Category: Entrepreneurship

After grinding it out for a couple years, most startups are failing. Startups are hard and 99% never hit $1 million in annual revenue. How do you know when it’s time to shut down and give up? No one wants to be the person that quits, and investors made a bet on the entrepreneur, yet most of the time it doesn’t work out. That’s the game; it’s brutal.

Here are a few ideas to consider that it’s time to shut down:

• Market Timing Not Right – Being too early is a failure. Being too late is a failure. Sometimes the timing is off and nothing can be done.
• Too Much of a Nice-to-Have – Most products aren’t a must-have. There are only a few must-have products and entrepreneurs (myself included) try hard to convince people that a product is a must-have. Markets decide winners and losers based on need and value.
• Value to Cost Misalignment – Some products fit a real need but the cost of customizing and delivering the solution is too expensive relative to what the buyer can afford. A product that’s a must-have but unaffordable to the audience is a failure.
• Tiny Market – What seems like a big market can end up being a tiny or niche market. While a modest business could be built it isn’t usually worth pursuing.

Notice I didn’t say running out of money. That happens as well but scrappy entrepreneurs find a way. Deciding to quit is more about a fundamental business model flaw with no apparent pivot to make. Failure happens — don’t drag out too long.

What else? What are some other ways you know it’s time to shut down a startup?

Continuing with the theme of The Slow Startup Movement from yesterday, one of the points to go deeper on is the different ways raising venture capital changes a business. Raising venture capital isn’t inherently good or bad — it has its pros and cons, just like anything. Here are five ways the business is changed after raising venture capital:

1. C Corp Conversion – Most startups are LLCs (or should be) and as part of raising institutional capital have to convert to a C Corp (essentially can never be converted back). A C Corp has more complexity, double taxation on profits, and more annual paperwork but doesn’t pass through profits or losses (required by institutional investors for a variety of reasons).
2. Quarterly Board Meetings – Most entrepreneurs don’t have a formal board or board meetings until after raising institutional capital. Board meetings, and the process of preparing for board meetings, are useful exercises for entrepreneurs when the business is scaling.
3. Constantly Raising Money – Once the first round is done, the entrepreneur has entered the fundraising race track and can’t get off until the race is won or the keys have been handed over to a hired CEO. The entrepreneur is expected to raise money every 18-24 months (if not sooner).
4. Focus on Growth Above All Else – Growth, growth, growth. Other aspects of the business are still important but every strategic conversation includes how to grow faster.
5. Exit Timeline – The clock is ticking. Investors need to see a return in 3-5 years (and absolutely no later than 7-10 years). An exit isn’t required tomorrow but it’s somewhere in the mid-range future.

Raising venture capital changes a startup by heightening the focus and sense of urgency to create value. These are five basic ways the business is changed.

What else? What are some more ways raising venture capital changes a business?

Much like the slow parenting movement gained traction in select communities several years ago, I believe we’re going to see the rise of the slow startup movement. The slow startup movement isn’t about growing slow, as the definition of a startup is a scalable, growth-focused company. Rather, it’s about taking a simpler, more flexible approach to building a successful business.

The slow startup values freedom and flexibility over marketshare.

The slow startup promotes a measured, sustainable pace, not a repeated heroic effort.

The slow startup favors the long-term over the short-term.

The slow startup eschews venture capital in favor of customer-funded growth.

The slow startup doesn’t read TechCrunch and the glorification of raising money.

The slow startup plans for the next 20 years, not an exit in 3-5 years.

The next time someone says you have to grow faster, have to raise money, have to win the market, know that there’s a different way with plenty of success stories: the slow startup way. Go slow and win your own way.

What else? What are some more thoughts on the slow startup movement?

This time last month I wrote a post titled 4 Reasons Investors Shouldn’t Do Convertible Notes. Today, Fred Wilson has an excellent post Convertible and SAFE Notes with more detailed reasons why he doesn’t like convertible notes. Here are his four reasons against convertible notes:

1. Dilution (and valuation) is deferred to a later date and is too important to punt on.
2. Notes make it harder for the founders to understand how much dilution they’re taking.
3. Notes build up and it becomes more painful when a priced round actually happens.
4. Founders often promise a percentage of ownership verbally to angels but then the notes don’t meet the expectations causing problems.

The solution is the same: price the round. Read Convertible and SAFE Notes along with the excellent comments to learn more.

What else? What are some more reasons to not do convertible notes?

With Snapchat going public earlier this month and having a current market cap of $25 billion (NYSE:SNAP) let’s hear from the Snapchat CEO. Our video of the week is Snapchat’s three-part business model with CEO Evan Spiegel. Enjoy!

From YouTube: The Snapchat frontman fielded questions on an array of tech-focused topics, including Snapchat’s three-part business, getting into content, age and audience, leadership role models, the inevitable IPO, the bubble, workplace diversity and those embarrassing emails.

At Pardot we chose to not raise outside capital and experienced the Benefits of Not Raising Outside Capital. With that said, I’m on the board of several fast-growing startups like SalesLoft and Terminus, so I’ve had the chance to see the other side. Not raising capital — if you can do without it — does make things easier overall, however it also makes it significantly harder to “win” the market.

Here are a few benefits of raising outside capital:

• Grow Faster – The number one reason entrepreneurs want to raise capital is that they see a chance to grow faster. Sometimes this is taking a model that’s already working and significantly expanding it. Sometimes this is investing ahead of expected revenue such that there’s an opportunity to scale faster and more efficiently. Regardless, growth is at the core of raising money.
• Helpful Board of Directors – A board is more work and structure but brings with it a good rhythm of planning and review at a high level. VCs are usually on 6-10 other boards so they can bring best practices and recommendations from experiences across a variety of startups. Boards provide entrepreneurs with help and guidance in scaling the business.
• Gain Marketshare – For most venture-backed tech startups, the game is to gain as much marketshare, and corresponding revenue, as fast as possible to either become a target for an acquisition or go public. While markets are rarely winner-take-all, they very much place a high reward on being the top three.
• Great Expectations – Once you raise money the clock starts ticking to generate a return on investment. This is motivating for many entrepreneurs and helps them focus on building a large, valuable business. Entrepreneurs are often ADHD such that outside investors can be helpful as a forcing function on the desired target.

Raising outside capital should not be the goal for the majority of entrepreneurs. Only in rare circumstances should capital be pursued and these are a few of the benefits that come along with it.

What else? What are some more benefits of raising outside capital?

In a few weeks I’m giving a talk to a group of entrepreneurs that have decided to eschew raising outside capital and focus on bootstrapping. With so much focus on TechCrunch and other publications about fundraising and venture rounds, it’s easy to get caught up in the belief that raising large amounts of capital is the only route. It’s not. Here are several benefits of not raising outside capital:

• Flexibility – Businesses change. Trends change. Being independent provides infinite flexibility to change course and pursue the best new opportunities. With no board of directors there’s maximum flexibility.
• Timeline – Without outside investors there’s no timeline on the business to sell after 5-7 years. Sometimes it doesn’t make sense to ever sell or there’s a desire to have a great cash flow business indefinitely.
• Quality of Life – Being an entrepreneur is already stressful enough. Once the business is working, there’s the option to focus on quality of life and less on the company.
• Expectations – With no investors there’s no expectation of building a large company at all costs. Expectations can be as high or low as personally chosen.

Overall, the biggest benefit of not raising outside capital is the ability to control your own destiny across every dimension. Control is what many entrepreneurs are seeking and not raising capital is the best route for that.

What else? What are some more benefits of not raising capital?