It breaks my heart to read Tom Howard’s post on his struggles with his startup.
On many levels, I can relate to his story. When Stephen and I started Archon a few years ago, we had no money and no funding. We mostly muddled through our first two/three years with minimum-wage projects, Stephen’s scholarship fund, and my grandmother’s pension savings. I still remember vividly of being afraid to attend gatherings with friends, seeing them making decent programmers money, and feeling like a failure when asked what was I up to.
But I’m not going to talk about all those struggles in this post. I think most startup entrepreneurs will share the same “just-suck-it-up-and-keep-rolling” mentality.
What I want to write about is the current trend in startup as I see it, and a reminder that we should get back to the basic.
My partner, Stephen, had a brilliant observation on the recent craziness we see in the startup world:
“It’s not just the startup world. Interest rates are low, gold prices are high, stocks and bonds aren’t yielding that well … in general because of demographic and other trends, there are too many people wanting to lend (and earn interest) and not enough people productively borrowing. So it’s only natural that this spills over into the startup world.
I don’t see a major “correction” in the next decade. The age of easy, predictable return on investments is over. Lots of startups overvalued? Yes. Bubble? No.”
To extend his thoughts, I think a multiple of factors have yielded the vibrant startup craze we see today:
- Big successes on seemingly simple apps: Twitter, Draw Something, Dropbox, Instagram, etc.
- Access to funds with just a PowerPoint deck, or a weekend-all-nighters prototype, or “my friend’s friend just got funded by doing …”
- Coding up something usable is quick and easy-to-learn with technologies such as Ruby on Rails, Django, Cake php, etc.
- You only need a few people – most of the time two to three only.
- Financial cost of doing a startup is low, and most people are willing to stay lean at the beginning.
- The idea of “if I solve this little problem/pain-point that so many people have, then I can make millions. Look at Company X. If things don’t work, I will just pivot.” Keyword here is little.
The optimism is good and all. Without it, we, as a society, won’t be able to take awesome photos, sync them across computers, and tweet them for the world to see. Without it, we, as programmers, will all just be stuck at our bank jobs, wearing a tie and wondering why we haven’t hung ourselves with it yet. Without it, we, as founders, will sleep even less at nights.
But realistically, most startups will fail.
When my older brother found his first startup, it was a bit before the dot-com bubble, back in the 90s. They were well-funded, had a talented team, and a beautiful office space. Heck, they even gave me my first internship!
But the problem was that they weren’t really making money. They were building websites for other companies, doing cool little projects here and there, and generally just having fun. When the dot-com busted, funding stopped, and they had to close shop. It was very disheartening for me to learn the news, as I always thought my brother was invincible.
Lesson that I toke from his experience was: “a company has to make money”.
Zooming back to today, I think startups nowadays had learned from their predecessors, somewhat. Hey, at least they didn’t have the whole Lean Startup and YC thing back then, right?
But I think the basic human psychology is still at play here. As Warren Buffet said:
“… when your neighbor has made a lot of money by buying internet stocks, and your wife says that you’re smarter than he is and he’s richer than you are, so why aren’t you doing it.”
Similarly, some might think: “if Twitter didn’t bother thinking about monetizing in its early days and is still super successful now, then why should we think about monetizing that early? Better to find the product/market fit first and build some traction from it.”
In my observation, quite a bit of startups are still going with this line of thinking.
Don’t get me wrong. I think it’s perfectly fine to use investor’s money for developing the product before its launch. And it is perfectly fine to live on investor’s money for a bit until things are picking up.
But what doesn’t sit well with me are startups with no real plans to make money on day one, and are just hoping the ill-thought-out freemium or half-baked ad-supported models will save their day, once they get enough users. The key here is, of course, once they get enough users.
I think instead of wishing for the ideal case, people should first look at the baseline. We should work backwards and ask: “how much money per month does it take for us to keep the team alive, so that we can all keep on working?”
After that, just do a simple math of calculating the average revenue per paying users, the number of paying users you need, the conversation rate within the industry, and, finally, how many active users you need per month to make all these numbers. Once you have all these numbers, ask yourself honestly in the mirror: “Can I realistically make these numbers before the money burns out?”
All these might sound like common sense, and I’m sure it has been covered extensively in many other books/articles. But with the recent string of big acquisitions and seemingly over-night successes, I just want to remind us that we should all focus on the basic first: “the company has to make money”.