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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 capital associates 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 distribution. It’s about getting through very testing circumstances to make a going of your business.
I was recently reminded of this reality by 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. 🍜 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.
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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 💸 We ended up doing a consulting gig over the holidays to get an extra $10,000 after failing to raise more from investors.
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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.
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I knew exactly what Colin was referring to because I have lived that ‘ramp up’ stage and all of its perplexing difficulties. I now find myself thinking about it as I start recruiting for my new project Zen Patient.
It turns out there is nothing really glamorous about starting a company; it’s a game of survival. It’s a stroll through a minefield where the wrong decisions can torpedo your company very quickly. And at the same time you somehow have to figure out how to pay rent and live on your company’s very meager revenue.
There are 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 the minefields are still out there.
What makes the ‘ramp up’ from an idea to an actual business so hard is that the resources needed to acquire customers at a rate to sustain your lifestyle are nonexistent. You have to be an alchemist of sort to build a product and find customers at a rate to simultaneously pay your rent and keep your company alive. It’s the proverbial startup magic trick.
In this existential push and pull, it’s a company’s burn rate that presents the biggest risk. The burn rate 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 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 and resources you’ll have to invest in actually growing the company.
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.
Some have the mindset that venture capital can fill in that salary gap. It’s the venture capital silver bullet theory. ‘I am going to pitch some angel investors to get my idea funded.’ The idea 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 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 see it all the time 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 yourself to the status of a ‘hopeful’ entrepreneur forever. 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 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 company. You either can pursue your idea, or you can maintain your lifestyle.
To understand why this is the case, just examine the math. In the ramp up phase, the primary goal is to create a business that pays you a regular salary. 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? Investing early in growth. You have to figure a predictable way to push the needle and investing into marketing does just that.
Now imagine you have to support multiple salaries. Those salaries are a significant financial obligation. Moreover, the return on investment for maintaining salaries just doesn’t compare to putting those same dollars into growth and 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.
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.
In the early stage, every dollar you put into salaries to build features is a dollar you don’t put into marketing, and is diverting resources to build this growth engine. At the very least you are prolonging the ramp up phase, at the worst you are making it likely that you never emerge out of it. There is no feature to revenue ratio that is as predictable or fruitful as that of a marketing investment.
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 on growth trajectory early and you can move on to the next stage. 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.
Raising venture capital funding is extremely helpful, but not to ensure you will have the same salary and lifestyle that you did at your corporate job. Those things will come once you arrive at a real business. 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 don’t have to be dependent on VC funding to survive — that’s the startup promise land.
Anything that jeopardizes that path is a liability, which is critical to remember when you put together your founding team. 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, 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.
The biggest success stories have one thing in common — the founding team could endure the challenges of paying rent and starting a business in the most precarious phase of the company’s existence.
But there is no virtue in needless martyrdom, which leads me to the second part of the story. These teams were smart enough to propel their companies out of the most precarious stage of a startup lifecycle by being resourceful and smart with how they deployed their scarce resources.
It’s the old story of delayed gratification combined with a little wit. This is how you avoid minefields. This is how you endure through the ramp up and allow the experiment that is your startup to continue.
A Stroll Through the Minefields—Surviving the Startup ‘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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