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I understand how the trappings of tech culture seem alluring. I am not entirely sure if itâs the open office spaces, the ping pong tables, or perhaps itâs the ubiquitous bring your dog to work policy.
Maybe itâs the idea of meetings with venture capital associates who are eager to jump on a call to discuss your âexciting project.â It can all seem like a high stakes role playing game that revolves around you the âtech visionary.â
I am often amazed how the perception of startup culture and the actual operation of a startup have very little to do with each other. Creating a sustainable business has very little to do with the trappings of the tech industry. Itâs 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, methodical attention to product development, operations, and distribution. Itâs about getting through very testing circumstances to make a going of your business.
This morning I was reminded of this sentiment in a retrospective tweet from Colin Nederkoorn, on the six year mark of Customer.io.
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We completely underestimated many things but two critical ones were: 1. đ How long it takes to ramp up a SaaS business 2. đ€Ż How big of a team you need to keep your sanity and run a mission critical service.
âââ@alphacolin
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At the end of our first year, we had 1 employee and almost ran out of our small amount of investor money đž We ended up doing a consulting gig over the holidays to get an extra $10,000 after failing to raise more from investors.
âââ@alphacolin
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We survived but that experience made me obsessed over đ„ burn and đ«runway. The best runway is infinite. BUT Sometimes to build a stronger business it's ok to burn in the short run.
âââ@alphacolin
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I find myself stressing this sentiment as I am recruiting for my new company Zen Patient. There is nothing glamorous about starting a company. You some how have to figure out how to pay rent and live on your companyâs very meager revenue.
There are of course ways to mitigate this financial sacrifice; consulting while building the company, for example, or having a large enough price point to sustain yourself off a handful of customers. These strategies can make it easier, but itâs still like walking on a tight rope.
What makes the ramp up so hard, is that the resources needed to acquire customers at a rate to sustain your lifestyle are non existent. You have to be an alchemist of sort to build a product, find customers at a rate to simultaneously pay your rent and keep your company alive. Itâs the proverbial startup magic trick.
In this existential push and pull, itâs a companyâs burn rate that presents the biggest existential threat. The burn rate is primarily driven by salary obligations. For an early stage company, the longer you can put off expanding your head count and endure the financial pain of not paying yourself anything close to a market rate salary, the more runway youâll have and the more resources youâll have to actually grow the company. This is all with the purpose to avoid a visit to the startup graveyard.
There is a mindset that venture capital can fill in that salary gap. Itâs the venture capital silver bullet. âI am going to pitch some angel investors to get my idea funded.â The idea here is that the entrepreneur can take funding to pay their own salaries and maintain their current lifestyles. I often find this 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 fantasy that youâll 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 now dependent on whether or not an investor likes your idea and write a check.
I see this all the time with hopeful âentrepreneursâ pitching ideas and never actually building their ideas without first having the green light of an investor cutting them a check.
This is a sure way to relegate yourself to the status of a âhopefulâ entrepreneur forever. If the strength of your belief in your idea only extends to what an investor thinks about it, and is something that you wouldnât invest your own time to build out, then it is not worth being built out in the first place.
The other fallacy around venture capital is that it can help you maintain your current lifestyle and allow you to pursue your idea at the same time. This is not the case. You cannot have both in an early stage. You either can pursue your idea, or you can maintain your lifestyle.
Itâs all in the math. In the ramp up stage, the primary goal is to create a self sustaining business. You do that by growing revenue. This is where resourcefulness matters. The return on investment for headcount and salary burn doesnât compare to putting those dollars into marketing.
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. This is how businesses are grown in a meaningful way. This is the beginning of creating a marketing engine.
Every dollar you put into salaries is a dollar you donât put into marketing and is diverting resources to grow the company. This is a liability. Your stifling your own growth.
Spend on early on marketing and maintain a low salary burn, and you might just find a way out of the precarious ramp up phase. Otherwise, youâll end up in a startup tarpit, draped in inertia.
You have a choice at the onset of the project. Focus on growth trajectory early and you can move on to the next stage. Through this path you can be a self sustaining business or you can 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, youâre dead in the water. Game over.
Thereâs no follow up funding, thereâs no reboot. Youâll just end up in an inertialess startup tarpit.
Raising venture capital funding is extremely helpful, but not to ensure that you have the same salary and lifestyle that you did at your corporate job. Those things will happen. They will happen when you emerge out of the ramp up phase, but venture capital is poorly deployed in this way.
Venture capital is there to propel your company out of the ramp up phase. Create a marketing engine early and the fruits of that work will pay off forever. A million dollar run rate gives you some peace of mind that you are not going out of business any time soon and it also allows you to continue to develop your product. Get to a million dollars in revenue and you have a business and you donât have to be dependent on VC funding to surviveâââthatâs the startup promise land.
Anything that jeopardizes that path is a liability. I find myself having to remind myself of that as I am recruiting for my new project, Zen Patient. Itâs hard to get talented people to quit there jobs to work on startups. This is especially hard in our industry where you have to compete with established companies offering high market salary rates.
No matter how talented I think the individual is though, I have to remind myself that if the condition for having that person come on board is providing anything close to a market rate salary, bringing that person is more of a liability than not. Itâs better to build things on your own, until you can find the right person to accept that pain threshold with you.
Thatâs what all of these success stories have in common. The founding team could endure the challenges of paying rent and starting a business in the most precarious phase of the companyâs existence.
There of course is no virtue in needless martyrdom, which leads me to the second part of that story. These teams were smart enough to propel their companies out of the most precarious stage by being resourceful and smart with how they deployed their scarce resources.
Itâs the old story of delayed gratification combined with a little wit. This is how you steer your company away from a startup graveyard and towards the proverbial startup promise land.
Surviving the Ramp Up was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
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