Share this postI distinctly remember saying, as a young developer a decade ago, that I didn't enjoy the business side of startups. I was very wrong. There is no other side to startups - and engineering a profitable business is at least as challenging and rewarding as creating anything else.
Paul Graham's essay How to Raise Money is excellent: a distillation of the fundraising advice that Y Combinator gives to its classes into an article packed with actionable advice.
If you're running a startup, or are interested in the startup ecosystem, it's a required read. Here's the link again.
Paul says a lot here about the kinds of investors that are valuable, the important things to take away from an investment round (hint: more than enough money to achieve your goals, not necessarily a high valuation), and how to approach investment in the context of building a high-growth company.
But here's something else to take on board:
If someone makes you an acceptable offer, take it. If you have multiple incompatible offers, take the best. Don't reject an acceptable offer in the hope of getting a better one in the future.
This is one of the most important lessons you can learn - about anything, let alone startup funding. If you receive an offer, whether it's a price on a house or a funding offer for a startup, that meets your goals, then take it.
The prerequisite for this, of course, is that you've set goals. You need to have a plan, understand where you are, and have a good idea about what it'll take to get from here to there. Of course, in startups and life, plans tend to change - but then, you adapt the plan. Think of it like a GPS navigation system. You're not legally bound to stick to the path the map lays out for you - but as soon as you deviate from it, the software figures out the best route from where you are now. As an executive or a product manager in a startup, you need to be that GPS navigator.
Paul points out that you should have more than one path mapped out:
And the right strategy, in fundraising, is to have multiple plans depending on how much you can raise. Ideally you should be able to tell investors something like: we can make it to profitability without raising any more money, but if we raise a few hundred thousand we can hire a one or two smart friends, and if we raise a couple million, we can hire a whole engineering team, etc.
To do that, you need data. As Tim O'Reilly pointed out in his post, How I Failed, that means making sure everyone understands you're a business:
Every manager - in fact, every employee - needs to understand the financial side of the business. One of my big mistakes was to let people build products, or do marketing, without forcing them to understand the financial impact of their decisions. This is flying blind — like turning them loose in an automobile without a speedometer or a fuel gauge. Anyone running a group with major financial impact should have their P&L tattooed on their brain, able to answer questions on demand, or within a few moments. It isn’t someone else’s job to pay attention. Financial literacy doesn’t come naturally to everyone. Make sure it’s part of your employee training package, and make sure that people running important business functions are held accountable for their numbers.
Everyone should understand their budgets (and have budgets!), and operate within them. And everyone should have an awareness of what a potential plan will cost, and whether it's actually feasible using the funds and resources available to the team.
The days of raising a huge amount of money and hoping that a business model will arise are over, if they were ever here to begin with. Twitter was famous for this strategy, but you have to remember that its founders had a very solid track record and were trusted in both the industry and the Silicon Valley community; it didn't just happen out of the sky. They were seasoned businesspeople, and had top-tier business development resources available to them.
Bootstrapping - where you grow your company without any investment - remains very interesting to me, but isn't applicable in every scenario. While it's nice to build an engine that makes enough money to support itself from day one, not every business can support this; sometimes investment is required. Equipment, infrastructure, advertising or simple market runway justifications are reasonable - and open up business possibilities that bootstrapping couldn't manage.
However, with controlled growth and a practical starting product, I think bootstrapped startups can manage more than you'd think, although perhaps not in the timeframe of a VC-funded one. Nonetheless, here more than ever, this GPS sense of the business roadmap is required. There isn't a business that isn't, ultimately, tethered to the numbers.
Many developers think of startups in terms of building something cool, and indeed, the product is very important - but it's also the engine of your business. It's what people hopefully buy into and pay for. You can't base a startup on creativity and good intentions alone. Pragmatism, practicality and the ability to face reality head on are requirements.
The good news for entrepreneurial developers is that this isn't a million miles away from the principles of architecting a complicated software application. Certainly, a different set of requirements and skills are involved, but in both cases you're talking about a lot of interconnected pieces and resources that have to work together just so. If you ignore a requirement, or mis-assess your platform resources, your application will be belly-up. That's true of your business, too. The good news is, in both cases, you can monitor resources, iterate and test. Okay, you also need to have empathy, people skills, and a dozen other qualities as a business leader, but guess what? You need those to build great software, too. What kind of application will you build if you can't empathize with the user?
I think of my early developer self, and wonder what I was talking about. Building this machine is an amazing journey - and the rewards, of course, are great.
