Why Your Startup Could Crash and Burn
Why does your average startup crash and burn?
According to Y Combinator co-founder Paul Graham, one of the biggest reasons is the self-delusion that sets in during the startup’s last six months’ worth of operating capital, when founders refuse to either curb expenses or change strategic course.
“There may be nothing founders are so prone to delude themselves about as how interested investors will be in giving them additional funding,” Graham wrote in his blog. (Hat tip to Business Insider for the link.) He refers to this six-month spiral as the “final pinch,” declaring it dangerous because “it’s self-reinforcing.” Simply put, by overestimating their ability to vacuum up more cash from investors, founders neglect the one thing that can possibly save them: developing an actual roadmap to profitability (or at least stability).
Once a startup has entered the final pinch, he added, there are three options for survival: “You can shut down the company, you can increase how much you make, and you can decrease how much you spend.”
In other words, a company doomed to fail can shut down—the corporate equivalent of a mercy killing; if it over-hired, it can cut people to save money, at the risk of devastating morale; or it can figure out how to generate more revenue, either from selling something new or by adjusting how it charges for current products.
“Another way to make money differently is to sell different things, and in particular to do more consultingish work,” Graham added. “I say consultingish because there is a long slippery slope from making products to pure consulting, and you don’t have to go far down it before you start to offer something really attractive to customers.”
Graham’s ultimate advice: The startup founder in the “final pinch” must be mercenary above all else, if he or she wants to survive. His blog offers some other good advice, as well.
- Does a Startup Need a Moral Compass?
- Daily Tip: The Startup ‘Gut Check’
- Best Advice for Startups Is Also Most Obvious