Also: “Burn less.” “Monetize early.” And “you can’t improve what you don’t measure.”
By Jeff Haynie
My startup career is roughly as old as Evan Spiegel (of Snapchat), the brothers Collison (of Stripe) and most of today’s YouTube stars. The “startup world” looked very different in my earliest days. AOL sent CD-ROMs (like this) with its dial-up and email offerings through USPS. It took hours to complete one level of Dune. Few companies had websites and even fewer had apps fueled by open APIs. Heck, few developers cared about APIs until 2000.
A lot has happened since those days. Those of us lucky enough to emerge from the first dot-com bubble spent the next few years rebuilding and starting anew, not to mention carrying out post-apocalyptic strategies when the global economy sank into the worst global recession since World War II in 2008. We very well may be on our way to another, albeit different burst, but regardless of what’s to come, the lessons I’ve learned in leading startups through both eras are as relevant today as they would have been back then.
Whether a company is preparing for the next industry-bending force majeure or simply seeking out prudent advice in flush times (or when the belt is tightening), these five lessons all apply:
At my current company (Appcelerator, recently acquired by Axway), we’ve always struggled with the “reach versus revenue” conundrum. On one end, you have “reach” (i.e. market impact) and on the other, you have “revenue” (i.e. monetization).
Every company monetizes differently — not only how and what, but when. In the traditional software sales model, companies spend money to achieve scale and drive monetization. It takes (lots of) money to scale, as well as (lots of) time to do correctly. The freemium model (which we used to grow our Titanium product) uses virality and a good product to drive reach and grab market share. But the further you maximize reach, the harder it is to scale revenue, often due to user resistance in paying for something they’ve received for free. In fact, the more successful you are in using the freemium model, the more friction the system introduces in monetizing the venture. Thus, the conundrum.
One thing I’ve learned is that it’s never too early to charge (something, anything) if you want to eventually have a sustainable business — even if you have to risk reach. I’d prefer to have fewer dedicated “power users” that can’t live without it (and are willing to pay) than lots of users that use our product only on the condition that it’s free. It won’t make you the most popular, but you’ll be around when others fail.
I’ve heard many opinions and had many experiences in this realm over the years. Even with Appcelerator, there was a long period of time (2008-2012) where we went slow, and then a period where we went too fast (2013-2014) and almost went off the cliff.
Out of that, I’ve learned that at a startup, it’s close to impossible to scale fast successfully.
The biggest reason is that you need a lot of things to make scaling fast work that are inherently a mismatch at a startup, including well-defined processes and people that work well with and know those processes well. By definition, startups rarely work well in conditions conducive to strict structure. You’re almost always single-threaded in many areas (HR, finance, operations, IT, etc.) for awhile. When you go into hyper-scale mode (i.e. hiring a lot of people over short bursts of time), the things that worked previously become a huge tax and drain of your attention overnight. You’ll turn 110 percent of your focus to internal things and the stuff you’re good at, like shipping a great product, starts to come second.
If you’re really successful, this problem is unavoidable. But the moment you go down this path at some reasonable scale, it’s hard to slow down. The unintended consequences that come will put an unimaginable burden on the company . Even the best founders and boards have a hard time controlling it.
The funny thing is, sometimes you’ll actually go a lot faster in the end, by going a little slower in the beginning. Rarely do markets and opportunities change so fast that you can’t catch up.
As a founder, you always need options, and more often than not, they’re related to how much money you have in the bank. Options give you a chance to control your own destiny when times get tough. (Read: Without them, you’re screwed.)
I’ve learned that it takes a tremendous amount of discipline and organizational restraint to burn less. It also takes so much longer to put on the brakes than you realize. That’s why I strongly recommend making some significant adjustments should you ever see signs of turbulence — all made under the assumption that you’ll need to live with what you have in the bank for at least 12 months. One essential step is taking stock of your resources (i.e machines, property, equipment, people, etc.), and if they’re not essential to your mission, making some tough decisions to sell off certain systems or downsize. On top of that, I strongly suggest freezing any and all increases in expenses. Lastly, I recommend meeting with investors to share your plan to get through the rough patch and, if needed, ask for advanced funding. The smart ones should have confidence in your ability to deliver.
One goal I have for my next venture is to always be within two quarters of cash-flow break-even, with the big advantage being that you can halt with minimal organizational and cash impact. Should the market takes a dive or sales slow, you can put the brakes on and reevaluate again in a quarter. In a word: Options.
Don’t be afraid to outsource
Spend your calories on things you do well and the things that make you and your business valuable — and outsource things that aren’t core to that mission. Sure, your developer can build the corporate website over the weekend or set up GitLab on your own server instead of buying a small monthly plan, but the long-term management and ownership headaches far outweigh the short-term economics. It’s just not worth it.
This mantra can sometimes conflict with the “burn less” philosophy, but generally, if it seems cheaper in the short-term, make sure you consider the long-term ROI and other non-financial metrics (such as distraction) when weighing options.
One of our core values is “measure, iterate and improve,” and it has served us well at Appcelerator. I believe that measurement should be a core property from the beginning vs. a bolt-on or afterthought later.
My favorite quip in this area, “You can’t improve what you don’t measure.” I’m always amazed at what we’ve been able to learn when we instrument something and then look at the data. It’s almost universally different from what we assumed it would be. This is not to say that good judgment or decisions based on experience aren’t important, too — it’s just recognizing that you must have the capabilities to make the best decisions and you need them early in the process. It’s the difference between being proactive and reactive, and that difference can make or break a company.
As in most things in life, context really matters and each situation is unique; what worked for me might not work for others. Still, having been through some tough times (with scars to prove it) and having the good fortune to work on a few successful ventures, considering these lessons will at least give you a better chance for success.