Predictable Crises of Startup Growth
Inspired by Passages: predictable crises of Adult Life, this is a non-complete list of the "everything" in the "everything that can go wrong will go wrong". Tied to startup progress (and assumes none of the ones prior to it takes the whole thing down). This is useful for counterfactual explorations, and wargaming scenarios. Contributions welcome!
What is the general story of startups?
- 3 founders come together to put an idea to market
- They fail to come to a common agreement around product/market/equity, or generally break up; founder in-fight is a startup killer
- Problem have low level of urgency -> people don't pay for the thing
- Failure to validate the sufficient level of need before product build leads to extremely large sunken cost, which is hard to course-correct
- they hire people, based partially on the idea, partially on money:
- They can't afford to pay competitive salary, so part of the compensation is stock/equity-based; this is an extremely risky financial instrument
- Word of wisdom here, is that they should hire people who are excited about the product / vested into the idea. This selects for mission-oriented people. However, the idea will get hijacked, and the business will be twisted by financial forces.
- they raise funds from investors on promises of the idea / existing market traction
- The power inbalance in VC-funded startups: it's 50% about what market wants; and 50% about what investors believe will make them a 100x money; entrepreneurs have to cover both, which takes on crony beliefs.
- To justify fundraising at higher valuation, founders are forced to change vision story, and with it, company mission
- New company vision have team-product misfit. This selects against mission-oriented people.
- founders fail to drum up initial business / make initial noise that gets them in touch with initial prospects
- pivots, eg from B2C to B2B (typically eg selling the thing to businesses to do it for their customers) => impact drastically lowers, customization work, incompetent middle-managers
- founders fail to do founder-sales, creating the blueprint for sales operations
- Related: sales involves non-repeatable parts, key personnel, or key connections, that are not repeatable -> customer acqusition sigmoids at N=low
- Key employees leave the company, taking culture / knowledge capital with it
- recruiting becomes significantly harder
- Idea fails to reach product-market fit, in that either some, or no-one at all uses it
- Stall-out / Customer acqusition channel saturates: what originally pulled in users stops working beyond a certain scale, and no other acqusition strategy is forthcoming
- it reaches product-market fit
- From an engineering perspective, self-directed projects will be replaced by being either KPI-bound, or client/sales-bound ones, whichever drives more revenues
- Market forces drive founders to change vision / trajectory
- they scale it up, and get more users
- Company takes on a large number of people; coordination between them becomes ~50% of the job
- At some point, monetization have to be turned up to justify higher valuation. This alienates some users, and some employees
- scaling bottlenecks: at any given point, there will be a bottleneck in the distribution/sales/delivery pipeline; this bottleneck sets the overall scaling speed of the organization; and it jumps from one point to another as points are elevated
- Company gets sold:
- Vast majority of employee (and even technical C-level) stock gets converted to acquirer's stock with revesting. That means, as an employee, you can either pull another 4-year stunt at largecorp, or get your stocks zero'ed out.
- they raise funds to scale up expansion
- they reach US-country-level scale, and go public
- And only at this point, that employees can cash out