
Advice for companies with less than 1 year of runway - loyalelectron
http://www.themacro.com/articles/2016/01/advice-startups-running-out-of-money/
======
danieltillett
There is a third way which is put the company into hibernation. I was faced
with this with my startup a bit more than 10 years ago now. I ran out of
runway so I laid everyone off, paid the bills, and got a job. I then bought
out everyone else, worked part time on the business and built it back up over
then next few years to the point where I could return full time. I could have
started a new business, but I believed that there was a lot of value in the
old business [1] which proved to be correct.

1\. Some caveats here. Firstly, I did not have many people to buy out and they
were willing to sell at a reasonable price. Secondly, my business is in
biotech/bioinformatics and we had put a lot of resources into R&D. This R&D
had real value that could be used to bring the business back to life.

~~~
OopsCriticality
Did you have any licensed IP, and if so, how did you deal with that during the
hibernation period?

~~~
guelo
I was in a situation where angry clueless investors wanted to keep the
software as an asset they were entitled to, but it was close to worthless
without the engineering knowledge. They tried to shop the MVP around but got
nowhere. If I could have kept it I would have tried to keep it running on the
side.

~~~
13of40
One of the best comments I ever heard was from a Windows engineer talking
about a source code leak several years back: "Sure, but how are they going to
build it?"

~~~
jcoffland
Surely this developer meant that the leaked code had many dependencies on
libraries that were proprietary to M$. That would make it difficult to build
but this scenario is likely unique to partial code leaks at large companies.

~~~
Joeri
Even a complete code leak can be near unbuildable without knowledge of how to
set up a build environment. A number of years back a product i work on was so
difficult to build it was a two day effort to set up a new developer
workstation with the help of the existing team. Someone with just a full code
dump would have taken weeks.

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Animats
The alternative is becoming profitable as soon as possible. Then you get run
over by someone with better access to capital who can absorb losses. Example:
Sidecar.[1]

[1] [http://venturebeat.com/2016/01/20/sidecar-we-failed-
because-...](http://venturebeat.com/2016/01/20/sidecar-we-failed-because-uber-
is-willing-to-win-at-any-cost/)

~~~
rcarrigan87
This is a great example of why the idea truly doesn't matter. It's all about
execution. They had better tech and still lost. Happens all the time.

~~~
danieltillett
No it is an example of the idea being bad to begin with. If your idea requires
that you be able to out raise everyone else in a capital-burning death match
then it is a bad idea unless you have a competitive advantage in capital
raising. Unless you have amazing connections to people with battleship loads
of cash don’t enter this type of market.

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nunobrito
Was laughing when reading "12 months of runway" as "low runaway". My
bootstrapped company is "low runaway" by default since the past two years.
Every. Single. Month.

Funny how your mind gets busier to work and build revenue in Europe without a
comfortable cushion like SF guys seem to have.

~~~
jakejake
I've worked at bootstrapped companies where we were always squeaking by every
month fighting to become profitable. But at least you are in control of your
own destiny. Nobody can force you to shut down as long as everybody wants to
keep hanging in.

Unlike this is the ticking time bomb you have on your back the moment you take
on investment. It's now do-or-die and when the money runs out you pretty much
have no choice but to liquidate - often the decision isn't even yours to make.

This article mainly applies only to the later. It is exciting when you get a
big investor check but it's not the only way. I always encourage friends to
think about investments that way - rather than just a free bag of cash!

~~~
crikli
Amen. Yeah it's exciting to get a big investor check. You know what's way more
exciting? _Being profitable._

I occasionally get approached to help seed startups whose entire plan depends
on a) getting funded and b) getting acquired. I enquire about a path to
profitability and the answer frequently reveals a token effort. The CACs are
unrealistic, market penetration estimates are hopelessly optimistic, etc. The
entire play is acquisition or death.

~~~
danieltillett
Being profitable is hard work. Much more fun to play the startup game, throw
some wild parties, and be acquired than building a real business making real
money.

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AndrewKemendo
I think this article needs to be paired with an article about "When to shut
your company down." If I recall, that article exists and it basically says:
when you lose hope.

Maybe I am not looking at this right but this part doesn't make sense to me:

 _In many cases, <2 months is the point of no return. If you are in this state
it is immediately necessary to lay off your employees and give them severance,
pay down your obligations, and use your remaining cash for shutdown costs._

So is that for companies that _had_ a year+ of runway at some point and are
now down to 2 months? What about companies that never had 1 year of runway?
The differences between those are pretty big.

For example if you have a 4 person startup and 2 months of runway after being
on the market for only 4-6 months, you are supposed to just shut it down?

No, you take consulting jobs and do side work till you can get higher revenue
or some financing.

I think, like most startup articles, this applies to companies who have
already gotten past seed stage, initial traction and thus is not applicable
for 90% of us.

~~~
pavlov
It's actually mentioned in the headline:

"Let’s imagine that you are the founder of a company that has successfully
raised an angel or institutional round ..."

That implicitly means there was more than a year of runway (otherwise it's not
much of a round).

~~~
AndrewKemendo
I guess I'm saying that 90% of companies don't fall into that category - so
applicability is low.

Also speaking of implicit statements, he is saying that no matter what, if you
have raised money, you should shut your company down if you are within 2
months of insolvency. Which I think goes back to my original point that you
only shut down when you lose faith.

~~~
ellyagg
Not all advice is supposed to be generally applicable and there's nothing
wrong with that.

And, you should shut down your company when either 1) you lose hope, or 2)
continuing will be unethical, whichever comes first. If it's likely you won't
be able to pay your employees and other debts, that falls under point 2.

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gjmulhol
My friends, we are finally hitting the new economy where even startup are
being asked to make money---maybe not to the point of profitability, but even
a little revenue can make a big difference in a lean organization.

~~~
pavlov
Hasn't "ramen profitable" been a YC mantra since, well, forever? I don't
really see how anything has changed.

~~~
gjmulhol
Maybe, but a lot of companies, even in YC, focus on a lot of things that are
not related to revenue (unpaid user growth etc).

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josh_carterPDX
I've never understood the psychology of those that do not fundamentally get
this. If you just finished raising a seed or angel round, chances are you had
less than 12 months of runway to begin with. Perhaps your personal savings was
drying up or you were running out of friends and family resources that could
help you run this out further. The sense of urgency and anxiety you felt while
raising your seed round doesn't go away simply because you were able to raise
some money. If anything, it would increase. So the fact that someone had to
specifically cover this in a blog post seems really counterintuitive to me.

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rl3
> _The Fatal Pinch does not apply to me_

Except, sometimes it doesn't? If you look at the notes[0] at the bottom of The
Fatal Pinch:

> _There are a handful of companies that can 't reasonably expect to make
> money for the first year or two, because what they're building takes so
> long. For these companies substitute "progress" for "revenue growth." You're
> not one of these companies unless your initial investors agreed in advance
> that you were. And frankly even these companies wish they weren't, because
> the illiquidity of "progress" puts them at the mercy of investors._

What do you do if you're one of those companies? There's plenty of business
models that could be attractive acquisition targets (read: billions), but
otherwise can't monetize to save their souls.

Two pieces of advice often encountered (paraphrasing):

 _" Treat each funding round as if it's your last."_

 _" VC money is like rocket fuel. It's intended to be burned at a high rate."_

I imagine reconciling both is difficult at best.

[0] [http://paulgraham.com/pinch.html](http://paulgraham.com/pinch.html)

~~~
danieltillett
>What do you do if you're one of those companies? There's plenty of business
models that could be attractive acquisition targets (read: billions), but
otherwise can't monetize to save their souls.

You need patient investors which are rather hard to find.

One suggestion I have seen is leave such businesses until you succeed once. If
your first business is a success then you will have your own pockets to draw
on and a track record that will allow other investors to trust you. Sometimes
you just can’t get to the final destination in one hop.

------
JarvisSong
Great analysis. I would add another chart -- likelihood of more investment /
buyout -- both decrease as you get closer to zero runway.

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bshimmin
I don't wish to be overly mean or uncharitable, but I don't really think
anyone who is unable to figure out the advice offered in the section titled
"Some tips on reducing burn" all by themselves is ever going to be able to run
a successful business.

~~~
patio11
Some people need to hear it spelled out that "Failure to hit a milestone for
the company will mean you are forced to go to people who you consider friends
and say 'I'm sorry. You're an excellent engineer and have done everything
we've asked of you. No company could have asked for better. We appreciate the
long nights and sacrificed weekends. We hope you will think of these years
fondly. You're fired. Your last check will be paid immediately; there will be
no more checks. I hate doing this. But that doesn't change the math: you're
still fired. Nothing either of us hope or say can change the fact that you're
fired, over what is potentially a screwup out of anyone's control but, since I
am a responsible businessman, I'm going to own the fact that no one is firing
you but me.'"

It's easy in the intoxicating aroma of the Valley, particularly when you're a
first time founder who quite recently had _a million dollars in the bank_ , to
imagine that your second million dollars will come as easily as the first did.
But the first was raised on dreams, and when you're coming up to your A round
you have to replace dreams with metrics. If you don't have the metrics, you
will not be offered an A round. This means hard choices which all suck.

Founders need to be told this early and often. Running out of money kills
companies; practically speaking _only_ running out of money or running out of
will to continue can kill a company. That will not be a pleasant experience
under any circumstances. Do not run out of money.

~~~
ScottBurson
Why do you suggest the term "fired" instead of "laid off"? The latter seems
rather more appropriate.

~~~
danieltillett
I can’t speak for Patrick, but there is actual value in calling lay offs what
they really are (firings) so you avoid falling into euphemistic thinking. The
whole reason we have the babble of management speech is people are avoid
facing up to what they are really doing. When you fire some to save the
company be honest about it and don’t pretend you are giving them the “chance
to pursue other opportunities”.

~~~
ScottBurson
I agree that "chance to pursue other opportunities" is bullshit. But there's a
real difference between "fired" and "laid off". _Being fired and being laid
off are two distinct ways of leaving a position. Being fired vs. laid off can
impact your eligibility for unemployment as well as your hiring prospects for
the future._ [0] If the distinction is relevant to the unemployment
compensation system, I don't think you can wave it away as a euphemism.

[0] [http://jobsearch.about.com/od/firedtermination/qt/fired-
laid...](http://jobsearch.about.com/od/firedtermination/qt/fired-laid-off.htm)

~~~
danieltillett
I am not suggesting that you don't do the right thing by the employee, and
making sure their employment is end in the right legal way is important, just
that you should try to avoid euphemisms when faced with difficult situations.

Here in Australia we call laying someone off as being made redundant. I have
often thought this is an anti-euphemism - you are not only unemployed, but you
are redundant.

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larakerns
It's discouraging when new employees expect a certain lifestyle on joining
your startup but you're runway is less than a year. Startups have been
portrayed as having so many perks that there's an impossibly high standard to
strive toward.

~~~
airza
I mean, usually those perks are a distraction from anomalously low salaries
and probably non-valuable equity..

~~~
cballard
The perks are also designed to keep you there as long as possible. If you
leave at a reasonable hour, you don't need catered dinner or company-provided
alcohol.

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Kiro
> In especially messy scenarios you can end up with personal liability.

When can this happen?

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aagha
I love how investors are always willing and wanting to show examples of how
they have the upper hand and the entrepreneur has the lower one (chart in the
article).

~~~
rwallace
Insulting people for honesty is a dick move. The article is doing its best to
show you how to _avoid_ situations where you have a terribly weak bargaining
position.

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lotso
Could someone give a brief bio of Dalton Caldwell? I know he created Svbtle,
but don't know much else about him.

~~~
kmonsen
[https://en.wikipedia.org/wiki/Dalton_Caldwell](https://en.wikipedia.org/wiki/Dalton_Caldwell)

