
Surviving the Series A Crunch - sethbannon
http://blog.42floors.com/surviving-series-crunch/
======
AndrewKemendo
_any entrepreneur able to build a prototype can get an idea funded_

Except this is not true and I don't know where people are getting this idea.
Maybe it's just SV or YC that has money but Angels and VC's in D.C. and NY at
least are looking for solid traction before even bringing up the word term
sheet.

At a recent Cooley pitch event a friend of mine who is already revenue
positive came up from Ohio to pitch his startup. He told me not a single
investor had followed up with him about a term sheet despite multiple
discussions after the pitch. Another friend in CO is in the same boat, being
revenue positive but with no interest from angels or anyone else.

I think stating that anyone can get money is a dangerous thing to say because
it gives the wrong impression about availability of dollars. That post about
things being frothy is so insanely different than the reality here on the east
coast that it's staggering and totally unbelievable (not saying that I don't
believe it by the way).

~~~
davidw
> Except this is not true and I don't know where people are getting this idea.

It's a bit of casual hyperbole that can feel kind of bad to read if someone is
_not_ part of the crowd that can get money.

That said, there is a lot of seed funding out there these days.

~~~
rexreed
Where? More specifically, where is it easily available in the quantities and
for the types of pre-revenue startups discussed by the OP? In my experience,
most startups have a tough time raising that first seed round, let alone
doubling down on that round.

~~~
davidw
There are tons of YC clone type things popping up all over the place. Maybe
you guys don't remember the dot com days, but it is _significantly_ easier to
get funded these days, and you can do so much more with less.

That said, of course "anyone can get funded" is not true and probably a bit
hurtful to some who are trying and aren't managing.

------
peterjancelis
If the founder can get the 90K cost constant and keep the rev growing at 9%
per month, there is only a $10K shortage by month 7 (and cash runs out in
month 6 only). This can easily be solved with some annual prepayments.

Source:
[https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqK...](https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqKvaJiF4BgYfO-
rvh0btojRkg/edit?usp=sharing)

~~~
nlh
Funny - you did exactly the same thing I did while reading the article - our
spreadsheets are basically identical :)

So here's my thoughts -- I think some outside "real world" perspective is
needed here. While 9% M-M growth may seem OK in the VC-fueled hockeystick
growth world, in the real world of profitable businesses it's spectacular.
Some companies spend years running losses trying to get to profitability, and
if that 9% is real (and sustainable), then I can think of only two things
going on here: A) Either the whole world has gone crazy or B) More likely -
there's missing information here.

As peter points out -- at a 9% growth rate the business turns profitable after
6 months and on the 13th month is net profitable. Any rational investor would
be frothing to get involved in that sort of business - it becomes a money-
printing machine in short order.

So I'm assuming that there's missing information here -- either the 9% monthly
growth isn't sustainable (then it's not a true 9% M-M growth rate) or the
costs must rise substantially to sustain it. And if that's the case, then you
can start to see the real reason VCs might be hesitating.

So I guess my point is: Don't obsess over the raw growth number as the sole
problem. That sets the wrong target. In the end, profits drive businesses, and
massively profitable businesses can go public (and get great valuations), and
public companies make VCs happy.

~~~
lpolovets
> A 9% growth rate the business turns profitable after 6 months and on the
> 13th month is net profitable. Any rational investor would be frothing to get
> involved in that sort of business - it becomes a money-printing machine in
> short order.

That's not 100% true.

1) Growth rates like this are not sustainable long-term, and a 9% growth rate
doesn't look great when lots of other companies are at 15-25% monthly growth
with similar revenues.

2) The revenues multiples for Series A startup are very high. Would I invest
in a $600k revenue/year startup growing 9% monthly at a $4m valuation? Sure,
that sounds good. But a Series A would be more like investing $5m at a $25m
valuation, which is way higher than the startup is worth based on pure
fundamentals. The reason to invest at a $25m valuation is because you think
there's a 10% shot the startup will be worth $500m, not because you think it's
a 100% shot at $25m. High growth rates are one of the best indicators that a
startup has a shot at $500m.

(My fund does seed/Series A investments.)

~~~
nlh
Sorry, bad choice of words on my part -- I shouldn't have said "any rational
investor". What I meant is "any profit-focused, long-term investor" (as
opposed to a moonshot-focused VC investor). I don't mean any of those things
as negatives, just descriptives.

Your first point is right (and I addressed 1 later in my comment) -- if 9%
isn't sustainable long-term, then the whole picture is quite different and a
different metric should be used. And your second point, put differently, is
"asking prices are too high", which is a fair point.

So I'd recast the original problem in a different light: "Company X is growing
at 9% now, expectations are that it's unsustainable and won't be profitable
for a while, and at the same time, they're asking a very high price relative
to that growth & profitability rate", which explains why they're having
trouble a bit more clearly.

My fundamental point is that the meme "anything less than 5% growth per week
is bad" in a vacuum feels crazy by itself. With more context, it makes more
sense.

~~~
lpolovets
I fully agree with that (and didn't read it negatively at all). The 5%
meme/week is definitely surreal -- that's >10x/year growth! I'm always really
impressed when I see companies with that kind of growth, especially after
they've reached non-trivial revenues (e.g. $50k-$100k/mo)

~~~
DenisM
My latest startup's user engagement is growing at >8x YoY, and while the
revenue history is not deep enough for a good YoY, it's... let's say, within
your scope of interest. Want to talk?

~~~
lpolovets
I'd love to chat. I'm leo at susaventures.com

------
debacle
So the plan of action when you can't raise more money is "Try pretty much
everything and hope it works?"

I realize you have to provide advice that might apply to all startups, but in
this specific case cutting the burn to 60k (maybe losing a bit of equity to
keep employees happy) and trying really hard to hit 60k in revenue and bam,
you're suddenly at breakeven and your runway can start to grow, you can
breathe, etc.

Raising money is always good, but it's hard, and if you've received a lot of
nos, it's not going to get easier. Planning for the acquihire is pretty much
admitting defeat.

------
asanwal
Great advice and solid post.

Some data on how long companies typically wait between Seed and Series A
rounds. The median is 349 days so raising for 18 months is smart.

[https://www.cbinsights.com/blog/days-between-funding-
rounds/](https://www.cbinsights.com/blog/days-between-funding-rounds/)

A couple of other notes:

\- Might want to look at revenue-based financing. More of a debt instrument
but if you can't raise or are getting bent over by equity investors, it is an
option.

\- I wish the funding is required to grow quick meme would die. Our company is
revenue funded and growing at a very good clip. If you can make your customers
your de facto "investors", life can be very good.

~~~
DevX101
What are some financial institutions willing to work with startups via revenue
financing?

Mind sharing some stats on the typical repayment rates & approval
requirements? This sounds like a great way to finance B2B/enterprise type
startups with revenue coming in the door from day 1.

Not giving up any equity doesn't hurt either.

~~~
asanwal
There are a bunch. I know of a couple but don't know how good/bad they are so
don't want to "recommend" anyone. But quick google search of revenue-based
funding SaaS should turn them up.

I've heard they generally work like this:

\- Will lend you money equivalent to 1/4 to 1/2 your monthly or annual
revenue/billings

\- Take a % of revenue every month as repayment. Your repayment goes up or
down with revenue which is a good feature.

\- Take some warrant coverage as well (1/3 to 1/5 of the loan value)

Some will want to be hooked into your payment solution to take money right as
it comes in but as we've not done it ourselves (have only looked at
superficially), I'm not sure if that's all that common.

For B2B SaaS startups who can customer-fund to traction, this is the way of
the future IMO. Unfortunately, the revenue-based financing guys aren't doing a
great job marketing themselves primarily cuz their funds are quite small so
far.

Hope that helps.

~~~
NickSharp
That sounds like Paypal Working Capital, which they have been "suggesting" to
me rather aggressively.

It makes a lot of sense. If you use Paypal for your business they have a good
sense of your revenue, and they can be sure they're first in line for
repayment.

[https://www.paypal.com/webapps/workingcapital/](https://www.paypal.com/webapps/workingcapital/)

------
beatpanda
I remember when I first started reading HN, when having a business model on
the table from day one, bootstrapping, and literally running your company out
of a garage was all the rage. Easy money really ruined all that. I hope we end
up back there some day.

~~~
sergiosgc
That option is still there, but does not make headlines. Lots of companies,
namely those not in the Valley, go for the organic growth route. It is very
fulfilling, but won't make you the next Bezos or Shuttleworth. The VC route is
a high risk high reward game. The organic route lowers risk and reward.

What I mean is that absence from the media is not non-existence.

~~~
slowing13
"The organic route lowers risk and reward."

Yes on the risk, fully disagree on the reward part. And i am not talking about
the reward of being able to focus on the business rather than raising money.

I am talking about cold hard cash. In a successful small business, many owners
will make mid 6 figures, year in, year out, and still many will make 7
figures. After a few year, it beats a lot of exits. And there are many many
more of those than the few IPO / big acquisition we can read about. Even with
IPOs, the remaining share of the founder sometimes makes me sorry for them.

VCs don't publicize that though, understandably.

~~~
sergiosgc
A six or even seven figure salary won't make you a billionaire. The success
cases of the highly leveraged approach _are_ billionaires. The highest return
with high leverage is higher.

I do agree with you on the rest of the comment. The mean return for a highly
leveraged approach is probably lower than the mean return for organic growth
startups.

------
wensing
This resonates. We raised just under $2m through a seed round and then were
fortunate enough to be able to raise a bridge that deferred any crunch. But
then we did 2 other things: we focused our sales, marketing, and product
design on the greatest pain within a single industry (instead of 3) and we
reduced expenses. Now growth is great and we are very close to being able to
say that raising money is completely optional indefinitely, and no matter what
investors do or don't decide, we will be fine. A wonderful feeling but the
challenge to get to that next level has also been nearly inexplicable. Great
post-mortem.

------
3pt14159
Haha, I know so many people in this boat. I even know of one startup that was
walking the line between B2B and B2C, and just temporarily made a slight turn
to B2C to see some easy (non-paying) user growth just to raise the A, only to
go back to their B2B route that they are confident will succeed in the long
run. I'm sure this story is not going to be popular amongst the investor
crowd, but it's much harder to raise an A once there is actual margins
involved.

------
nodesocket
While $50,000 a month is nice revenue, a growth rate of 9% month over month
does seem quite low. Was the majority of the $50,000 front-loaded? I'd really
be curious to hear what market they are in? Seems hard to believe given their
pedigree (YC), monthly revenue 50K, and lean team (8 people), they can't find
a VC to bite.

If they are charging monthly, what about blasting all paying customers with an
upgrade to yearly promotion (20% off). That would bring in a lump sum of cash
upfront which should provide additional runway.

~~~
kenferry
I was surprised that 9% month over month growth rate is a bad number, given
numbers in
[http://www.paulgraham.com/growth.html](http://www.paulgraham.com/growth.html).

I suppose the difference is "during YC" vs "leading up to a Series A"? What
are good numbers?

~~~
dchuk
Well pg is talking about weekly growth, not monthly:

"A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're
doing exceptionally well. If you can only manage 1%, it's a sign you haven't
yet figured out what you're doing."

~~~
kenferry
Oop, yep, thanks!

------
cykho
This is a real wakeup call - raise bigger seed rounds to last until you're a
breakout success.

------
dchuk
If anyone from 42Floors is reading this: your link to your own site with the
anchor text "office space" is a relative link and therefore broken:

<a href="42floors.com">office space</a>

You need to make that [http://42floors.com](http://42floors.com) or it's not
going to work for users (and search engines ;) )

~~~
jaf12duke
Thanks! Fixing it now.

~~~
nodesocket
Also, all your images are loaded over http, when you are serving from https,
resulting in:

    
    
        Mixed Content: The page at 'https://42floors.com/' was loaded over HTTPS, but requested an insecure image 'http://images.42floors.com/8ede644d63d36e5e26d7a394ee5061d07e87389d.jpg?s=75x48%23'. This content should also be served over HTTPS.

------
yesimahuman
Really great post, and not just for founders but for early stage investors as
well. This is definitely why we are seeing so many more bridge rounds, but I'm
not sure if those are really as bad as they've been made out to be, or just a
new reality (for example, I know startups that have done a "damaging" bridge
round only to then raise a huge A).

Either way, even more reason for founders to bootstrap for longer if they
haven't hit that huge growth curve yet, or just bootstrap forever!

------
nandemo
> (...) _preparing severance packages_ (...)

Do US startups typically pay severance packages?

~~~
been_fired
I've never been in a position to receive one from a startup, but I have
received one from a well established company before.

Most of the time severance is used as a vehicle to establish good relations
with the person being fired (so they don't bad mouth the company), and as a
way to get former employees to sign a document stating they wont sue for any
reason.

------
michaelochurch
The real problem is that this game is controlled by ADD children who can't
differentiate between 9% monthly growth in something of quality and 15-30%
"viral" monthly growth in Snapchat-for-cats (the original Snapchat was
idiotic, and give cats some credit because they have way better taste than
sexting tweens) bullshit.

~~~
jacques_chester
I treasure the occasions on which you and I agree.

------
notastartup
i dont get why you have 8 engineers when you can't afford it. does raising
money give you a false sense of optimism?

I've seen a startup where they just broke even year after year for the past 6
years. they just increase the revenue for the sake of higher valuation but
what ended up happening was, it created a toxic working environment, highest
attrition rate (because they simply fire people and replace it), eventually a
year came around when they started bleeding. eventually the founding members
were fired. now the company is getting outdone by the competition, A list
clients have jumped ship, and business is dwindling.

