An interesting observation I’ve seen amongst early stage internet startups is that more and more of them are requiring closer to two years to get to breakeven. This is because of many factors, one big one being the fact that there are too many me-too products and that distribution is the number one problem facing entrepreneurs today. But also, many startups end up in someplace different than where they started. They may find that their initial theses is wrong and need to twist/turn/adapt into some other product to be successful. This also takes time.
I talked with an early stage VC and she mentioned that she had seen the same thing, which was a large percentage of them coming back for bridge rounds after working for about a year. We talked about the fact that they always seem to raise money for about a year or runway, but yet most of them just need a few months more to get to breakeven.
Even in my own startups, there are a number of them that “just need a bit more time.” If only they had a bit more runway, if only they had a bit more cash, if only they could raise more….we are seeing that startups with mediocre metrics aren’t finding it easy to raise cash so they are dead in the water, and soon to die in totality.
I talked with another investor about whether or not we should get more of our startups to raise more cash at the beginning. He actually was less of the opinion that we should demand startups find a way to last 2 years from the get-go. It was an interesting conversation and I think the difference in perspectives comes from the fact that I’m an angel investor with limited resources, and that this investor had far more resources to bring to bear on successful versus mediocre or dying startups. Also, given that this was my own money I’m investing, it was far more important to me than investing someone else’s money. Strategically, it makes sense for them not to care as much. We already know startups will die; it’s a ruthless culling process that startups experience. A professional investor can just move on and invest in the next big one, or invest in the winners in his portfolio. But given that my personal money is at stake, I care more about startups lasting long enough to make something with their businesses.
I’ve been tooting the “last 2 years” horn ever since the economy tanked. But universally I have been ignored. Remember that there are two levers to apply here: one is how much money to raise, the second is the burn. However, I never see anybody produce a 2 year plan ever. A host of reasons why not:
1. Entrepreneurs are unwilling to reduce their burn. There are a number of reasons for this, ranging from families that need support to those unwilling to reduce their lifestyles, to inability to hire people at low salaries.
2. Entrepreneurs are unwilling to go out and raise more. Yes, begging for money sucks and takes too much time and is not fun. Entrepreneurs just want to get back to work building.
3. Entrepreneurs are unwilling to take the dilution. They already have sold part of the company and don’t want to sell more.
4. An investor assures an entrepreneur that they will give them more money if they need it. Entrepreneur decides to trust investor.
Great reasons all, but the reality is that a huge majority of startups are all taking 2 years to get to a good place. The marketplace for products and for investment is not like it was 2-3 years ago before the economy tanked. In previous years, you could go raise money on no revenue but a ton of users. Now it’s near impossible. Second chances are hard to come by. Raising money on mediocre metrics is near impossible.
One last appeal: Entrepreneurs, do what you can to last 2 years. Expect it. Raise enough money and/or adjust burn assuming no revenue. It’s become unfortunately the norm.