The start-up vortex of doom

Starting a tech company is expensive. That’s why those who start one — unless they can do everything themselves, including designing, coding and selling — must accept fund-raising as an early goal.

Every day we read about budding entrepreneurs who raise millions of dollars to start something. Often, we never hear of them again. A handful resurface when the company sells for a fortune, but most trip and fall into the start-up vortex of doom, spinning to an almost certain and painful death. Companies don’t send out press releases when they die, so the vortex isn’t well known. But as someone who has spent the last eight months trapped in it, I know I’m lucky to have escaped to tell the tale.

Three years ago, at home in Sydney, I hatched an idea for a tech company called Posse, a “social search engine” that helps users get recommendations for products, places and services from their friends. I drew up a plan for the product and showed it to a web development agency for a cost estimate. The agency’s answer was that it would cost plenty. So I created a PowerPoint deck and started pitching investors. With an idea but no track record, I thought angel investors might be the way to go. I pitched more than 700 times, and one full year after I started, I finished my first round with $1.5 million from 23 individual investors.

Next came the team, a product, and in no time we were parting with $100,000 a month in expenses — engineers don’t come cheap! And after 10 months, we were still finding our feet. I made a couple of hiring mistakes, the product didn’t work right, and we needed to raise more money. We were now entering the vortex. The second round was tougher to raise than the first. We had made progress but didn’t have exploding user numbers. I discovered that it’s much easier to raise money for a vision than for a product. With a big vision, investors dream of what might be. When the product appears, no longer a vision, investors see what it doesn’t do more than what it does do — or what it might do.

With a start-up, everything must fit together for the product to fly. We needed the right team and the right strategy, and we needed to execute. Some companies require several iterations to get it right, and that can take years. I moved from Sydney to New York and spent 70 percent of my time raising money, a process that compromised our priorities. Investors wanted to see growth when we needed to focus on engagement — getting people to return to use Posse again. I’ve caught myself pushing growth to impress investors, when both the team and I knew it was inappropriate.

The team became disheartened, and since I was on the road raising money, I wasn’t around to motivate them. They became less productive, and everything slowed down just when investors were demanding progress. As this dragged on, team members left, which made things even more depressing. I was exhausted and started to lose faith. Many companies fail at this stage. It’s the death spiral that almost killed my business and at times seemed like it might kill me as well. The things I have learned about avoiding and surviving that spiral, as I’ve built my company, will be the topics of my posts on this blog.

To get started, here are a few discoveries I have made along the way.

1. Avoid the Vortex

Entrepreneurs are optimists. I started with a plan, budgeted costs and believed my idea would fly. I would raise enough money for the first year, and I thought that by then I’d have enough traction to raise my next investment round at a higher valuation. This is how entrepreneurs think when starting out, but the number of companies who actually do this in the first year is tiny. Even successes like AirBNB, Twitter and Pinterest needed several years and many pivots to get it right. If I had it to do over, I would raise more money right upfront, when everyone is still excited about the vision. And I would give myself at least two years runway, giving us time to make mistakes and focus on the right things without distraction.

2. Raise Money Before You Need It

When we were spending $100,000 a month, I knew just how much time we had left, and four months before it ran out, I started trying to raise money again. As we compromised priorities and team members left, my energy collapsed. It’s almost impossible to raise money in this situation. I remember one day in particular. On a hot New York summer afternoon, I was sitting in my co-working space at the Alley in Midtown. Paralyzed by stress, I couldn’t do a thing. I summoned my last fragment of energy, walked to Central Park, sat on the grass and cried. I knew I was approaching the very bottom of the vortex. I was spinning fast; one slip and it would all be over.

3. Focus on Breaking Even

It’s sexy to focus on growth; we often hear of sky-high offers for companies with no revenue but lots of users. Yet thousands of companies have both users and growth — just not steep enough growth to raise money or be bought by Facebook. Next time I start a tech company, I’ll pick an idea capable of generating revenue from Day 1, then I’ll expand that revenue so we break even as quickly as possible. I might seek investment to accelerate growth — but I won’t fall into the trap of needing it.

4. Learn to Live With Discomfort

Early on my founder journey, I recognized I would need to figure out how to handle stress. I started reading about Buddhism and found comfort in its teachings: that everything is temporary, that suffering is a part of life. Uncertainty and suffering are part of running any business. I took up yoga and learned to meditate, yet I survived the year by recognizing that my path was of my own choosing. That day in Central Park, I got a glimpse of failure. To my surprise, it wasn’t that bad. I wasn’t about to die, after all. Since then, I’ve been more willing to accept the uncertainty.

At 4.58 a.m. on a recent Saturday morning, I got the email I needed: confirmation that the funding round I’d been working on all year had closed. The last investor had said yes. That day, I slept, watched TV and went for a walk in the park, enjoying my first adrenaline-free day for months! What got me through the year was tenacity. Half an hour after my breakdown in Central Park, I dusted the twigs and dirt off my skirt and marched down Lexington Avenue to another pitch. Like 99 percent of my meetings with investors, it ended with their saying no — but it didn’t matter. The only way out of that vortex is to keep going.

 

CATEGORY: Capital Raising, Growth, New York Times

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