Friday, October 20, 2006

Killing startups

Paul Graham talks about 18 mistakes that kill startups. When I read that first, I said: Why 18? Why not 20? Or top 10, or even top 3, in todays times of instant gratification? I think this was more on the lines of "Ok, here's the top 10. Oh shoot, I forgot that one. Let's make it the top 11. Er, remember that guy who shot his co-founder. Top 12. And 13. And 14...Okay 18 and that's it. The remaining 982 they learn for themselves."

Apart from what Paul said, I think one of the other BIG reasons that kills startups is:

19. Inertia
You know the standard way startups try to fund themselves: I'll do some consulting on the side, they think, and pay the rent. Soon, they get a few projects, hire a few employees on both product and consulting sides, and now they have some healthy revenue that they pump into their product's marketing like visiting trade fairs, buying advertisements and so on.

But the product still does not sell. The employees are working hard; as hard as they can. But some employees are on the consulting side and others, on the non-performing product. As every company does, founders try to reward performance through bonuses - consultants get the meat and the product employees are handed only a "company wide bonus"; they either begin to leave, or ask to be moved to the "other side". The products flounder further.

Yet, the startup owners are doing well - the consulting revenue is enough for profitability, and they still feel the product "has something in it". So they continue to fund it, and after a few more down or "just break even" quarters, have the big doo-dah meeting: What should we do with this thing? Founders are (usually) human beings with a huge attachment built up for the product; after all, it's the only thing the company owns as a technology asset, while the rest of the work is for-hire-for-customers.

Warning sign: Inertia.

They *could* fund the product forever. As long as consulting revenues come in, the product can underperform, or just about break even, and no one will feel compelled enough to break the impasse. This is where I believe startups fail; the inertia from running a business profitably eats into the potential growth one could have with a more "remove the deadwood" approach.

That's why founders need a plan. Not a plan you show investors where your numbers make you sound like a significant contributor to GDP. A plan that says: This is how much I want to grow. This is how long I'll wait to see that growth. And if we fall short, I will quit or find a venture capitalist.

I failed in that I did not have a plan. I did have dreams. I was scheduled for my second ferrari last year, according to one of them. I have one car by ferrari's parent company, Fiat, and I just cleared the loan last September. Oh so much not the same thing.

What I'd recommend is: 50% growth for the first five years of sales, and a Rs. 5 crore revenue target (Rs. 1.5 crore net profit) within 36 months of your first sale. Or quits.

If you already have venture capital, throw all of this away; the VCs will tell you what sound to make next.

Note: I understand inertia does not "kill" a startup - if you're still profitable, are you dead? Well, I could run a company profitably with $1000 in annual revenue. See what I mean?

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