Paul Graham: How startups get through the most lethal stage of austerity

YC founder Paul Graham published the latest article on his personal blog, which mentions that startups are easy to get into the fatal Pinch (the deadly Squeeze) phase. PG shares a lot of information about how to avoid this phase and how to get through it. Thank my colleague salad to compile this article with me.

Many startups experience a few months before they die: even though they have a significant amount of money in their bank accounts, they are losing money every month, and profits are growing poorly or not at all. In this case we can say that the company's business is only 6 months, or more straightforward, 6 months later they will be bankrupt. In this case, they expect to avoid bad luck by raising more money to investors.

The "anticipation" described in the last sentence is the deadliest.

Although it was difficult to convince investors for the first time, entrepreneurs had a good anticipation. What they do not know is that in the second financing they will be affected by three factors:

The company now spends more money than it did on its first financing.

Investors are more demanding on companies that have been financed;

The company seems to have failed at the moment. When it comes to financing the first time, it is too early to talk about its success or failure. Now, however, investors need to start thinking about the problem. Usually the default answer is failure-because startups are at this stage, failure is the default result.

I described this in the first paragraph as a "deadly squeeze". Although I don't like to make words, a name for this situation may cause many entrepreneurs to be aware of this situation.

One reason that "deadly austerity" becomes so dangerous is that it is a self-reinforcing result. Entrepreneurs overestimate their ability to make more money, so they are less likely to consider profitability and then reduce the likelihood that they will be able to make more money.

Now that you have a sense of the "deadly squeeze", how would you deal with it? Obviously, the easiest way is to avoid it. Y Combinator has been telling entrepreneurs to take every financing as their last. Because self-reinforcing is counterproductive in this situation: the more you don't need to raise money, the more likely you are to get financing.

So what do you do if you're in the "Deadly Pinch" stage? As a first step, you must reassess your company's chances of merging the next amount of money. In fact, I can tell you the answer with predictability now: the probability is zero.

So you have three more options: Close your doors, earn more money, or spend less.

One of the things you should do is to shut down the company, and that is that you are pretty sure that no matter what you try to do, you are doomed to fail. Since it is doomed to fail, it will be closed early, at least not to waste the rest of the money, but also can help you save a few months of "futile."

In fact, very few companies are "doomed to fail". So I'm actually helping you find an excuse to admit that you've given up.

If you don't want to shut down the company, then "open source" and "throttling" are the rest of your options. In most cases, start-up companies spend almost all of their money on hiring, so in most cases, a startup that saves support means layoffs. It's a very tangled thing to dismiss an employee, and there's a situation where you don't have to tangle with it: you've been feeling that someone in the company should be fired, but you're always running from the fact that you're not going to do it--don't hesitate now.

If you open these people and your company is instantly profitable, or if you instantly make enough money to support the day your company can make a profit, you'll avoid the immediate dilemma.

If you leave these people alone and the company doesn't get any better, you have three more options: fire some of the good workers, temporarily cut some or all of the staff, or expand your income.

Making a temporary pay cut for employees is a bad solution and only works if your problem is less serious. Otherwise you're just stalling, and don't think the employees who are being cut will not see it.

Then you lose one option, the last two: fire a good employee, or earn more money. When weighing the two options, I recommend that you do not forget your ultimate goal: to be a successful product company. That means you have to have a good product at least, and a lot of people use it.

If your problem is simply to recruit too many people, you should certainly lay off staff. For example, if you don't even know what kind of product you want to make, you run to recruit 15 people, which will definitely crush the company. You need to figure out what kind of product you're working on, maybe you need to do just a few people, and it's more efficient than dragging 15. Besides, those 15 may not be the type of person you need. In this case, you should shrink the person and figure out where your product is headed. After all, you take 15 of people to bring down the company, and they are not a bit of a benefit. They end up losing their jobs and wasting so much time in an unreliable company.

If your team has only a few people, you'd better make more money now. It seems a little too superficial to suggest that a start-up can earn more money. Many companies have tried everything they can to sell. In fact, what I'm saying now is not that you can make a lot of money out of the existing model, but you have to think of some other way to expand your revenue. For example, if you have only one sales, there are four program apes, then you can now consider for everyone to sell. You're going to fall, what's the code? If you have a business that needs to be hit by code, knock it off and you'll have to do everything for sale now. Remember, you are only doing the business that maximizes your income in the shortest possible time.

Another way to outnumbered money is to sell something different, especially if you can do a little more consulting work. The reason you say "do some consulting work" is because if you switch from doing a product directly to a purely consulting business, that is "landslide fallacy" (that is, irrational use of a chain of causation, transforming "possibility" into "certainty"), and before you can really offer some very unique value to your client, Don't go too far in the matter of counseling. Even so, as a start-up, your programmers are generally better than the programmers in those companies that ask you to consult. Or, in some areas, you have very knowledgeable experts, and those companies don't. So, adjust your sales question, don't ask "what do you want to buy us" and ask "what do you want us to do for you", you may feel your company's ability to absorb gold suddenly on a step.

When you start to do counseling, please "ruthless" point. Remember that you are saving your dying company, so the more money your clients pay, the better, the sooner the better. And you have to avoid the pitfalls of consulting work as much as you can. Ideally, you will be able to tailor a derivative version of your product to your customers, or you may be selling your products directly. Remember to keep your intellectual property and do not accept "hourly payments".

In the best of circumstances, this kind of consulting work may not only help you survive, but may also be an unexpected turning point for your company. Don't expect this to happen, but when you look at the needs of individual users, keep your eyes open for those that look small but that will be limitless in the future.

Like custom work, the demand is usually large, unless you are really incompetent, you can certainly survive this pattern. But I use the word "landslide fallacy" for a reason: the customer's demand for bespoke products is endless. Well, now you may well have survived, but the question has become: how to survive at the lowest possible cost, at the least disturbed.

The good news is that many of the startups that are now successful have experienced the brink-but they survived and prospered. It's just that when your company is in the business of survival, you should never be aware of it. And if you're in the "extreme pinch" situation, face it.

Notes：

Some companies are barely able to find a reasonable way to make a profit in their first year or two--because they build things that are huge and take a very long time. For these companies, they don't have to be more focused on project progress than on revenue growth. Unless your investors have reached a consensus with you ahead of time to focus on the progress of your product without having to make a profit, do not default to the company. And, to be honest, many of these companies do not want to be the kind of company they are--because of the lack of liquidity, they are very passive in the face of investors.

Sometimes you get into trouble and your investors promise that they will continue to give you money to help you through the difficult times. What's more, you think you've got their promises, but what they're talking about is just "likely" to continue investing in you. When your money is only worth 8 months or less, you should try to solve it immediately-and ask your investors for the money right away. In this way, if you get the money smoothly, the problem will be solved immediately, or at least avoid the situation where your investor says he wants to help you, but it drags you away for a while.

Of course, if you have a lot of other expenses to cut down than your salary, then do it.

If you do it for a long time, the root of your company's dilemma is that you're paying yourself too much, so you have to cut off a part of it. For a founder, it should be sacrificed to reduce his salary to the minimum amount of money he needs to solve the company's dilemma. But if you have to read this article before you realize it's a very bad sign.