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.
Nothing that I could not re-license again later. I lost the patents in progress as I didn’t have the resources to continue with them, but this was actually a blessing in disguise. Rather than protecting the IP by patents I was forced to concentrate on trade secrets which if you have the choice is a much better way to go.
If anyone is interested in learning more I wrote a rather long blog post about the whole experience [1].
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.
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?"
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.
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.
I read (old new thing probably -- a long time ago) that windows had circular dependencies until relatively recently. A large-ish team spent half a decade untangling it. Good luck building 40mm lines of source for a 25 year old project without detailed instructions...
Sure if your investors are going to be idiotic about the situation then this might not be possible, but it is an option worth exploring and in my case it worked out well.
This is what I like about non-SaaS models like desktop or server software -- they can have zero burning rate. Even if you're out of money you can stop developing new versions of the product, fire everyone including yourself, and simply keep your website alive (which costs pennies). Your customers keep using your product and you still have a chance to get new ones.
Thank you for your thoughtful and thorough answer about your experiences.
Quick follow-up question, I followed up on your Bioinformatics company and seems like (pls correct if I am wrong) your product-line revolves base-calling and resolving genome assemblies from Sanger Sequencing.
How did you guys adapt to the constant changes in sequencing platforms: first generation of sequencers (Sanger) to NGS (Illumina, 454, PacBio)? Especially when a lot of sequencing centers retired a lot of Sanger facilities and staff?
This would require an very long answer, but the short version is we only concentrate on Sanger sequencing. It is an open secret that Sanger sequencing never went away. The large genome centers sold off all their sequencers and they were bought by small facilities and companies around the world. These are all still being used.
Sanger sequencing is far from dead as none of the NGS sequencers are as good at what Sanger sequencing excels at which is sequencing short sections of DNA. This demand is still there.
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]
This is a very good reason to avoid markets like this unless you are the most well funded. In some markets there just isn't a first mover advantage.
The question is how much of a monopoly uber can build once they shift to profit extraction. There is little evidence that their customers are sticky against a new competetor willing to accept a lower rate of return.
For industries where there's a strong network effect, growth is a game of chicken. Who can get the most investment and spend the most money growing before they go bust? Only one can survive.
The question is how much of a network effect Uber really has.
People stay with Facebook because that is where all their friends and family are, but do they have the same lock-in with their rideshare provider? It is an open question how much of a network effect exists in this market. My gut feeling is not much, but others obviously disagree with me. Uber could win the battle and lose the war.
There is going to be a sliding scale between wait time and cost for ride. If all the other companies band together to create a marketplace exchange for rides (Google, Apple, Tesla, etc.), then Uber may be unable to maintain any advantage.
There is a similar effect with tollways. People often have a choice between using the tollway (and paying the toll) or taking the public roads and sitting in traffic.
I don’t have the figures for the USA, but here in Australia the rate people empirically use to avoid tolls is $12 per hour (i.e. they will sit in traffic for an hour extra to save $12 in tolls). Assuming people apply the same thinking to ride sharing, then a cheaper competitor with worse coverage should be able to capture a reasonable share of the market.
To poke a hole in my original comment, presuming that the vehicles are still being driven by humans, there should be a hard floor in how low the price can go. If Uber is already at the a point in some markets where the drivers earnings can't even make up for vehicle depreciation & gasoline, that floor may have already been reached. At that point competitors may have both the same or higher price point and be slower than Uber.
Once driverless vehicles are brought in to the market, presumably these dynamics change again.
A third variable is the device which retrieves a vehicle. Google & Apple, the platforms where presumably almost all Uber vehicles are called from (not sure how many people are using the SMS feature or if it is still functional), are both working on producing vehicles. The current assumption is at least Google's will be self driving from day 1 and both may operate in a manner more like Uber than a traditional automobile business model.
There is a lot more certainty around how transportation will look, in general terms, by 2025 than who will be collecting the profits from it.
Yes there is a hard floor with the price, but there are two ways it could go lower even without driverless cars. The first is Uber's indirect vehicle costs (borne by the driver, but ultimately affecting the price floor) are very high. The drivers don't have any economies of scale in running and servicing their vehicles. A competetor that is optimised for running costs could undercut Uber.
The second way a competetor could undercuts Uber is by accepting a lower return on capital. Uber's cost of capital is very high compared to the cost of capital in the utility industry. It will be very hard for Uber to compete long term against a rival with low cost capital.
My expectation is Uber will win the battle against its venture backed rivals and will lose to a new competetor optimised for running and capital costs.
The Uber network monopoly effect is on the seller side, not the buyer side. It's having a large majority of the drivers under your control that makes it work, because the biggest seller is most likely to have a car nearby.
The drivers don’t seem to be very loyal to any one company. The thing about ride sharing is you can achieve a high density of drivers in a small geographical location at relatively low costs. It is really hard to stop a competitor that is localised.
If I was going to take on Uber I would wait until they IPOed and then build out a business based on local dominance in secondary markets where I would concentrated on getting the transport and maintenance costs down as much as possible. I would lobby the local governments to make life difficult for Uber while promoting the “local hero”. Done well this strategy would be hard for a large player like Uber to fight.
The network effect lies in the chicken-and-egg relationship of riders and drivers, no? Drivers drive for the service that has the most fares, users pick the app with the most cars available.
Similar to selling & buying on eBay, though maybe not quite the same since both sides can be on multiple apps at once.
But drivers can drive for multiple services at the same time, using whichever one is giving them a customer at any specific moment. I've talked to many Uber/Lyft drivers that use both apps at the same time.
On the consumer side, having the most cars available is not the only thing to consider. There's also price. For me, Uber is the first app I check (mostly out of habit), but if there's any sort of surge pricing going on, I'll check Lyft. If Lyft doesn't have a similar surge, I'll usually ride with them, even if it means a slightly longer wait.
You are correct... for now. But the way I see it all going down is only the top marketplace will survive and the rest will shut down. Sure, they may even generate revenue, but I think those that don't manage to become the top will fade away for the same reason most acquired companies die off. When that happens, there won't be any Lyft. Lyft knows this and that's why they took investment from GM, and this is why Sidecar shut down recently.
woah what's up with you people downvoting? I just pointed out what is true and wasn't even trolling. I'm offended, HN. Uber is a marketplace. Facebook is a social network. Craigslist is a marketplace. Uber's network effect works the same way Craigslist's does, and is not so much similar to Facebook's network effect.
I didn’t downvote you, but I think the reason you are being downvoted is nobody is comparing Uber to Facebook, we were discussing how much of a network effect Uber actually has with their service.
As a rule don’t complain about being downvoted - it just brings you more downvotes.
Agreed with danieltillet. Also, an assertion of fact without any explanation or supporting evidence is not particularly constructive. If you had included this part in your original comment it may have received fewer downvotes:
> Uber is a marketplace. Facebook is a social network. Craigslist is a marketplace. Uber's network effect works the same way Craigslist's does, and is not so much similar to Facebook's network effect.
The lock-in originates from (1) immediate (< 5 min) availability of a ride and (2) high density of customers, so drivers aren't idle. Ultimately, it comes down to the numbers, which no one outside of the ridesharing companies really has.
I wonder about the strength of network effect for ride sharing. Both drivers and riders can easily use multiple networks. The tech isn't monumental. Sure there's value in the brand / installed base but is the defensible part really enough to justify the amount invested?
FTA: "If you want to reduce burn, the least painful thing to do is make a lot more money immediately. Hopefully you have been trying to do this anyway."
UBER has sustained growth and momentum which provides access to capital so they can to pay win at the moment. The OP's article is contextual to a startup running out of cash (e.g. < 2 months) which happens because the startup hasn't sustained growth and investors are no longer interested.
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.
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.
I think this article is targeted at larger companies with employees, where you need to think a bit more carefully about how much cushion you need, and when is the "last minute" to pull the plug. Depends on the country, but in many, not paying employees salary/wages you owe them for work they've done is a bigger deal legally than going bankrupt with other kinds of debt is. So it's usually better to start laying people off before the very last minute, vs. holding out until you literally have no money left, at which point you just don't send out people's final paycheck. The 2nd approach can lead to a very messy bankruptcy, with lawsuits and government labor agencies involved.
As the article says,
> If you don't do this [i.e., lay off staff and shut down gracefully] and instead end up with zero cash and outstanding payroll, tax or other obligations, things will get Very Bad.
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!
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.
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.
I don't think you understand what "low runway" means.
If you have "low runway" every month than your company is already dead. Runway is the time left, with current revenue and expenses, before your company is out of money.
Bootstrapped companies should typically have infinite runway by either keeping expenses minimal or growing revenue.
The problem with people that make generalizations is that they're always wrong. /j
Everyone here in the SF Bay Area doesn't have a comfortable cushion. I bootstrapped my business in 2014 and didn't make a single penny the whole year--in fact, was in the red since I'd personally been lending money to the company.
that's stereotyping, plenty of companies in Europe have good access to capital and plenty of startups in SF don't. I do think there has been a culture issue in SF (and I think that party is coming crashing down) but not everyone in SF acts the same
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.
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.
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.
99%+ of companies aren't startups, even if they just "started". Why would you expect the advice to be general?
Almost by definition, a startup is burning at a unsustainable rate while looking for a model that will make it sustainable and then some. The author is suggesting a point where you can decide that just isn't going to happen and bow out with some grace and avoid the almost inevitable pain and mess if you don't. It wasn't even suggested as a hard and fast point.
I don't believe most people who let a company burn to the waterline do it because they haven't given up "faith", but because they are unable to be honest with themselves that they have failed until it is unavoidable. Doing this to yourself is unfortunate, but there is a special level in hell for people who take employees with them unawares.
This article is written for VC-funded startups of the type that Paul Graham talks about. Why is that an issue?
"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."
The article very clearly explains that if you are within 2 months of insolvency, you need to shut down in at least the sense of firing all your employees, because otherwise you run the risk of not being able to pay salaries or taxes, which is illegal. Having faith has nothing to do with this - faith doesn't pay salaries.
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.
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.
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."
>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.
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.
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.
Firing people is never fun - about the only good thing that can be said about firing is the more you do the better you become at it.
It is pretty obvious to say don’t run out of money, the trap to avoid is thinking that if you can just hold out another week everything will be OK. I nearly fell into this myself and to this day I don’t know if I fired everyone too soon or not. Would the contract have come through if I held out a month longer or would I just have got myself into a deep hole that I could not get out of?
The reason I did pull the plug when I did is I had decided long before that if we ever reached a minimum bank balance I would pull the plug. I think if I had not had this concrete number I might have tried holding out that little bit longer.
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”.
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.
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.
Not to speak for Patrick, but a layoff is a specific kind of exit; as an example: in a factory, workers will be laid off for a month when orders are low, then called in again when volume picks up.
It's probably the case that if one is contemplating shutting the company down, an hour with a HR-oriented lawyer would be worth it to avoid saying the wrong thing (and thus ending up in court).
You'd be surprised how many people that are perfectly capable of running a business when things are going well and the company is expanding are totally clueless to running that very same company when it is contracting.
The best thing for someone in a situation like that who is unable to handle it is to pass the helm as soon as is feasible to someone who does because otherwise it will be 'game over' in short order.
So it is very well possible to run a successful business without being able to figure out how to reduce burn, the problem is that success is never forever.
Yes money solves lots of problem and fixes all sorts of bad decisions - much like how a marriage is fine until unemployment hits.
I agree 100% that there is a need for different management approaches between foot-to-the-floor growth and surviving hard times. It is a rare person that excels at both. Having lived through both, I am better at the later, but the former is much more fun.
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.
If your runway is less than a year and you don't have a proven way to self-fund from revenue, you should be careful about hiring employees at all.
It would be a red flag to me as an employer if we were close to exhausting our resources and somehow communicating to employees that they might be joining the kind of company that could afford perks of any sort.
If you're that tight, the first conversation you should be having with candidates is about the kind of company you're running. There are good developers that are willing --- with enough upside! --- to join high-risk companies like this. But most developers, sensibly, are not.
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.
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).
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.
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.