The Startup Treadmill

going-nowhere-fasterDo you know why startups fail? Because they run out of money. Yes, there are lots of root causes: wrong market, timing, team, product, execution. But you can get past these sins and keep fighting as long as you have cash.

Ironically, the reason why startups run out of money is because they raise capital too early. And they raise the wrong kind of capital too early.

As soon as you raise institutional capital of any kind you get on a treadmill where the VCs want you to run harder and burn faster. They want you to use their capital to accelerate – spend, hiring, marketing and ultimately growth. Acceleration is of course why you raise money and give up part of your company in the first place. But premature efforts to accelerate usually don’t work.

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The Dolphin Dive

There are many reasons why startups fail. From bad timing to poor execution, bad hiring, too much competition, the list is almost endless. Despite these pitfalls, you can always live to fight another day so long as you have cash in the bank. So, for me, the technical reason why companies fail is that they run out of cash.

To avoid this, you need to perfect the dolphin dive. If you’ve ever watched those nature shows, you’ve seen great images of dolphins jumping into the air then diving. They stay underwater for a period of time, and then come up for air.

This is how you need to approach each funding round. Treat it like your last. Make sure your money gets you far enough to either not need more funding or, more likely, to have enough proof points to raise more capital at a significantly higher valuation.

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Social Proof is Overrated

From the outside looking in, the Valley and startup land in general seems to run on “social proof” – the notion that I should only pay attention to you if someone credible says I should. While it’s a well known psychological phenomenon, the term “social proof” only started showing up in my World as Angel List started to take off.

It’s absolutely true that the best way to meet people professionally is through warm intros. Especially for investors who have an abundance of opportunities to look at. So, in that context, social proof is a good and valuable thing. I only invested in entrepreneurs that came through trusted channels.

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Avoiding the “Bored” Meeting

VCs attend lots of board meetings. The vast majority of them are sub-par experiences. That goes both ways. The entrepreneurs spend a lot of time preparing for them and don’t get much return on that time investment. And VCs don’t end up contributing a lot and don’t get much return for their time investment either (especially true when they have to travel to said meetings).

This is a shame and a waste of a precious opportunity. The right board can have a huge impact on a startup’s performance by offering an expert perspective on the issues facing the management team, exposing their network of relationships, and helping the CEO develop and grow as a leader.

So, if you’re not getting the impact you should from your board then read on.

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