I started my first company, FatWire Software, when I was 27, and just finished with grad school. Things went well for the first few years. I built a product, and grew revenues to $3M, then raised venture capital, and by our fifth year we were doing about $10M annually. I won a regional Ernst & Young Entrepreneur of the Year award, and I thought, ”yeah, that’s right, I’m an entrepreneur.”
Then the tech bubble burst and 9/11 happened, and we had two years of NO growth. We stayed flat at $10M in sales, and we were lucky to stay alive. A few of our competitors had used the tech bubble to raise hundreds of millions of dollars—10, 20, even 50x more than us—and even they were starting to run out of cash.
So I gathered my two partners into my office on Dec 21, 2002, the darkest, shortest day of the year. They knew the situation well: we had about $1.5M in the bank, and we were burning about $200k per month. Over the past couple years we sadly had to let go about half of our staff, and we were down to about 65. Everyone was working super hard, but we just weren’t able to get growth in that environment. If we didn’t do something big, we’d be out of business by the fourth of July.
Every day was a struggle. Many customers were hiding under their desks, not buying anything. Some customers were going out of business and leaving receivables behind. Day after day I would look at myself in the mirror and ask, “How long can I keep this up?” And day after day, I’d get up, take a shower and go to work in the morning and do the best job I could. And it was the day before, on Dec 20, 2002, after two years of asking myself “how long can I keep this up?” that I finally had an answer.
Before I go further into this story, I’d like to show you a picture of how successful entrepreneurial projects work. Not just for tech startups, but this should apply just as well to larger, more established companies that are building out new products or services. Here’s the lifecycle of entrepreneurial projects.
You see, things start off small, then you build your initial team, and raise enough capital for growth, and then grow the operations, until you have a new sustainable, mature business.
There’s only one thing you should know about this picture…it’s completely untrue!
This is the real lifecycle of entrepreneurial projects. I adapted this from Y-Combinator’s Paul Graham. It starts off with the “Napkin of Destiny” followed by the “Trough of Sorrows,” then the “Near-Death Moment of Clarity,” and if you’re lucky things grow and stabilize from there. Every project that I’ve been involved with follows this Startup Curve. After 20 years of building tech companies, the question isn’t about the shape of the curve, it’s about the length of time it plays out.
TROUGH OF SORROWS
Today, I’d like to focus on the “Trough of Sorrows.” This is where ideas and startups die. And some of them should die because they’re not viable ideas. But even viable ideas—companies that can turn out to be huge successes—need to survive this hike through the desert.
How do you know you’re in the Trough of Sorrows? Difficulty in articulating mission. Insufficient capital. Incomplete team. Failing to live up to early customers’ expectations. Lack of sleep. Worries about failure.
I’d like to give you three tools I developed through the seven companies that I’ve launched in the last twenty years. It’s the “Three C’s” for making it through the desert: a Canteen, a Compass, and Cannibalism (of a sort).
THE FIRST C…CANTEEN
When you are going for a hike through the desert, bring a canteen. Don’t try to figure out how you’re going to tow around a refrigerator full of Gatorade.
Startups never seem to have enough capital. That’s the way it should be. Every now and then I hear about advice for entrepreneurs that says, ‘make sure you have enough capital, so you can execute your plan, and make it through the tough times.’ That’s poppycock. Unless you know exactly what you’re building, how much you’re going to charge, and what the demand is, you SHOULDN’T be given too much capital to blow. Even if it’s your own capital.
CULTURE OF SCARCITY
Hiking through the desert with a canteen creates a CULTURE of SCARCITY. And there are many benefits to this. Hire slower. Fewer product features added. Less attachment to “vision,” more attention to actual market response.
What does this mean in practice? It means putting up with a shitty website for longer than you’d like. It means dropping the ball and disappointing some people, but managing to maintain your commitments to paying customers. Grimy offices.
A lot of guilt can build up that you’re not moving fast enough or that you’re missing opportunities. These are all natural feelings. And the 2nd or 3rd time you go through it, you start to embrace the way of the desert, not run from it. There’s a term for this in fashion: it’s hobo-chic…own it and wear it proudly.
THE SECOND C…COMPASS
When I started FatWire, right out of grad school, I was the ‘vision guy.’ I could talk for hours about the future of architecture, IT, artificial intelligence, blah blah blah. I had to have all the right answers. I had to get an A+ on every test. I thought I had a compass, but really what I had was a little piece of wood, with a fancy arrow painted on it pointing to an ‘N.’ And as a result I wasted a lot of time in the early days wanting to be right more than listening to the early customers.
If you run or have built up a big company, then you’re the commander in chief. You set the direction, you delegate, you make sure you have the right people on the bus. But when you’re doing a new project, you’re not the commander in chief; you’re the ‘BELIEVER IN CHIEF.’ You’re the person who has to believe in the mission, even though you have plenty of doubts.
A real compass amounts to being PASSIONATELY DETACHED. You love the journey, but you leave yourself room to change the path at any time in the early days. There are lots of people who will give you free advice, and the earlier the project, the more negative the feedback you’ll get. But the only people you should be really listening to are the ones that are ready to pay for your product or service in the next 12 months. Those are the points at which you can refill your Canteen.
You’re walking through the desert, you are hoping from oasis to oasis, doing the best to keep your eye on the compass, until you make it to civilization.
THE THIRD C…CANNIBALISM
Now most of you are familiar with Nando Paraddo’s story “Alive” where they miraculously survived over two months in the Andes after a plane crash. I’m not talking about that kind of cannibalism. I’m talking about the cannibalism of ideas.
Let me pick up the story where I left off before. I’m sitting in my office with my two partners, it’s the shortest day of the year, and we are running out of money. What are our options? We could innovate and sell our way out of it. We could cut our costs, and hunker down to survive. But we had been doing both of these things the best we could for the past two years…the competition was doing the same thing. We needed scale to get to profitability. So the answer was to throw away our product.
I went out looking for acquisitions, and some months later one of our competitors, OpenMarket, went bankrupt within a company known as Divine InterVentures. OpenMarket had raised over $350M and had a market cap over $1B at their height. The short story is that I bought that distressed company out of the bankruptcy for around $6M. This meant that we had to decide whether to go with our original product, that I had personally written the first version of, and that our very talented team had spent the last five years building. Or we would go with the new product, which had many more man-years put into it, and a much bigger customer base. The answer was simple…we had to sunset our original product.
It was the right decision. Within two years, we had grown sales to over $30M, become profitable, and laid the foundation for Oracle buying the company a few years later at a good multiple.
Making it through the Trough of Sorrows leaves no room for sentimentally holding onto your old ideas. As the Believer in Chief, you need to be free to cannibalize your IDEAS for new ones. This doesn’t mean you should cannibalize your CULTURE and VALUES.
So there you have it: the Three C’s: Canteen, Compass, and Cannibalism.
And back when I was going through my first Trough of Sorrows, looking at myself in the mirror asking, “How much longer can I take this?” The answer for me was “forever,” which is how I knew I really was an entrepreneur.