Advice for companies with less than 1 year of runway
themacro.com
themacro.com
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.
If anyone is interested in learning more I wrote a rather long blog post about the whole experience [1].
1. http://www.tillett.info/2015/06/24/why-i-kept-my-startup-in-...
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?
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.
[1] http://venturebeat.com/2016/01/20/sidecar-we-failed-because-...
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.
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.
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.
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.
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.
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.
I think in major cities, both Uber and Lyft are becoming commodities - both of them have ample enough supply that I just choose the cheaper option.
Similar to selling & buying on eBay, though maybe not quite the same since both sides can be on multiple apps at once.
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.
As a rule don’t complain about being downvoted - it just brings you more 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.
Funny how your mind gets busier to work and build revenue in Europe without a comfortable cushion like SF guys seem to have.
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.
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!
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.
If you are breaking even you have infinite runway.
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.
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.
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.
"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).
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.
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.
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.
"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.
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.
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.
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.
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.
[0] http://jobsearch.about.com/od/firedtermination/qt/fired-laid...
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.
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 can find a definition here: http://definitions.uslegal.com/l/layoff/
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.
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 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.
When can this happen?