For any startup, there is only one viable strategy: to stop being one.
The reason for this is simple: when the organization reaches viability, if something goes wrong there is always the option (except in the most egregious cases) to unwind, go back to where the business was previously, regroup and try again.If you're a startup, you don't have that luxury - there's nowhere to go back to. For a new venture, the only options are "up" or "out." This is one of the reasons why the failure rate for startups is so high (by my estimation around 80 percent). In so many cases, time simply runs out for the founders and the would-be business dies an early death. Call it a high infant mortality rate.
Funding Can Kill
So you'd think the answer would be to find some funding, and the more the better, right? Just add a dollop of cash, and all will be well. Well, no, actually. In fact, in my experience, external funding is often the primary reason for the demise of many startups.
Here's why: In the long term, the only valid source of funding for any business is cash generated from a profitable, sustainable market. No external source of funding can, will, or should be a substitute for profitability. For the founders of any new venture, therefore, their primary goal must be to find that profitable, sustainable market, and start mining it as soon as possible.
Being Hungry Helps
Being Hungry Helps
Here's where it gets tricky: The need to find a profitable, sustainable market is at its most obvious when the new venture has no alternative. When there is no other way to pay the bills, the distance between a startup and a profitable market is dramatically shortened. Necessity mothers invention, and customers appear (not in every case, of course, but presuming even an average product or service and reasonably intelligent founders, a market can usually be found). In those cases where I have worked with highly successful startups (i.e. those which quickly stopped being startups and became viable businesses), the founders exhibited an almost obsessive need to release endorphins by getting demonstrably closer to a sustainable market every single day.
But no-one likes to wake up every morning and have their first thought be "how do I pay the bills today?" And if you have employees –even only a few– the financial and emotional burden of meeting payroll is grindingly oppressive. As months go by, to the cash-strapped, nerve-jangled, resource-parched founder the idea of obtaining external funding becomes more and more alluring.
So we put together a plan, network like crazy, schlep around the usual suspects, pitch so often that we're sick of hearing our own voice, suffer multiple ignominious rejections, tear our hair out...until, after what seems like a hellaciously long-drawn out process that costs more in fees than we originally thought of actually raising...we get our funding. Usually less than we were asking for but still - we have funding.
Getting DistractedAnd now two things happen: First, our 'pleasure synapses' are rewarded in a different way: We buy a bunch of Aeron chairs, maybe. Or lease our first actual office. Or we can finally purchase that equipment we need, or hire a bunch of programmers, or take some of the back pay we're owed. It might be any of a thousand things, but one way or the other, we've found a way to get an endorphin release that isn't directly correlated to finding a market.
Secondly, we know that if we've done this funding thing once, we can probably do it again. And now we have a track record, we can probably do it bigger and faster the next time. So the sheer terror of needing to find a profitable, sustainable market is diluted: know we now–albeit subconsciously– that we have an alternative to hacking through the jungle in search of that market.
Am I saying that every startup should be entirely bootstrapped, or that all external funding is bad? No, of course not. Used sagaciously and applied with laser-like focus, external funding can speed a new venture toward finding its market.
But in my fourth decade of launching, working with and advising countless startups (and their funders), I do know one thing: I've seen more over-funded startups fail than succeed; and I've seen more bootstrapped businesses succeed than fail. So think hard before you take that external funding, and ask yourself one question: will it take you closer to finding your profitable sustainable market, or will it merely numb you to the need?
Read more posts and venture capital and startup funding.