Life and Death of Companies

A few weeks ago, a person I was coaching asked me this: “How was it working at X?” X is a mid-sized company. They then followed up with, “What did X do to grow?” and then followed it up with, “How did Y do all this?” Y is a much larger company than X. This post is a narrative born out of that conversation! Let’s get going, shall we?

The beginning

All companies start with an idea and a few founders who believe in it. However, ideas are a dime a dozen. For a company to come to life, it needs an exceptional founding team that can ideate, build a delightful product, sell it into a large addressable market, and isn't afraid of the grind and a healthy dose of luck. And thus, a startup is born. We are now going to follow this startup from inception to demise.

Early Stage Startups (0-2M revenue, newborn)

Startups are tiny companies, with team sizes ranging from one to ten. The founders typically work for sweat equity or put in a bit of their money to pay for their salaries and operations. In the very beginning, it isn’t unusual for the founders to be the only employees of the company and they often have equal ownership of the company. The goal of a startup at this point is to just survive. Survive long enough to get a product out in the market that customers would pay for. Getting to a stage where the startup’s product resonates with a specific segment of customers is often called getting to product market fit, often abbreviated to PMF. Marc Andreessen from Andreessen Horowitz (a16z), a prominent Silicon Valley venture capital company, is credited with coining that term.

Simply put, if the startup cannot keep up with customer demand, it has reached PMF. It has built a product that its customers love, and reaching PMF sets the stage for the next evolution of this tiny but mighty startup.

At this stage, the founders have a choice to make. Either they stay bootstrapped, as in growing their company in a measured manner that doesn’t put their finances at risk, or raise external capital from venture capital firms to grow quickly. If they stay bootstrapped and spend only what they earn, they might be financially (both personally and as founders) strapped for a bit, and if they can’t handle customer demand, their customers might seek out other competitors. However, on the plus side, staying bootstrapped gives founders the utmost control of their company. They can make all the company's decisions without worrying about external investors' interference. A great example of a successful bootstrapped company is Apple. Alternatively, the founders might decide to raise external funding.

The media has glamorized raising venture capital. OpenAI just raised a billion dollars (yes, with a capital B!). Naturally, startup founders tend to seek out external capital quite a bit in the early days. However, the percentage of startups that manage to raise external capital is very small. To raise external capital, a startup needs to show three things: a) Customer traction (people are paying for the product), b) A founding team that has the right skill sets to win their segment, and c) A big market to sell into. Having personal or professional connections in the venture capital industry is also extremely important as that world is highly insular and runs on personal relationships.

Raising external capital at a high level involves the founders selling some of their ownership in the company to external investors at an agreed-upon price. Selling equity also means giving up control, which means they have to play nice with their new investors.

A quick note about venture capital firms. These investing firms raise money from wealthy individuals and large financial institutions and invest those monies into startups and quickly growing technology companies. Their strategy is high risk, high reward. They don’t need all their investments to work out. They just need one or two large wins to show meaningful returns to their investors. Lastly, when early-stage companies raise money, that funding round is typically called a seed round (traction and PMF) or a pre-seed round (some traction+high profile repeat founders).

Bootstrapped or not, if the company has hit PMF, its annual revenues are somewhere between 1 and 5M, and it is now ready to evolve into the next phase of growth.

Goals, Metrics, and Quirks

The goals for an early-stage startup are very simple. Actually, they just have one goal. Survive. The only metric they care about is the money left in the bank. It is also the metric you should care about if you are considering working for a startup. Startups try their best not to run out of cash, survive long enough to find product-market fit, and make enough money to either live off if they want to stay bootstrapped or use their newly found customer traction to raise another round.

Startup teams are very small. Usually, it's ten or under, and everyone does everything. There aren't really any departments or divisions of labor. Word of caution: early-stage startups are not for the faint of heart. There is a lot of experimentation, building prototypes quickly, throwing them on the wall, and seeing if they stick. Trying to sell your product to whoever might show even a slight interest. Lots of late nights and weekends, and finally, the constant dread of running out of cash and cratering the company. Founder burnout is real. However, I have met some founders and early employees who wouldn’t want it any other way.