mercenary when you start doing this, though. You're trying to
save your company from death here, so make customers pay a lot, quickly. And
to the extent you can, try to avoid the worst pitfalls of consulting. The
ideal thing might be if you built a precisely defined derivative version of
your product for the customer, and it was otherwise a straight product sale.
You keep the IP and no billing by the hour.  
  
In the best case, this consultingish work may not be just something you do to
survive, but may turn out to be the thing-that-doesn't-scale that defines your
company. Don't expect it to be, but as you dive into individual users' needs,
keep your eyes open for narrow openings that have wide vistas beyond.  
  
There is usually so much demand for custom work that unless you're really
incompetent there has to be some point down the slope of consulting at which
you can survive. But I didn't use the term slippery slope by accident;
customers' insatiable demand for custom work will always be pushing you toward
the bottom. So while you'll probably survive, the problem now becomes to
survive with the least damage and distraction.  
  
The good news is, plenty of successful startups have passed through near-death
experiences and gone on to flourish. You just have to realize in time that
you're near death. And if you're in the fatal pinch, you are.  
  
  
  
  
  
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