
Dear Startups:  Here’s How to Stay Alive - whbk
http://heidiroizen.tumblr.com/post/139377970205/dear-startups-heres-how-to-stay-alive
======
dsugarman
> _If you are in Silicon Valley and your customers are mostly well-paid
> consumers with no free time, or other venture-backed startups, well, I’d be
> worried._

That's the most beautifully I've heard this thought articulated. I constantly
hear people in SV talk publically talk about how they're living years in the
future due to getting services from startups that haven't yet hit other
markets. These people are very wealthy and very short on free time; they
incorrectly assume the rest of the world is as well. The reason Uber became so
successful was because it became cheaper than a cab in most major markets with
world class service. You have to really dig deep to justify most other on
demand startups having the ability to jump the shark and it's because they
don't have a plebeian offering.

~~~
lowglow
I've called these the 10% startups. They typically only serve people in the
top ~10% of earners in the US.

~~~
AndrewKemendo
So basically any startup with an iOS only product (disclaimer our's is iOS
only).

~~~
zepto
Given that iOS has a 40%+ market share in the US, no.

~~~
georgemcbay
The market for smartphones is only about mid-60% of all Americans, though,
from what I've read. So still not 10%, but more like 25%-ish.

~~~
jacalata
Well, the original comment was "10% of earners" and I'd bet that smartphone
penetration is higher among earners (eg 20% of Americans are under 14, 0% of
them are earners and ??~10% of them have a smartphone). So you could perhaps
push it up to more like 1/3 earners use iOS, which is starting to be a healthy
potential market share.

~~~
lmm
> 20% of Americans are under 14, 0% of them are earners and ??~10% of them
> have a smartphone

OT but 10%? I'd've guessed at least twice that.

~~~
jacalata
I just made it up, I don't even know anyone under 14.

------
eldavido
What goes unspoken is how tiny the overall effect of this will be.

Yes, it will bring some concentrated pain to investors, CEOs, and employees of
lots of companies. But how many people will be genuinely, life-alteringly
affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way
of comparison Google has what, 50,000 employees?

I keep having to remind myself that the big companies are the elephants in the
room compensation-, real estate- and traffic-wise. They employ _hundreds of
thousands_ of people and pay _billions of dollars_ annually in wages. As much
as I'd like an affordable place to live, none of this will move the needle
that much for the average Bay Area resident.

~~~
dasil003
Unfortunately I don't have numbers, but "a few thousand" strikes me as low.

~~~
ransom1538
Yahoo had around ~11,700, they did follow through the cuts of %10 last week.
That is 1100 right out the gate. Yahoo is huge as far as local employee count.
Google probably wont bother doing cuts. Facebook wont bother. Apple maybe a
few low level poeple. HP will cut to the bone [1]. There are 800k people
stuffed in sf. For the cuts in SF (not all SV) to matter, I would estimate 20%
job cuts would be required. That is 160k jobs. We wont get to 160k job loses.
Not even close.

[http://www.businessinsider.com/hp-layoffs-hit-on-monday-
more...](http://www.businessinsider.com/hp-layoffs-hit-on-monday-more-to-
come-2015-10)

------
tarr11
The cynical side of me wonders if all this is "helpful advice" from VCs is
just designed to bring valuations down to earth.

~~~
tdaltonc
Is there no objective way to tell if things are really cooling? Or for what
types of startups things cooling?

~~~
nostrademons
There is no "objective way" when it comes markets, there is only what the
market will give you. If the market will give you $450M for 5% of a product
that doesn't work (a la Theranos), then objectively you're worth $9B, at least
until you go bankrupt and then you're worth nothing. If the market is dead but
you somehow manage to IPO anyway, save the company, and sell for $1.5B, you're
worth $1.5B (a la LoudCloud/Opsware). If you want to find out what you're
worth, try to raise money, and whatever you can get is your answer.

This throws a lot of people for a loop who want one source of objective truth
for everything. But markets don't work that way: they're just deals between
individual people, which may or may not become public. If somebody else makes
a deal that you think is absolutely crazy, it is objective truth _for them_
but absolutely irrelevant to you.

Personal finance works the same way. I know a few folks who were momentarily
multi-millionaires during the dot-com boom; then valuations came crashing down
and they were completely broke. We also tend to think of the value of a dollar
(in cash) to be stable, but as anyone who lives in Zimbabwe can tell you,
that's not a given.

~~~
rokhayakebe
So technically you can raise $1M for 0.1% of your startup and give the VC some
crazy 20x liquidation preference. Now the market has you at $1B in valuation.

~~~
nostrademons
Exactly, and several unicorns are doing things exactly like that:

[http://blog.samaltman.com/the-tech-bust-
of-2015](http://blog.samaltman.com/the-tech-bust-of-2015)

I could drop the market cap of Google down to $3.4M right now. All I have to
do is sell one of my shares for $0.01. The thing is, it would pop right back
up again to $483B within a few milliseconds, and I'd just be out $690, so
there's kinda no point to it.

(Pedantic note, since I know there's gonna be someone in the financial
industry that corrects me: no, I couldn't, technically. When I put in a sell
order, it goes into the order book, and buyers are required by law to take the
best offer, which is probably more than mine. I'd have to place my order at a
time when there are no outstanding limit offers. This has actually happened
during flash crashes and technical glitches, but is not a normal occurrence.)

Privately traded companies are similar, but because there's less liquidity,
the price doesn't necessarily correct on any reasonably time scale.

------
mindcrime
On a related note, now's probably a good time to remind people of pg's famous
"How Not To Die" essay, which is at least tangentially related to the topic at
hand.

[http://www.paulgraham.com/die.html](http://www.paulgraham.com/die.html)

~~~
code777777
Thanks, great read! His words from 2007 still ring true today. It was also
nice to see how some of the startups turned out.

------
roymurdock
_You know what kind of companies generally survive? Companies that make more
money than they spend. I know, duh, right? If you make more than you spend,
you get to stay alive for a long time. If you don’t, you have to get money
from someone else to keep going. And, as I just said, that’s going to be way
harder now. I’m embarrassed writing this because it is so flipping simple, yet
it is amazing to me how many entrepreneurs are still talking about their plans
to the next round. What if there is no next round? Don’t you still want to
survive?

Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our
portfolio) where this is simply not possible. But for the vast majority of
startups, this should be possible._

What is the point of calling them start ups anymore. Remove the high risk/high
reward aspect and new companies are simply small businesses that receive small
business loans from banks. A lot of the "wow" factor of the startup ecosystem
was the mind boggling user growth/high valuation/massive losses phenomenon
that a few companies weathered through to IPO and monetization.

I think I saw someone advocating for better terminology on HN recently. I vote
to call any close-to-profitable <2 yr old company a small business. Likewise,
any portfolio that holds mostly safe small business loans and equity should
simply be called a bank.

Leave the unicorn/VC/startup lingo in the past, or use it to describe actual
risk profiles, and things will be a lot less confusing.

~~~
sharkweek
"If you show revenue, people will ask 'HOW MUCH?' and it will never be enough.
The company that was the 100xer, the 1000xer is suddenly the 2x dog. But if
you have NO revenue, you can say you're pre-revenue! You're a potential pure
play... It's not about how much you earn, it's about how much you're worth.
And who is worth the most? Companies that lose money!"

[https://www.youtube.com/watch?v=BzAdXyPYKQo](https://www.youtube.com/watch?v=BzAdXyPYKQo)

~~~
rpgmaker
Huh, Gabe is on that show. How good is that tv show anyways? I've been meaning
to binge watch it but it seems like its raison d'être is to take cheap shots
at SV.

~~~
throwawayank333
It's very, very good. Mike Judge isn't the biggest fan of Silicon Valley, but
he knows it well. (See Office Space for another example of that).

It might seem like cheap shots if you have only seen short clips of it though.

~~~
mjevans
Office Space should be /required viewing/ in high school. That movie taught me
more about what to expect in the typical American office than any other
experience in my life.

~~~
slavik81
There's a brief clip of pornography near the beginning. We watched it on the
bus ride for a high school trip. The teachers quickly turned it off upon
noticing.

------
jorgecurio
> You know what kind of companies generally survive? Companies that make more
> money than they spend. I know, duh, right? If you make more than you spend,
> you get to stay alive for a long time. If you don’t, you have to get money
> from someone else to keep going. And, as I just said, that’s going to be way
> harder now. I’m embarrassed writing this because it is so flipping simple,
> yet it is amazing to me how many entrepreneurs are still talking about their
> plans to the next round. What if there is no next round? Don’t you still
> want to survive?

Sort of reminds me of the conversation with a senior developer I had the first
time I joined a startup and my first company lunch at my first job.

Me: "So, we just spend whatever money the company makes"

him: "Correct"

Me: "what if the company is burning all the money it makes to grow as fast as
possible, and they can't raise money anymore?"

him: "that will never happen"

Me: (concerned) "so the company is constantly breaking even"

him: "sometimes"

ME: (shocked) "so the company loses money some year, yet raises more money
year after year so it can lose more money the following year than the last"

him: (annoyed) "you studied economics haven't you? you dont get it? everyone
knows this is how you do startups what did they teach you in that shithole?"

(everyone else laughs)

end scene.

That was 4 years ago. I checked the glassdoor comments and boy I didn't think
a 2.1 rating was possible on glassdoor because that would pretty much scare
off anyone in the job market....and yup the company is going under _exactly
for the reasons I asked 4 years ago but was ridiculed at my 'ignorance'_

another one bites the dust for vancouver's brain drained tech scene. thank god
I won't have to work here again in the near future.

~~~
BinaryIdiot
That practically triggers PTSD from some of my experiences with similar types
of people.

I know in start-ups making revenue is a bit of a dirty word but that's what
the business is ultimately supposed to do anyway! Why the hell not build to
support the revenue model(s) early so you can turn them on and test them as
soon as possible? better to test your bets early before you're laying off
hundreds of people because your guesses ended up being wrong.

~~~
mindcrime
_I know in start-ups making revenue is a bit of a dirty word but that 's what
the business is ultimately supposed to do anyway!_

I keep a note to myself positioned prominently nearby, titled "The Most
Important Question". I wrote down something for "Question One" when I first
put it up, but shortly after I went back and wrote in "Question Zero".

 _" What is the single most important thing I can be doing right now, to get
us to revenue?"_

(And no, "posting on HN" isn't a very good answer to that question, so shame
on me). Hey, I won't claim to manage to adhere to 100% absolute razor-sharp
focus on that point, but I keep coming back to it. When I find myself starting
to bikeshed or work on some "cool but speculative" idea, I remind myself "work
on what's going to bring dollars in the door first".

------
Ftuuky
What? One of the advice is to get cash flow positive with the money you
already have. Isn't that basic knowledge? You can't spend more than you have
and you only ask for other people's money when you don't need it. Idk, maybe
this is an american thing, with all the capital you have but here (Portugal)
you can't get series A funding without being at least cash flow positive, no
way.

~~~
dhaivatpandya
There's no inherent reason why being cash flow positive is such an important
consideration for a venture capital firm.

A startup that's not cash flow positive right now but could be massively so in
the future (or, atleast, the market expects it to be massively cash flow
positive in the future) is significantly more valuable than a startup that is
cash flow positive right now but with not a ton of room for growth.

In fact, placing the requirement of cash flow positivity right at the
beginning of the startup would probably squash a lot of good (i.e. valuable in
the long-er term) ideas.

~~~
AstralStorm
How do you know that it will ever produce returns?

Valuations are made out of belief (whole cloth).

The requirement is not a must, but you should take into account startup's burn
rate over funding, which should eventually turn into burn rate over revenue.
(without taking extra funding into account)

So, a startup that would have a huge burn rate should be much less valuable,
as you're liable to lose money both short and long term. Same as with the
bets, taking large bets with long timeframes is more liable to turn you
bankrupt (both VC and startup owner) than taking small bets often, since you
can back out at any given time. (I'm not talking about motivation, that's a
separate thing.)

However, markets are not rational, so startups with high burn rate are
considered very valuable for some reason.

------
arielm
I think the startup world has become somewhat of a fork of how real companies
should be built. Over the last few years companies have been investing into
"scaling" and getting traction with no real revenue to substantiate any of the
growth. That to me is backwards, and why those startups are fearing for their
lives now.

Companies should be built with revenue (and profit) in mind, and in most cases
those are the ones that thrive and succeed.

~~~
bkjelden
Scaling without revenue makes sense if you're in an industry with strong
network externalities or large economies of scale. In those cases, expensive
customer acquisition is okay because customers have a very high lifetime
value.

During the "unicorn boom", I think we all had this belief that network
externalities were very common in tech - a belief driven by the rise of
facebook, google, and others. But now we're realizing that maybe strong
network externalities are just as rare in tech as they are in other industries
- and a business without network effects that's losing money for growth is
just a business that loses a lot of money.

This NYT article from last week seemed to do a good job summing up the issue:
[http://www.nytimes.com/2016/02/13/business/dealbook/the-
rise...](http://www.nytimes.com/2016/02/13/business/dealbook/the-rise-and-
fall-of-the-unicorn.html)

~~~
sbov
How can you calculate lifetime value without revenue?

~~~
rhino369
Estimated revenue for the future. It's really tough, but even using revenue
for a start up is very tough. Your growth rate is essentially estimating
future revenue.

------
matchagaucho
DFJ has had some great exits over the years. But looking at their current
active portfolio, they're a little exposed.... and certainly not investing in
any early rounds.

It's not surprising to hear they plan to slow down investing. But that's not
necessarily a reflection of the overall market.

[http://dfjgrowth.com/portfolio](http://dfjgrowth.com/portfolio)

~~~
tim333
Yeah I was wondering if overall funding has dropped that much.

------
carsongross
_" Annual income twenty pounds, annual expenditure nineteen pounds nineteen
and six, result: happiness._

 _Annual income twenty pounds, annual expenditure twenty pounds nought and
six, result: misery. "_

 _\--Wilkins Micawber_

------
mmaunder
So the above is obviously written through a VC lens. Through an entrepreneur's
lens - who also survived the dot-com bust (at etoys.com) and has since run
several failed and now successful businesses - I'd add the following:

The most valuable advice in this post reminds me of Marc A's awesome blog
entry. Quote:

"Companies that have a retention problem usually have a winning problem. Or
rather, a "not winning" problem."

[http://pmarchive.com/guide_to_big_companies_part2.html](http://pmarchive.com/guide_to_big_companies_part2.html)

In my opinion winning is, ultimately, measured by how much cash you can
generate. We stopped thinking about an exit a long time ago while in the
deepest darkest part of the valley of the shadow of startup death. We were
forced to do it because we ran out of money and no one cared about us. Then we
started focusing completely on our customers and our income statement. As soon
as we did that, amazing things started happening.

Cash, in this case and in this climate, is king. Or net income to be specific.
If you're able to generate large amounts of cash and keep a lot of it, not a
heck of a lot else matters. From my perspective the only problems that really
remain is giving your team a great quality of life and serving your customers.

Cash takes away issues like the board bugging you, investors breathing down
your neck or (worst case) wanting to play CEO, hiring problems, retention
problems, funding, what business are we in problems, product problems (you're
obviously killing it, so do more of that!), exec hires, issues with rebellious
execs (you're killing it, so you're implicitly right) etc.

When you "go for growth" (numbers growth, not revenue) you give up all of the
above and put yourself as a CEO or exec in a precarious position. Your
arguments are no longer that defendable because growth means jack shit unless
it generates cash or will very clearly ultimately generate cash.

Think about the CEO of Giphy who just raised something like $50M at something
like a $300M valuation. It's like my wife and co-founder says: Doing that you
turn a cash problem into a much bigger cash problem. I'd add that you also now
have less equity and less influence. For the investors it's awesome - the biz
will likely bulk up on talent and worst case will exit as a talent acquisition
at $2M per engineer and the investors (who get paid first) will recover
perhaps everything that way with little left over.

If I was early stage in this environment I'd do the following:

Stop dreaming about a Deus ex Machina that will reach down and save your sorry
ass. Stop fantasizing about acquisitions. If you don't you're going to
inadvertently turn acquirers into your target market instead of your real
customers. And humans aren't good at focusing on two goals at once.

Then do absolutely everything you can to generate sustainable cash. Usually
this means (if you're early stage) discovering who your customers are and what
business you're in or (if you're later stage) serving the heck out of your
customers and making sure that what you provide is worth more than each dollar
they spend to acquire it. Then do more of that. If you're successful doing
this, rather than raising money, you'll notice that the really big scary
problems simply go away.

~~~
rsp1984
Good points here but lots of questions remain:

What happens when you have competition with 10x or 50x the VC funding?

What happens to long-term product development when all you do is short term /
small-scale improvements in order to 'better serve' your customers?

What happens to your core IP advantage that may be several years now but will
have disappeared after doing long stretches of "feature" developments to chase
after customers?

~~~
mmaunder

      What happens when you have competition with 
      10x or 50x the VC funding?
    

Money doesn't solve all problems. I've been in a startup that raised $250M and
one that raised $55M where all innovation had stalled. Don't assume they're
kicking ass because they're rich. There are plenty of professional money
burners out there. But if you're faced with a competitor that has their act
together (I am and they've raised 360 times what I have) you need to
differentiate and move quickly. You'd be surprised the constraints that some
startups operate under e.g. boards who want them to be something that you're
not even if what you're doing is clearly more lucrative. Or legacy (even in
startups) customers they brought on free where it would be akward or
embarrasing to explain to them why they're now doing what you're doing in the
way you're doing it.

    
    
      What happens to long-term product development when all 
      you do is short term / small-scale improvements in order to
      'better serve' your customers?
    

Don't do that. Always play the long game.

    
    
      What happens to your core IP advantage that may be several 
      years now but will have disappeared after doing long 
      stretches of "feature" developments to chase after customers?
    

I have no idea what you're talking about. Sounds like you've misinterpreted
'serving customers' as some kind of short sighted feature focused strategy?

~~~
rsp1984
Well often times as a tech entrepreneur you have the choice between

a) working on something that generates revenue in the short term (by adding
features, improving the interface, improving your market reach or even doing
some service work) and

b) something of more impact that generates revenue in the long-term (like
investing in R&D, creating entire new products, etc..).

Note that b) most often does not include a), i.e. choosing b) explicitly means
that you're _foregoing_ some short term revenue opportunities for possibly
larger revenue down the road.

This is _precisely_ the case for VC (which you've argued against) so I was
interested in how you'd solve this dilemma.

~~~
mmaunder
I think we're in two different realities here. You've misinterpreted what I've
said. I've raised VC. We really seem to be missing each other. I don't agree
with much of the way you see the world.

------
rpgmaker
_When a market like this turns, in order to survive, it is critical to
redefine what success is going to look like for you – and your employees, and
your investors, and your other stakeholders. Holding on to ‘old’ ideas about
IPO dates, large exits and massive new up rounds can ultimately be
demotivating to your team.

.

.

Stop worrying about morale: Yes, you heard me right. I can’t tell you how many
board meetings I’ve been in where the CEO is anguished over the impacts on
morale that cost cutting or layoffs will bring about._

With these prospects, I wonder how will these CEOs keep all those underpaid
and highly skilled young laborers working for him/her now?

------
jmspring
The whole bit about "don't worry about morale"... Some engineers are
replaceable, not all. If things get bad and you lose early/key people, there
is a non-negligible hit. But, I think Ben and Mark at A2Z outlined a strategy
harkening back to the last big hit -- build up the reserves in the bunker. If
you think things will be bumpy for X-months out and you aren't cash flow
positive, get the requisite amount in the bank ASAP.

------
gizi
"The sky is falling ..." No, it isn't. All there is, is that there seems to be
less appetite for endlessly unprofitable ventures that get away with
dismissing the idea that they should be bringing in more cash than they spend
within a reasonable time frame. Furthermore, is the entire VC scene actually
needed? Lots of startups do not make use of their services and are doing
absolutely fine ...

------
selvan
During late nineties, my startup was providing technology
consulting/development service to other dot-com startups. Demand for our
consulting service was so high that our company resort to auction kind of
process to select customers. Then dot-com bust happened, 97% of our customers
had gone out of business, quickly, very quickly. Obviously, our company
fortunes dwindled and never recovered from that.

------
lsiebert
I think people are ignoring the huge cash reserves that Google and Apple,
among others, have. I fully expect more acquisitions if VC funding drops out.

------
zan2434
Based on the rest of the comments here deriding the growth over revenue
strategy I think it's very important to bring up that risk is proportional to
reward, and by definition any business that can be cash flow positive early on
is unlikely to be very risky - and thereby not really what VCs are in this
business for.

------
ar7hur
This is very similar to the infamous "RIP Good Times" presentation Sequoia
shared in 2008

[http://www.slideshare.net/eldon/sequoia-capital-on-
startups-...](http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-
the-economic-downturn-presentation?type=powerpoint)

------
aledalgrande
This is based on the "Techcrunch" concept that being successful and continuing
business for a startup depends heavily on external funds.

That couldn't be farther from the truth, for a real startup with a real
business. Maybe growth will not be as fast without VC funds, but I don't think
real businesses will notice shrinking investments.

Correct me if I'm wrong.

~~~
CamatHN
Usually startups, defined roughly as young companies with extremely high
growth creating something _new_ , to start off with are running at a negative
cash flow to sustain their growth or development and plan to capitalise on the
position later.

These companies would struggle to operate with positive cashflows as their
products/services and growth hasn't matured to allow for it yet. Perhaps they
are building their product and/or are still in the early stages of iterating
on their idea. Just because they have a decent business doesn't mean straight
away they can consolidate right away on their business in terms of running a
profit.

A lot of decent future businesses could die if startups are forced to
consolidate. However in instances this may be a wake up call to keep them
accountable to the financials of their business.

~~~
aledalgrande
>> These companies would struggle to operate with positive cashflows as their
products/services and growth hasn't matured to allow for it yet.

Then they would have to do like all of us, get creative and find alternative
ways of getting cash.

------
arihant
_> If you are in Silicon Valley and your customers are mostly well-paid
consumers with no free time, or other venture-backed startups, well, I’d be
worried._

This is the most shallow statement I have read this year. The needs of the
rich today would be needs of less rich tomorrow. The author clearly missed out
on the whole American dream concept. I'm sure some people felt the same way
about refrigerator and cars.

You'd almost never create a market segment starting with the bottom end.
Almost every product you touch, including the very screen you're staring at,
was once made for the 1%.

And almost always the version for the 1% is expensive, won't see a version 2,
and is a one time sale. It doesn't matter if your initial rich/busy customers
are going out of business. If you found a need you're fulfilling, you will
with a fairly high probability will continue to find customers through the
generation.

Dot com bust did not kill Network Solutions/Verisign. Very, very important.

------
ohadron
Good read. Sounds like good advice in general, regardless of how hard it is to
obtain capital.

~~~
arielm
Totally agree. In a world that runs on money getting to profitability should
not just be something you strive to get to but rather something you have.
Until you do you shouldn't let anything else take away from your focus.

------
honksillet
Dear VCs, You made a lot of bad investments. Prepare to take a loss.

------
melted
A VC taking the valuations down and encouraging the companies to become
profitable sooner, to get a fatter slice of a tastier pie when founders come
begging for money. News at 11.

------
jedicoffee
Found the problem! "It is going to be hard (or impossible) for many of today’s
startups to raise funds." You don't need to take on millions in debt to start
a company.

~~~
mindcrime
Strictly speaking, raising VC money isn't taking on debt. You're selling
equity and if the company fails you don't - as a general rule - repay the
investors anything.

That said, I agree with your overall point about not needing to raise millions
of dollars to start a company. That's one way of doing things, but hardly the
only way. Another choice would be to just take a regular job and start your
company as a nights and weekends side project (deal with any potential IP
issues, of course), or do consulting in your area of business and gradually
transition from a service company to a product company. I'm sure there are
others.

~~~
jedicoffee
I agree, I may have been a bit open ended with my previous statement.

------
codingdave
Even shorter version of how to stay alive - model your business around some
transaction that brings in more revenue than its costs to provide.

------
outworlder
> It is going to be hard (or impossible) for many of today’s startups to raise
> funds.

So, just like it is in most of the world, then?

------
julianozen
What a time to be alive

