Paul Graham: The Last straw

Original author: Paul Graham
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The notorious entrepreneur, programmer and founder of Y Combinator Paul Graham seems to know everything about startups. We at Alconost have translated for you his pragmatic essay on projects that have found themselves in a difficult financial situation. Although it is worth reading for those who have no such problems yet.



Many start-ups go through a stage a couple of months before their death, when they spend too much with significant funds in their accounts. Revenues are either negligible or non-existent. The company has, say, 6 months to rectify the situation. And if you call a spade a spade, then 6 months before bankruptcy. And such startups expect to avoid failure with the help of additional investments. [1]

This is precisely the error.

The confidence of the founders that the investor wants to additionally finance them may well be an illusion. Although convincing the investor was not easy for the first time, the entrepreneur is still counting on a positive answer. But the second time he will encounter unexpected problems:

  1. Now the company spends more money than with the initial financing.
  2. For startups that have already received investment, the requirements are higher.
  3. Companies are now treated like a failure. When money was issued for the first time, it was too early to predict success or failure. Now is the time to think, and usually everyone is inclined to "failure." It is logical - because the result is quite typical for a start-up company.

I call this situation the last straw. I do not like to impose stamps, but such a name can a little sober up an entrepreneur.

The situation is made especially dangerous by the fact that businessmen themselves exacerbate everything. They too rely on additional financing, and therefore do not particularly try to get into the "plus" on their own. And this further reduces the chances of a successful exit from the crisis.

“The less you need money from outside, the easier it is to get it.”

Now you know about the problem of the last drop, but what to do about it? Of course, besides the obvious advice not to allow this. Investment company Y Combinator advises to treat investments as if it was the last infusion into your business. Indeed, the power of self-conviction also works in the opposite direction - the less you need money from the outside, the easier it is to get it.

But what if the situation has already become unenviable? First, weigh the probability of additional investment again. Now I will be clairvoyant and predict that the probability is zero. [2]

Three options remain: you can close the company, increase profits, or reduce costs.

If you are really confident in the failure, then it is better to collapse the company. At a minimum, you can return the remaining money and save energy on meaningless attempts to fix everything.

Finish / start


In fact, truly doomed companies are not often found - I just give you another chance to admit that you have already given up.

If you do not want to close the company, then there remains a way to increase profits or reduce costs. For most startups, costs = employees and cost reduction = layoffs. [3] Deciding on dismissals is often not easy, with one exception: you already know that you need to part with this person, but you simply refuse to accept it. If this is just the case, then now is the time.

If this makes the company profitable, or the money saved will improve the situation, you have avoided immediate danger.

Otherwise, three options reappear: lay off good employees, lower some or all of your colleagues' salaries for a while, or increase income.

Reducing salaries cannot be called a good solution, and it will work only when things are not very bad. If the chosen business strategy does not lead to special profits, but the company can survive with a small reduction in salaries, you can try. Otherwise, you just postpone the decision, and it will be obvious to everyone to whom you cut compensation. [4]

There is a choice of two options: dismiss good employees or earn more money. When trying to balance between them, remember the ultimate goal of building a successful food company. Which creates one thing for use by millions of people.

It is worth even more active thinking about layoffs if the reason for the situation is in an overly inflated state. When 15 people are hired at the start, and there is no clear understanding of what you are creating, the company is doomed. First you need to decide on a goal, and to do this with a handful of people is much easier. In addition, these 15 people may well be not the ones you really need. And the solution may well be to reduce staff with the subsequent rethinking of goals and development paths. In the end, you will do a disservice to these people if you go broke with them. They will still lose their jobs, along with the time spent on a doomed company.

In the case when only a couple of people work for you, it is better to focus on ways to increase profits. An offer to earn more may seem frivolous - as if simply asking for money from someone is enough. Beginner entrepreneur and so does what he can to sell more. But I do not suggest selling even more actively, but simply recommend looking for other income options. For example, you have a whole team writing code, and only one of them is engaged in sales. Then try to attract everyone to sales. How will the abundance of code help you when a company goes broke? If the code is needed to close the deal - then go ahead. This is the attraction of programmers to sales: first of all, it is necessary to spend energy on what will bring real income in the foreseeable future.

IT man versus salesman


Another way to make money is to increase the range or try to enter the outsourcing market. I say "try" because the path from creating products to outsourcing services is long and difficult. It’s better not to go this far until your products are in steady demand. But even if your product is still not so good, then programmers will surely be better than those who could be hired by potential customers. Or a team may have experience in some little-studied direction. In general, the transition from the question "do you want to buy our product?" to "what can we offer one for which you are willing to pay?" make money much easier.

For a while you will have to become a ruthless mercenary, because you are trying to save your company from death. This means that the client must pay a lot and quickly. But try to avoid well-known outsourcing traps. An ideal situation can only be if you created a product that clearly meets the needs and desires of the customer, which would make its sale simple and predictable. But you do not work with payment by the hour, but develop a business.

In the best case scenario, outsourcing will turn from a survival-engaging activity into a thing-that-does-not-scale that defines your company. Do not expect this to happen, but try not to miss the small opportunities with great prospects.

The demand for private orders is large enough, and you will probably find a suitable path for survival on this slippery path, if you have at least some qualifications. And I didn’t just call the path “slippery”. Endless customer requests will always inexorably push you down, away from the original goal. Now that survival has become more likely, it remains to survive with minimal losses and not much distract from the main activity.

The good news is that most startups have gone through a similar phase and become successful. The main thing in time to understand that you are on the verge - and if things have become bad, then it is.

Notes


[1] There is a category of companies that cannot earn a lot in a year or two - the result of their activities takes time. For them, simply replace “revenue growth” with “progress”. Your company does not apply to these, unless this has been discussed with investors right away. And you will not envy such organizations, because difficulties with liquidity make them dependent on investors.

[2] There is a hypothetical option that your investors will meet and allocate more money. Rather, you simply decide that they will meet - although they just mentioned that possibility. The only way to solve the problem for the remaining 8 months or less is to try to get the money right now. Then you either receive the expected and immediately solve the problem, or stop being confused about the intentions of investors.

[3] Of course, you should immediately get rid of other large expenses, in addition to salaries.

[4] Unless, of course, the source of the problem is not that you pay too much salary to yourself. Reducing the income of entrepreneurs usually contributes to the company in the “plus”. The only bad thing is that an understanding of everything said came to you only after reading the article.

What is your experience in solving such problems? We will be glad if you share in the comments!



About the translator

Translation of the article was done in Alconost.

Alconost localizes applications, games and sites in 60 languages. Native-language translators, linguistic testing, cloud platform with API, continuous localization, project managers 24/7, any format of string resources.

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