When to Shut Down a Startup [video]
blog.ycombinator.com
blog.ycombinator.com
So what he said is that if its a viable, sustainable business that the founder wants to do, that adds value to society, but there is no exponential growth on the horizon, then it should be shut down.
Because (and he said it explicitly), the only thing that makes a startup truly a startup is the exponential growth and nothing more.
This is just crazy, exponential growth is extremely rare in business and only happens in situations like the way Facebook grew, by upon sign up getting the whole list of email contacts of the new user, and sending invitations to join Facebook to all of them.
Most of the times in business, linear growth is what happens. what's wrong with a 20 employee company that adds a ton of value to society, operates for 30 years and gives the founder and family a comfortable life, isn't that more than enough and worthwhile pursuing?
Exponential growth is impossible to predict and only comes by accident, it's like chasing the rainbow.
Just focus on building a real business that you really want to dedicate your life to, preferably borrowing as little money as possible if it all, how about that?
Most businesses that you start, are not "startups". And that's good, for all the reasons you outline. It's ok to look at companies that are trying to find exponential short term growth as a different thing, and talk about when to pull the plug if you aren't going to achieve that.
The more interesting question I think is when you should try to initiate that sort of company, vs "a viable, sustainable business the founder wants to do", as you put it.
I think the crux of the issue is that if you set out to create a startup and you end up with a viable business that isn't really growing, it isn't really a good business in most cases.
There are people who intentionally start other kinds of businesses. These are often called lifestyle businesses. They tend to be structured differently than the kind of business that attracts VC money.
Since a Venture Capitalist typically does more than lend you money, it's a huge drain on their business for you to keep plugging along, calling on them for advice, etc and they can't divest because you aren't worth enough.
There's nothing wrong with starting a different kind of business. But if you set out to have something grow rapidly and you attracted talent based on the idea that this would be an exciting venture and you attracted investors based on that and you don't follow that path, it creates a lot of problems.
Think of like borrowing money to build a mansion, then building a little shack in the woods. You might be happy with the little shack in the woods, but the bank can't repossess your little shack and sell it for anything remotely resembling the amount they lent you.
So now you have some problems. You have legal and financial obligations you can't really meet.
I have a big problem with this.
From my point of view, most "exponential" startups are simply those startups that stayed alive long enough to be around when something shifted and left them in the right place at the right time to take advantage of the exponential that they now found themselves in.
I watched this in the "dot-bomb". The companies that "won" were big enough to actually mobilize enough resource at the problems but small enough to still react quickly. That generally meant that you needed to be "alive" for several years--they had enough infrastructure and the people to make use of it but not so many that they were too sclerotic when the shift happened.
Most "overnight" successes are 5+ years in the making.
It's a "small business" - nothing wrong with that, autonomy is great (e.g. The "E-myth" (Entrepreneur) is that people start businesses to get rich, when most just don't want a boss), it's just that yc doesn't fund them.
Maybe it's within everyone's power, who could do the first part, to make an exponential-growth startup. Just like most anyone with a medical degree can start working as a doctor.
It's not a perfect analogy, but is what I thought of.
To new founders: The most important thing is that you believe that this is something worth working on, that you have a good financing strategy and that you (most of the time) like working on it.
Now, that doesn't mean ignore feedback and advice, but just make sure that you know why you are doing it. Make sure your financing strategy fits with your business strategy and your character as well. It might make sense to not pursue VC funding now, but maybe later. Or never.
Hanging out on HN, watching YC videos and reading their essays can be misleading. Think about why YC says what they say (might they have a self-serving motivation ;-))
The coolest thing about being an entrepreneur is that you can and must think for yourself.
Edit: Typos.
> ... not growing but it's not dying. ... and the founder doesn't really know what to do.
Makes me think of Paul Graham's concept of "default alive/dead":
> When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?
http://paulgraham.com/aord.html
I think this is a much more valuable place to start the conversation. The available options (which may or may not include shutdown) depend strongly on the answer to the question "are you default alive or default dead?"
The demand for perpetual (even artificial, fraudulent) growth is prioritized over all else. The VCs can't get out of their investment unless things have grown. That's all that matters to them.
Neither of those startups is around anymore, they were both driven out of business by this demand for more growth. The Series A investors couldn't care less, they exited long before the end and left someone else holding the bag.
If your company is marginally profitable and stable, and you choose to ignore demands from an early minority stakeholder investor to spend more, what are the consequences? I get that they might stand in the way of future funding rounds, but what if you simply don't need future funding rounds? The VC likely has eight times as many bleeding startups as it has profitable, let alone growing startups. Would they ditch a profitable slow one?
This isn’t gospel but I have a friend at a tier 1 vc who told me something to the effect of: we’ve got $X00MM in this fund. We’ve got four years to invest the money and will choose something like 40 companies over that time. Two need to become unicorns to make their nut. If you don’t have the intent to be that, then they don’t want to invest.
Of course there are vc’s And angels who don’t follow that methodology but for the most part they want to invest in _growth_ startups rather than lifestyle businesses.
Those people found a new place to work.
There's pushing people out of their comfort zone, and there's pushing people way out of their comfort zone so they are perpetually off-balance and need your help.
In one, the VCs came in, ousted all the management, installed their own highly-paid employees, and then promptly ran out of money. The technical cofounder stealth-bid (through an employee friend) against the VC for the company IP at the bankruptcy auction. The auction house messed up and told both parties that they'd won. Lawsuits started flying back and forth. The founder decided that rather than deal with this, he'd move to China with the IP, where they don't enforce IP laws, and start the exact same company with Chinese employees. The company failed for exactly the same reason the first one did, namely the technical founder's complete and utter inability to manage a production-quality project to completion.
In the other, the business cofounder quit, ran off with the customer list, contacted all their customers saying "Hey, I'm founding a new startup", a lawsuit was filed, and AFAIK both businesses failed.
I've been lucky that with my own startups, I've parted on amicable terms with all the cofounders I've worked with - though this is usually because we only gave up when it was clear neither of us wanted to do it anymore.
IIRC, some of the executives can be held personally liable for payroll in California law.
From that page:
>>>Until a few years ago, however, it seemed that, absent special circumstances like alter ego or failure to observe corporate formalities, courts in California would not impose personal liability for wage and hour claims on the key employees, directors, officers, or investors of a corporate entity.
Recent decisions suggest the tide has turned.<<<
The video I'd love to see is "How to Shut Down a Startup"
In those situations, it's better to shut it down and move onto something else then stay working on it simply because of momentum. Every year of your life is a huge opportunity cost.
However, the alternative such as a messy shutdown by leaving unpaid bills and unrealized contracts is even worse. Bankrupcy laws doesn’t work so smoothly around the world, even after bankcrupcy you can still be liable for taxes as well as unpaid bills/wages get bad reputation which can hurt you in the future.
You can never reach that level returns if a business is sitting at 50k/mo.
I’ve been in a VC fund for 10 years and literally all the returns are from three companies, the others make no difference whether they zero out for return 3x
You should decide this before you enter the startup scene, and ideally as you're beginning your career. Because if you think you're playing one sort of game but are playing it according to the rules of another sort of game, you're basically guaranteed to lose.
The assumption when you play the startup game is that you're playing for a big, low-probability payoff. There are a couple variations for just how big a payoff (are you looking to play the outsource-R&D-and-get-acquired game? show-I'm-a-good-programmer-and-get-aqhired game? build-a-billion-dollar-company game?), but in general, when people talk about startups, they mean hyper-growth. If you don't find hyper growth, you've lost at the startup game, and should call it and invest your time into either playing again or playing a different game.
If you want a lifestyle business, you should play that game from the outset, because it means playing several choices differently. Notably, you should seek a small niche with real customers first, you can afford to pick an area off the cutting edge, you should seek profitability over growth, and you shouldn't take (equity) investment.
In reality, you can only make effective decisions once you've had the experience of what you are deciding about.
Also, regarding the specific issue of zombie companies, they can always be brought back to life. There is tremendous value in having a fully working organization/team.
Also, why not play in a big, HIGH probability payoff.
For example, why not compete with Google or Amazon in what they think is their next market? This assures you a big market with at least 100M - 1B annual sale.
> why not compete with Google or Amazon in what they think is their next market?
These two things are at odds, because your startup generally can't compete with the likes of Google and Amazon because you simply don't have the resources that they do. VC money evens the playing field a bit, so at least you have a chance at getting your product out there and getting real customers before BigCo eats you alive. You can't have it both ways.
This sort of rhetoric shows how much of entrepreneurship isn't really about like, making money. It's meaningless emotional warble-garble, a kind of psychological warfare that people do to themselves to stay happy in a system of really emotionally punishing rules of one-upmanship.
Like one funded founder I know, I asked him straight, "Are you motivated by acting out college-age vengeances against your peers?" and he said yes! It's not really about, "I don't want that Google engineer lifestyle," because that person does, he just wasn't qualified (in some narrow sense) to do that. He just failed at it.
A lot of people don't grow out of that.
And it's not just limited to people who didn't pass the Google interview. There are plenty of Google engineers who said to, e.g., studying medicine in college, "I don't want that doctor lifestyle," when really they did not perform competitively in their first-year life sciences class! Medicine dropouts everywhere!
The startup handbook materials seem so incomplete. They don't honestly engage with the emotions of their audience, which is overwhelmingly disaffected college-educated 20-40 year old men of means.
In fact, the reason your rhetoric is so appealing is because it doesn't put these emotional things out into the open. It amplifies the weird psychological warfare, it doesn't question it.
The right question isn't, what kind of game you want to play? It starts with what a therapist would ask, "Why are you here today?" to lead to "Why do you think you're unhappy?", questions that make the audience of your line of thinking deeply uncomfortable and something to be avoided.
A lot of our decision making, historically, was just decided for us. Parents had children and married them based on economic benefits. Your work was just what your Dad did or through other close relationships. Now you have seemingly infinite choices. People are often making the wrong decision for the wrong reasons all the time. Sometimes it works out, sometimes it doesn't.
I think anything that helps you frame your actions and understand yourself and your motivations is fine. I know plenty of people who happily would identify with the 'collect a paycheck and get fulfillment elsewhere'. I also think it's perfectly valid to want to start a company to get vengeance on those who appeared to underestimate you.
The reality is there are many paths and it's very hard to judge what a valid or right path is.
Once you make it clear to them, though, you're unlikely to face that conundrum.
It’s largely been depressing coasting as a zombie. Making enough money to pay the bills but not enough to save or do anything for the future, but have been afraid to start something again for fear of going down this same route again.
Best of luck to you - sounds like a tough spot.
Small businesses and startups (as YC uses the term) are different things. Your neighborhood coffee shop is not a startup that leveled off, it's a small business.
1) A company that is sustainable and effectively “runs itself,” growing linearly, generating passive income, and default alive, but without much input or massaging from the founders outside of thinking about and implementing strategy, and,
2) A company that intended to be a startup, that still requires heavy support, tons of the founders’ time and effort, and is constantly still trying to figure out how to acquire new users. It’s profitable, but only because of the founders’ active efforts.
One of these is depressing and leads to burnout. The other is fine.