If the question is "why" then I think it's the founders don't start with a simple plan that they can modify in response to events, they don't change methods and experiment when their initial concepts don't work (no business plan survives contact with the market doesn't mean you shouldn't plan, without a plan it's hard to be explicit about what you are changing), or they don't change when the market changes.
We have a good interview up with Dave Stubbenvol at
His model of how to grow a startup is controlled experimentation:
"We continue to evolve both our marketing and the product. Our focus is on three things; market development, product development, and organizational development. We are finding that if you take an evolutionary approach to organizing yourself to ensure survival, performing enough trials so that no one mistake can kill you, you get stronger."
With VC-money often comes a sense of greater responsibility and pressure. So in this regard it isn't difficult to see cash as a constraint.
Well-said, Dharmesh, and applicable to other endeavors in life. I'm looking forward to the follow-on!
<p>I like the phrase from Dave Stubbenvol quoted by Sean Murphy in an earlier post: "Controlled experimentation". </p>
<p>In fact, I think scientific experiments could be a good analogy for assessing the success or failure of a startup. Scientific research involves many of the same tradeoffs and value assessments as a startup. There is no single determinant of "success", but we still have a gut feel for whether we have achieved that success. And sometimes the assessment changes over time, as the value of a discovery gradually becomes more apparent.</p>
<p>If we were to think about "success" in similar terms to scientific research, some of the dimensions might be:</p>
<li>How does the scale of the effort compare to the value of the result? I might be willing to spend my life in pursuit of nuclear fusion, but might not spend more than a couple of months on a Facebook plug-in.</li>
<li>How (intellectually) significant is the work? Even if I make money, I may not feel that a brute-force process is a success.</li>
<What is the time frame in which it produces real value? Is that time frame reasonable in light of the effort required and the resulting value produced?</li>
<li>Can the value be translated to commercial terms? Does the value exceed what we have invested in time and capital?</li>
<p>It seems to me that "success" is a multi-dimensional measure. Each of us will weight those dimensions differently. But it seems clear that the key personnel involved in a given startup (VCs also, if they are involved) should have definitions of success that are at least compatible, if not identical!</p>
Oops... as you can see, I tried to format my post with some simple HTML and it didn't work! (That in response to Raza's post about formatting.)
Carl: Thanks for the great comment.
Apologies for the formatting problem. Looking into the problem now (the good news is that the comments were saved with the right formatting -- it's the rendering that seems to be the problem).
Dharmesh and everyone here,
I struggle with this exact question everyday. We bootstrapped Passageways, our first startup and have been now profitable for all 5 years. The growth is a healthy 50% as we sell corporate portals to financial institutions and have 150 clients. This is all good but the opportunity is much greater..we could/should be selling this product to all verticals and sell it the worldover...now that calls for some VC funding..or some cash infusion......I get calls from PE and VC guys every now and then but we keep delaying this...the decision is whether to keep at our current pace and grow at this growth rate or to involve some professional money and try to call from our most aggressive pages of our growth playbook .
Anyone willing to discuss this on the phone....please email me back..........Dharmesh can you talk?
This is a good problem to have - a successful enterprise that feels that it could be orders of magnitude more successful.
Don't assume that the solution is to throw cash at it. It looks like you have a marketing problem; you need to make your offering known to a much wider audience. But maybe it's not a "shouting louder" problem; maybe it's a "saying it clearly" problem. Don't assume that prospects can recognize that your offering can address their need. You need to speak clearly and directly , showing them that they NEED your offering.
Plus, of course, you have to figure out WHO to speak to and exactly what their needs are. That's an iterative process, as I''m sure Dharmesh would agree.
So don't immediately think "VC funding" or "cash infusion". Instead, think "How can my communication be more effective?"
Question 1 was "Why startups fail?". Startups don't fail because cash runs out, they fail because of the issues that lead to cash running out. Running out of cash is a consequence of failure, not a cause. It is the point at which failure is crystalised.
Question 2 was "What is failure?". I think that there are two types of failure. The first is business failure, where the startup itself fails. The second is entrepreneur failure. In the second scenario the startup does not fail, but the entrepreneur does not achieve his or her goals.
Questions 3 was "Bootstrap vs. VC?". There isn't an off-the-cuff answer to that question. Every startup has different requirements and every entrepreneur has different motivations. However, I think that you can broadly correlate the chances of "Entrepreneur-success" by the timing and amount of VC raised. In other words, if you raise more money early on your startup has more time to figure out the path to success, but you are less likely to do well personally from your efforts.
I have started companies and both bootstrapped and raised VC. Personally, I found that the bootstrapping approach forced better discipline in all areas of the business that when I was mainlining VC cash.
Well said, Mat.
However, let me pick at one of your assertions. Cash can be both a consequence and a cause. I agree with you that it is most often a consequence (or indicator) of some other root cause. I suspect Paroon (earlier post) is in that situation, and I don't think simply adding more cash will solve his problem. Re-reading "Crossing the Chasm" might be more helpful!
Startups (and more established companies too) often assume that more cash can fix anything. But if you have a leaky ship, all the fuel in the world isn't going to get you to port. You have to fix the leak or you'll sink. And that means you have to recognize (and acknowledge) the leak. That 'acknowledge' step is often the hardest.
Now the other side of the coin. Cash can sometimes be a cause in itself. A startup involves an investment of money (yours or someone else's) and you'd better have enough sources of cash to cover that investment. To continue my analogy, you'd better leave port with enough fuel to get back safely (and with some to spare for unforeseen situations). Even if the ship has no leaks, running out of fuel is a problem!
I like your reference to crossing the chasm. One VC funded startup I was involved with was "encouraged" by the VCs to bring in McKinsey (this was 2000!). Several hundred thousand dollars later we had a report that gave us nothing more that a good read of Crossing The Chasm would have. Several of the VCs were ex-Mckinsey. Funny that.
I also like the analogy of leaving port with enough fuel to get back. "Even if the ship has no leaks, running out of fuel is a problem!" Agreed, but I still content that a startup running out of fuel, but still executing well, can top up the tanks relatively easily.
To Mat's prior post:
"A startup running out of fuel, but still executing well, can top up the tanks relatively easily."
Yes, absolutely! To continue the analogy, if you know there's a refueling depot partway along your route, you can include that in your plans. A refueling stop can help you cover more territory than would be possible with your onboard fuel tanks alone!
Inspired piece and inspiring comments! I like your simple recipe for startup success: bring in more money than you spend. Could this be the secret to financial success that millions of debt-ridden Americans are seeking? Thanks for your, and the commenters', thoughts.
Great post and even better comments! I myself have started a start-up (sorry for the redundancy!) and am facing the dificult task of choosing between the two options, litghting a candle that will last or go after wood to make a great bonfire that will last a few months...
I am eager for your next post.
Interesting post and revealing comments - I tend to think about VC funding as afterburners for your startup, they are great to get that highly needed speed but are inefficient long term (conflicts of priorities present any time "tank is refilled" among inefficiencies). Of cause if company is without plan and direction but amount of additional power would help...
If anyone in the group reads Russian , there is a song "Koster" (Bonfire") by Mashina Vremeni ("Time Machine" with lyrics describing the choice between lighting a candle or going after wood.
I think another reason startups fail in-general is because they don't take advantage of the resources that are directly targeted to them. There are a lot of programs out there but Sun Microsystem's startup essentials program is offering x64 server discounts, free tech support and access to other startup 'missing pieces' through their free conferences. For those interested, check outwww.sun.com/startup
I have a simple theory in regard to the above. With or without funding I make sure I never lose the feeling of my back to the wall. Having your back to the wall while a startup is a good thing. It keeps you edgy, responsive and aggressive. Rare is the moment when something comes to a startup. You need to go out there, shake trees and make it happen in all areas of your business. Success demands it.
I agree that a start up is about controlled experimentation. In that way you never fail. You read your results. If your experiment says change, drop it. The change and drop it.
Equally if your startup is a hobby and you drift off to do something else, who cares?
A failure is when you had grand ideas and are bitterly disappointed they don't work out. You are in a bit of a psychological hole and have to dig your way out. And even that is only a failure, if you trap yourself there by refusing to get out all the while complaining about how unlucky you have been.
Package up your experience to show what you have to show and move along to the next experience.
Of course you might fail in other people's eyes. They really should stop living vicariously!! Buy them a drink. Set them a task. Get them going on their own journey and you be the 'second' for a while.