Surviving the Series A Crunch | Hacker News Reader

Surviving the Series A Crunch

blog.42floors.com

165 pointssethbannon55 comments

any entrepreneur able to build a prototype can get an idea funded

Except this is not true and I don't know where people are getting this idea. Maybe it's just SV or YC that has money but Angels and VC's in D.C. and NY at least are looking for solid traction before even bringing up the word term sheet.

At a recent Cooley pitch event a friend of mine who is already revenue positive came up from Ohio to pitch his startup. He told me not a single investor had followed up with him about a term sheet despite multiple discussions after the pitch. Another friend in CO is in the same boat, being revenue positive but with no interest from angels or anyone else.

I think stating that anyone can get money is a dangerous thing to say because it gives the wrong impression about availability of dollars. That post about things being frothy is so insanely different than the reality here on the east coast that it's staggering and totally unbelievable (not saying that I don't believe it by the way).

Agreed. I don't know the world where investors are throwing $1.5M at you, and you somehow had the option to raise twice that. Most of us can't even raise the first $1.5M. These are first world problems.

To be more precise, these are first world YCombinator problems :). Unless there is something great cooking behind the scenes, raising $3MM in seed is not really a piece of cake.

> Except this is not true and I don't know where people are getting this idea.

It's a bit of casual hyperbole that can feel kind of bad to read if someone is not part of the crowd that can get money.

That said, there is a lot of seed funding out there these days.

Where? More specifically, where is it easily available in the quantities and for the types of pre-revenue startups discussed by the OP? In my experience, most startups have a tough time raising that first seed round, let alone doubling down on that round.

There are tons of YC clone type things popping up all over the place. Maybe you guys don't remember the dot com days, but it is significantly easier to get funded these days, and you can do so much more with less.

That said, of course "anyone can get funded" is not true and probably a bit hurtful to some who are trying and aren't managing.

I'm based in the UK just outside of London and also raised an eyebrow when I read the "frothy" statement. Frothy eh? That's not what my interactions have taught me. Investors want to see a clear idea, ideally already well executed and underway and a line of sight to profitability that requires their £'s and perhaps their experience to boot.

This is as opposed to having some vague "It's like Facebook for nymphomaniac Eskimos" concept that it seems anybody in SV is capable of getting funding for.

We spoke with a couple of investors about my start up and ultimately concluded that we would bootstrap as frankly there are too many time wasters out there...

The author probably meant to say that's it's way way way more easier to get seed funding than ever before (besides probably the pre-dotcom burst era).

Secondly besides a prototype you also need a little amount of validation in the form of paying customers or small loyal user base and a good amount of connections to pull of that funding.

If the founder can get the 90K cost constant and keep the rev growing at 9% per month, there is only a $10K shortage by month 7 (and cash runs out in month 6 only). This can easily be solved with some annual prepayments.

Source: https://docs.google.com/spreadsheets/d/1RSHx9pwrSKfOlUr2jyqK...

Cool spreadsheet. This will come in handy later in life. Thanks.

Mo money mo problems, unfortunately. Hard to keep that overhead constant.

Yes this also assumes the 9% growth is word of mouth and not ad spend driven.

Assuming half the costs are fixed (office, salaries, etc) and half the costs grow with revenue (Sales, Marketing, Servers etc.) than the situation becomes a little more bleak:

https://docs.google.com/spreadsheets/d/1YoPnpFzmcpdZQh6HZ_2f...

EDIT: they would hit breakeven at 22 months - not bad actually.

Yea, I was running the numbers in my head as I read the article, and thinking this company is not in that bad a predicament. They look to be very close to turning the corner. Without knowing more about the business, it's hard to say if 9% month/month growth is bad or not. Some of these Saas business start out slow and then they take off once they get some critical mass.

Funny - you did exactly the same thing I did while reading the article - our spreadsheets are basically identical :)

So here's my thoughts -- I think some outside "real world" perspective is needed here. While 9% M-M growth may seem OK in the VC-fueled hockeystick growth world, in the real world of profitable businesses it's spectacular. Some companies spend years running losses trying to get to profitability, and if that 9% is real (and sustainable), then I can think of only two things going on here: A) Either the whole world has gone crazy or B) More likely - there's missing information here.

As peter points out -- at a 9% growth rate the business turns profitable after 6 months and on the 13th month is net profitable. Any rational investor would be frothing to get involved in that sort of business - it becomes a money-printing machine in short order.

So I'm assuming that there's missing information here -- either the 9% monthly growth isn't sustainable (then it's not a true 9% M-M growth rate) or the costs must rise substantially to sustain it. And if that's the case, then you can start to see the real reason VCs might be hesitating.

So I guess my point is: Don't obsess over the raw growth number as the sole problem. That sets the wrong target. In the end, profits drive businesses, and massively profitable businesses can go public (and get great valuations), and public companies make VCs happy.

> A 9% growth rate the business turns profitable after 6 months and on the 13th month is net profitable. Any rational investor would be frothing to get involved in that sort of business - it becomes a money-printing machine in short order.

That's not 100% true.

1) Growth rates like this are not sustainable long-term, and a 9% growth rate doesn't look great when lots of other companies are at 15-25% monthly growth with similar revenues.

2) The revenues multiples for Series A startup are very high. Would I invest in a $600k revenue/year startup growing 9% monthly at a $4m valuation? Sure, that sounds good. But a Series A would be more like investing $5m at a $25m valuation, which is way higher than the startup is worth based on pure fundamentals. The reason to invest at a $25m valuation is because you think there's a 10% shot the startup will be worth $500m, not because you think it's a 100% shot at $25m. High growth rates are one of the best indicators that a startup has a shot at $500m.

(My fund does seed/Series A investments.)

Sorry, bad choice of words on my part -- I shouldn't have said "any rational investor". What I meant is "any profit-focused, long-term investor" (as opposed to a moonshot-focused VC investor). I don't mean any of those things as negatives, just descriptives.

Your first point is right (and I addressed 1 later in my comment) -- if 9% isn't sustainable long-term, then the whole picture is quite different and a different metric should be used. And your second point, put differently, is "asking prices are too high", which is a fair point.

So I'd recast the original problem in a different light: "Company X is growing at 9% now, expectations are that it's unsustainable and won't be profitable for a while, and at the same time, they're asking a very high price relative to that growth & profitability rate", which explains why they're having trouble a bit more clearly.

My fundamental point is that the meme "anything less than 5% growth per week is bad" in a vacuum feels crazy by itself. With more context, it makes more sense.

I fully agree with that (and didn't read it negatively at all). The 5% meme/week is definitely surreal -- that's >10x/year growth! I'm always really impressed when I see companies with that kind of growth, especially after they've reached non-trivial revenues (e.g. $50k-$100k/mo)

My latest startup's user engagement is growing at >8x YoY, and while the revenue history is not deep enough for a good YoY, it's... let's say, within your scope of interest. Want to talk?

I'd love to chat. I'm leo at susaventures.com

And if they can tighten burn just a little bit, they don't go off the runway.

I don't really understand this blog post.

I don’t think it (the blog post) is strictly about the revenue. As others have stated, if they can sustain 9% MOM (not trivial beyond the very short term) and keep that $90k cost constant, they will be profitable shortly after going off runway. Even with a 1-2% MOM cost growth they still reach net profitability by the end of the year.

I think the blog post is particularly focused on Series A Silicon Valley VC firms. With as easy as it is to get Seed funding at the moment (in SV and with decent connections, anyway), they’ve got multiple companies with – to quote another poster here – 15-25% MOM growth at similar levels of revenue. They’re not looking for the thing that will be making $25k/mo in profit a year from now. They’re looking for the thing that will be sold for millions of dollars.

I think this company would be a great investment for somebody who wants to put $100k+ into a long-term, strategic venture. It is probably a pretty bad deal for most VC firms, though.

and/or short-term salary reductions (especially for founders)

So the plan of action when you can't raise more money is "Try pretty much everything and hope it works?"

I realize you have to provide advice that might apply to all startups, but in this specific case cutting the burn to 60k (maybe losing a bit of equity to keep employees happy) and trying really hard to hit 60k in revenue and bam, you're suddenly at breakeven and your runway can start to grow, you can breathe, etc.

Raising money is always good, but it's hard, and if you've received a lot of nos, it's not going to get easier. Planning for the acquihire is pretty much admitting defeat.

Great advice and solid post.

Some data on how long companies typically wait between Seed and Series A rounds. The median is 349 days so raising for 18 months is smart.

https://www.cbinsights.com/blog/days-between-funding-rounds/

A couple of other notes:

- Might want to look at revenue-based financing. More of a debt instrument but if you can't raise or are getting bent over by equity investors, it is an option.

- I wish the funding is required to grow quick meme would die. Our company is revenue funded and growing at a very good clip. If you can make your customers your de facto "investors", life can be very good.

What are some financial institutions willing to work with startups via revenue financing?

Mind sharing some stats on the typical repayment rates & approval requirements? This sounds like a great way to finance B2B/enterprise type startups with revenue coming in the door from day 1.

Not giving up any equity doesn't hurt either.

There are a bunch. I know of a couple but don't know how good/bad they are so don't want to "recommend" anyone. But quick google search of revenue-based funding SaaS should turn them up.

I've heard they generally work like this:

- Will lend you money equivalent to 1/4 to 1/2 your monthly or annual revenue/billings

- Take a % of revenue every month as repayment. Your repayment goes up or down with revenue which is a good feature.

- Take some warrant coverage as well (1/3 to 1/5 of the loan value)

Some will want to be hooked into your payment solution to take money right as it comes in but as we've not done it ourselves (have only looked at superficially), I'm not sure if that's all that common.

For B2B SaaS startups who can customer-fund to traction, this is the way of the future IMO. Unfortunately, the revenue-based financing guys aren't doing a great job marketing themselves primarily cuz their funds are quite small so far.

Hope that helps.

That sounds like Paypal Working Capital, which they have been "suggesting" to me rather aggressively.

It makes a lot of sense. If you use Paypal for your business they have a good sense of your revenue, and they can be sure they're first in line for repayment.

https://www.paypal.com/webapps/workingcapital/

I remember when I first started reading HN, when having a business model on the table from day one, bootstrapping, and literally running your company out of a garage was all the rage. Easy money really ruined all that. I hope we end up back there some day.

Yeah. While I'm happy to read about these kinds of things, they're far from my own interests (for now). I much prefer the 'bootstrapping' approach for all kinds of reasons, so obviously I also prefer reading about other people's experiences and observations taking the same, more conventional approach.

That said, I understand that the demographics of a site can change, and that's not always a bad thing. And there's still enough variety to keep me here.

Would you (or anyone else reading this) know of online communities similar to HN that are more bootstrappy in their focus?

Not an active member, but when I read it from time to time they are offering solid advice: http://discuss.bootstrapped.fm/

That looks interesting. Thanks!

That option is still there, but does not make headlines. Lots of companies, namely those not in the Valley, go for the organic growth route. It is very fulfilling, but won't make you the next Bezos or Shuttleworth. The VC route is a high risk high reward game. The organic route lowers risk and reward.

What I mean is that absence from the media is not non-existence.

"The organic route lowers risk and reward."

Yes on the risk, fully disagree on the reward part. And i am not talking about the reward of being able to focus on the business rather than raising money.

I am talking about cold hard cash. In a successful small business, many owners will make mid 6 figures, year in, year out, and still many will make 7 figures. After a few year, it beats a lot of exits. And there are many many more of those than the few IPO / big acquisition we can read about. Even with IPOs, the remaining share of the founder sometimes makes me sorry for them.

VCs don't publicize that though, understandably.

A six or even seven figure salary won't make you a billionaire. The success cases of the highly leveraged approach are billionaires. The highest return with high leverage is higher.

I do agree with you on the rest of the comment. The mean return for a highly leveraged approach is probably lower than the mean return for organic growth startups.

How about the next Bill Gates? Microsoft was bootstrapped.

You need to read up on your history I think. Most plutocrats bootstrapped their businesses. Most giants of the tech world sought VC funds after they were runaway growth and/or profitable.

The VC story only matches a few cherry-picked examples.

This resonates. We raised just under $2m through a seed round and then were fortunate enough to be able to raise a bridge that deferred any crunch. But then we did 2 other things: we focused our sales, marketing, and product design on the greatest pain within a single industry (instead of 3) and we reduced expenses. Now growth is great and we are very close to being able to say that raising money is completely optional indefinitely, and no matter what investors do or don't decide, we will be fine. A wonderful feeling but the challenge to get to that next level has also been nearly inexplicable. Great post-mortem.

Haha, I know so many people in this boat. I even know of one startup that was walking the line between B2B and B2C, and just temporarily made a slight turn to B2C to see some easy (non-paying) user growth just to raise the A, only to go back to their B2B route that they are confident will succeed in the long run. I'm sure this story is not going to be popular amongst the investor crowd, but it's much harder to raise an A once there is actual margins involved.

While $50,000 a month is nice revenue, a growth rate of 9% month over month does seem quite low. Was the majority of the $50,000 front-loaded? I'd really be curious to hear what market they are in? Seems hard to believe given their pedigree (YC), monthly revenue 50K, and lean team (8 people), they can't find a VC to bite.

If they are charging monthly, what about blasting all paying customers with an upgrade to yearly promotion (20% off). That would bring in a lump sum of cash upfront which should provide additional runway.

I was surprised that 9% month over month growth rate is a bad number, given numbers in http://www.paulgraham.com/growth.html.

I suppose the difference is "during YC" vs "leading up to a Series A"? What are good numbers?

Well pg is talking about weekly growth, not monthly:

"A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing."

Oop, yep, thanks!

Founders should aim for 15%+ monthly growth in MRR if they want to raise a Series A within a reasonable time after raising seed capital.

This is a real wakeup call - raise bigger seed rounds to last until you're a breakout success.

If anyone from 42Floors is reading this: your link to your own site with the anchor text "office space" is a relative link and therefore broken:

<a href="42floors.com">office space</a>

You need to make that http://42floors.com or it's not going to work for users (and search engines ;) )

Thanks! Fixing it now.

Also, all your images are loaded over http, when you are serving from https, resulting in:

    Mixed Content: The page at 'https://42floors.com/' was loaded over HTTPS, but requested an insecure image 'http://images.42floors.com/8ede644d63d36e5e26d7a394ee5061d07e87389d.jpg?s=75x48%23'. This content should also be served over HTTPS.

Really great post, and not just for founders but for early stage investors as well. This is definitely why we are seeing so many more bridge rounds, but I'm not sure if those are really as bad as they've been made out to be, or just a new reality (for example, I know startups that have done a "damaging" bridge round only to then raise a huge A).

Either way, even more reason for founders to bootstrap for longer if they haven't hit that huge growth curve yet, or just bootstrap forever!

> (...) preparing severance packages (...)

Do US startups typically pay severance packages?

I've never been in a position to receive one from a startup, but I have received one from a well established company before.

Most of the time severance is used as a vehicle to establish good relations with the person being fired (so they don't bad mouth the company), and as a way to get former employees to sign a document stating they wont sue for any reason.

The real problem is that this game is controlled by ADD children who can't differentiate between 9% monthly growth in something of quality and 15-30% "viral" monthly growth in Snapchat-for-cats (the original Snapchat was idiotic, and give cats some credit because they have way better taste than sexting tweens) bullshit.

I treasure the occasions on which you and I agree.

Nobody cares about quality, they care about bottom line and how quickly they can return their investment. No news there.

i dont get why you have 8 engineers when you can't afford it. does raising money give you a false sense of optimism?

I've seen a startup where they just broke even year after year for the past 6 years. they just increase the revenue for the sake of higher valuation but what ended up happening was, it created a toxic working environment, highest attrition rate (because they simply fire people and replace it), eventually a year came around when they started bleeding. eventually the founding members were fired. now the company is getting outdone by the competition, A list clients have jumped ship, and business is dwindling.

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