I understand how the trappings of tech culture seem alluring. Perhaps it’s the open office spaces, the ping pong tables, or the ubiquitous bring-your-dog-to-work policy.
Maybe it’s the idea of meetings with venture capitalist who are always eager to jump on a call to discuss your ‘exciting project.’ I get it. It can all seem like a high stakes role playing game that revolves around you, the ‘tech visionary.’
I am often amazed how the perception of startup culture and the actual operation of a startup are so disconnected. Creating a sustainable business, in fact, has very little to do with these trappings. It’s not VC meetings, ping pong tables, or how many buzz words you can fit into your pitch.
It has more to do with extreme discipline to keep your burn rate low and methodical attention to product development, operations, and aggressive user acquisition. It’s about getting through very testing circumstances to make a going of your business.
We completely underestimated many things but two critical ones were: 1. 🍜 How long it takes to ramp up a SaaS business 2. 🤯 How big of a team you need to keep your sanity and run a mission critical service.
At the end of our first year, we had 1 employee and almost ran out of our small amount of investor money 💸 We ended up doing a consulting gig over the holidays to get an extra $10,000 after failing to raise more from investors.
We survived but that experience made me obsessed over 🔥 burn and 🛫runway. The best runway is infinite. BUT Sometimes to build a stronger business it's ok to burn in the short run.
It turns out there is nothing really glamorous about starting a startup; particularly when you are in a ramp up stage. It’s a game of survival. It’s a stroll through a minefield where the wrong decisions can torpedo your company very quickly. This is all compounded by the fact that through all of this you somehow have to figure out how to pay rent and support yourself on your company’s very meager revenue.
What makes the ‘ramp up’ from an idea to an actual business so hard is the dearth of resources. Resources to build products, market products, and support products. It’s during the ‘ramp up’ that founders have to master the art of alchemy. The founder has to conjure up a product and customers at a rate to sustain the business. It’s the proverbial startup magic trick.
In this period of existential limbo, it’s a company’s burn rate that presents the biggest risk— a burn rate that is primarily driven by salary obligations. Fortunately, unlike other aspects of a business, salary is something a business has control over.
For an early stage company, the longer you can maintain a low burn—putting off expanding your head count and enduring a subsidence rate salary—the more time and space you buy yourself to figure out how to build a business that works.
This dynamic seriously limits the pool of individuals who can successfully start companies to those who have higher risk profiles, can defer immediate financial gratification, and who are resourceful enough to make something with scant resources. Most importantly it favors the operators who are skilled enough in their domains to command these aspects of the business on their own to absorb the costs of operating.
Some have the mindset that venture capital is silver bullet to all of these early stage conundrums; particularly the financial pinch of the ramp up phase. ‘I am going to pitch some angel investors to get my idea funded and I can quit my job.’ I often find this mindset in a category of people that have the lowest pain threshold and least likely to launch a product.
The error here is manifold. It starts with a misconception that you’ll meet this mythical investor who is going to fund your idea; an idea of course, that has no validation at all with actual users or paying customers. The basis of your company is purely dependent on whether or not an investor likes your idea and cuts a check.
I encounter this mindset with hopeful ‘entrepreneurs’ pitching ideas and never actually building those ideas without first having the green light of an investor. In a world where even the most fleshed-out startups consistently get rejected by investors, an idea stage ‘project’ has the slimmest prospects of getting funding.
This strategy is a sure way to relegate you to the sidelines in perpetuity. It’s the strategy of amateurs. If the strength of your belief in your idea is only as strong as the willingness of an investor to fund you, then perhaps it is not worth being built out in the first place.
Moreover, the notion that this investment money is going to enable you to avoid the financial sacrifice to start your company is misguided. Founders do themselves no favors by saturating their budgets with high salaries. They simply are putting the salaries of tomorrow at risk for the temptations of today.
To understand why this is the case, just examine some very basic math. In the ramp up phase, the primary goal is to create a sustaining business that at the very least pays you a salary so that you can dedicate your full time to the project. Say that your average customer pays $100 a month for your product. Then you need to find 70 customers to bring you a monthly salary of $7,000. How do you find these 70 customers?
If we assume that a great product is a requisite, then the other part of this story an aggressive user acquisition mindset. Aggressively acquiring customers in the earliest phases of your company is the surest way to propel you out of the ramp up phase in the most expeditious way possible.
Developing features of your product without a commensurate push to grow your user base can set your startup on an inertialess path. This is what I learned when I was my previous company’s ramp up phase. We developed new features thinking each feature would cause the inflection point we were looking for. ‘Ticketing will be a game changer,’ or ‘this new mobile app will allow us to sell at a higher price point.’ Each time we barely pushed the needle when it came to growth. We dreamt silver bullets, but we were only pushing out what amounted to paper bullets.
It turns out paper bullets are expensive. Features cost money in the form of engineering hours. We invested all of our seed funding in developing a great product. In doing so, our feature list expanded, but our actual revenue growth never changed in a meaningful way to support that development.
Eventually we stopped making new features all together. We had no choice; we couldn’t meet payroll to continue all of this development. We were in what I call a startup tarpit. The startup tarpit is the land of inertia. We had a good enough product but not enough marketing resources to get out of our stagnation. We raised money to build a great product and when we ran out of money we had nothing to show for it; making it nearly impossible to raise additional money.
Now imagine your ramp up phase company has to support multiple salaries. Or imagine your want to pay yourself the same salary as the job you just left to start your company. The return on investment for those salaries just doesn’t compare to putting those same dollars into growth and marketing. It’s very simple. I can acquire a user for X amount of dollars through marketing channels. That user will result in some multiple in revenue of the acquisition cost.
That is how companies grow — they arrive at a place where they can predictably acquire customers at a given cost, and earn some multiple of that in revenue from that user. I spend $100 through PPC campaigns, for example, to acquire a customer and receive $400 back over the course of the user’s lifetime. I can grow the company by replicating this process over and over. This is the beginning of creating a marketing engine that will continue to grow the company in perpetuity. This is how you support salaries and get through the ramp-up.
There is no feature to revenue ratio that is as predictable or fruitful as that of a marketing investment. I say this as a person whose craft is product development. Invest early in marketing and maintain a low salary burn, and you might just find a way out of the precarious ramp up phase. Otherwise, you’ll end up in an inertialess startup tarpit.
You have a choice at the onset of the project. Focus aggressively on growth and you stay alive. Through this path you can be a self-sustaining business or have the metrics to raise additional funding. You open up possibilities.
On the other hand, if you ignore early growth trajectory and solely focus on product development, and end up having nothing to show for it, you’re dead in the water. Game over. There’s no follow up funding; there’s no reboot.
Anything that jeopardizes this prime directive is a liability, which is critical to remember when you put together your founding team. Your team has to buy into this mindset. It’s something I have to remind myself of as I am recruiting for my new project, Zen Patient.
It’s hard to get talented people to quit their jobs to work on startups, and especially hard in our industry where you have to compete with established companies offering high market salary rates.
When thinking about the team I want to put together for Zen Patient, no matter how talented I think the individual may be, I have to remind myself that if the condition for having the person come on board is providing anything close to a market-rate salary, bringing the person on board is too much of a liability during this fragile stage.
Too much burn is too much risk. It’s better to build things on your own until you can find the right person to accept that pain threshold with you. Stay lean and stay alive.
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