October 3, 2017
One bit of counterintuitive advice common to the startup community states that you should always reinvest your earnings immediately, creating a virtuous cycle that will grow your business with that hockey stick growth everyone’s after, and eventually letting you IPO for billions.
But a new class of startups is challenging the notion with a counter-counterintuitive suggestion: At a certain point, you should stay small and just turn those profits into better salaries for everyone. For those aware of how double negatives works, this counter-counterintuitive advice could also just be called “intuitive advice.” But here’s why it’s so hard to remember.
The Typical Startup Path
The startup blueprint is clear: Bootstrap your way to a minimum viable product, prove the viability of your to VCs for a juicy seed round, get hockey-stick growth with the funds (and maybe a few more investment rounds along the way), and either sell it off or go public, netting everyone a big payday in the process. If you fail, no worries, just try the exact same thing again.
You don’t want to spend too much cash and run out, and you won’t want to spend on the wrong things, or waste it. But the cash only exists to get you to that next stage, selling or IPOing. Under the standard startup mentality, the cash itself isn’t the point.
Get Out of the Rat Race
But what if you want a smaller, sustainable company? You’ll need to ditch the startup mentality and start looking at your money differently. Here’s how Josh Pigford, founder of Baremetrics, explained the idea in a Medium post earlier this year, after first writing about running out of cash so fast he needed to take a 30 percent pay cut.
“The way that we ended up in that situation was just such a classic ‘silicon valley’ scenario that I’m honestly embarrassed to even talk about it. Raising multiple rounds of funding (we had 2 rounds totaling $800k, which is honestly small by most SV standards), hiring fast, spending faster, pushing hard for the mythical ‘hockey stick’ growth. Beating ourselves up when we didn’t have that growth. We were embracing it all,” Pigford writes.
Yes, I’m writing about this poor guy’s embarrassing moment. Because he’s right: He explains later in the article that his problem was assuming “success” was following the typical VC-driven model. Once he realized it wasn’t, he was able to slow down, stop pouring money into hopes for unrealistic growth, and enjoy the “good ‘ole fashioned normal growth.”
And You Might Get a Better Pay Day, Too
Saving money along the way is easier if you don’t go for outside funding at all. And if you don’t get investors, you’ll still own most of your company. One great example? Blaine Vess, who recently sold a 17-year-old company for what would seem to plenty of entrepreneurs to be a pittance of just $58.5 million in cash.
“With no outside investors,” Fortune wrote of the sale. “Vess owned more than 80 percent of the company, earning at least $47 million on the sale. (Swalla and his co-founders, Chris Nelson and Todd Clemens, owned minority stakes.) He achieved a better personal payday than the founders of some venture-backed buyouts with price tags that were twice as high. He also avoided the pressure to achieve Silicon Valley-style hypergrowth, which is designed to produce all-or-nothing results. Under that model, startups find out very quickly if they are a wildfire or a bright flame that burns out quickly. Vess opted for a 17-year slow burn.”
If the typical startup model works for you, great. But you’d be a moron not to consider the alternative, more traditional method of running a business. And it all starts with re-examining whether you really need that rapid-fire cash burn.
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