Profit 101 #5: Fail Fast

May 30, 2023

a VC innovation

In my last post, I noted how I like to start fractionally before diving all-in into a startup. That raises a few questions:

  1. How do you know when to go all in?

  2. With apologies to Kenny Rogers, how exactly do you know when to hold em and when to fold em?

The Virtue of Failing Fast

Let me start here with praise for Silicon Valley, and a fundamental part of the VC ethos - the culture of failing fast. I'd go so far as to say it's a truly great innovation within the west coast venture capital model. In Silicon Valley entrepreneurs are able to wear their failures as badges of honor, something that doesn't get you very far in any other business capital.

How does the fail-fast approach work in VC world? Let's say a VC fund has 20 early stage investments, each with 5% of the fund. Most startups fail, and so the VC is looking for a couple of startups that return the fund - in this example that means they go up 20x, so that those two startups are each worth the entire original fund. A few more startups will break even or produce some modest return, and the rest will essentially go bankrupt. Since venture is true home run ball, VCs are incentivized to figure out which startups will grow 20x+ as quickly as possible. Startup land is also hyper competitive, and speed is an important edge, which encourages VCs to put even more premium on this.

As a startup founder, when you take external funding, and in particular when you take VC funding, you are agreeing to race towards a brick wall at 90 mph, burning up your fundraise over 12-18 months. You will either soar and fly over the wall, powered by your next round, or will be among the burning wreckage below. Either you hit your growth and other metrics and get to that next round, or your startup is dead. Why do VCs work this way? It enables them to cull their herd and focus on the startups that they think have a shot at winning big. This sucks for founders, at least on the surface, but there's a brutal logic at work: if only a small percentage of startups are really going to succeed, why not focus on figuring out which ones as quickly as possible?

Applying Fail-Fast to Your Startup

Now if you know me, you know that I've been a bootstrapper throughout my career - it just suits my nature. So how does the above relate if you're bootstrapping or haven't taken a VC round? I would argue that for very early stage startups (and founders) the exploding deadline is actually a good thing. The entire startup exercise gets boxed into a timeframe of 12-18 months. Time is our most valuable asset, and this approach conserves it. The exploding deadline / fail-fast mentality is not encoded into bootstrapping in the same way, because you as a founder get to make the rules. External forces (like bills to pay) may eventually force your hand, but in the worst case a bootstrapped startup can also be like Kramerica on Seinfeld - a caricature of forward motion, just a game you play.

When I started HiddenLevers, I set a goal - we had 18 months to get to viability. We defined viability a bit loosely at first, but then decided that in our case viability would mean 100 customers. We formally started on Jan 1, 2010, and gave ourselves til July 4th 2011 to get those 100 customers and viability - 18 months of runway. I've previously described our first year, and how we desperately searched for those customers. We had just a handful of customers about four months before the deadline, but we had at least finally identified an audience (financial advisors) that wanted our product. In February or March of 2011 we got the opportunity to join a webinar and present HiddenLevers to 80 advisors (my co-founder Raj got the webinar by networking with other providers in the industry). Of the 80 advisors on the webinar, 8 signed up that day, and 16 in total by early the next week! We knew we were onto something - pure sales hustle and guerilla marketing got us to 100+ advisors a month before our deadline, and favorable press coverage drove us further from there.

We hit that goal, but it was just the first of many, and we kept setting viability targets thereafter. As the company grew, they became inflection point checks - is it time to raise or sell now? But the most important target was that initial one. I see bootstrapped (and some who have raised angel) founders who are fighting the fight, but who could really use an exploding deadline to force the issue. Failing fast is a good thing, and a valuable concept created by the VC industry.

How Long Should You Give Your Idea?

I think 18 months is sufficient to execute on (non-hardware) ideas, with perhaps 6 months of ideation and exploration before that. That's two full years - if you can't move the needle in two years, it's time to move on, as you don't get just one shot. Don't get me wrong - Succeeding is goal #1, #2, and #3 - but you've got to give yourself a timeline to force the action.

How Do You Know When to Go All In?

I think there are a couple of criteria:

  • Do you have an alpha product to take to market?

  • Have you talked to customers and started demoing your alpha and getting feedback?

  • Have you set a clear MVR (Minimum Viable Revenue) goal, and clear timeline to get there?

Within the 18-24 month timeline above, I think at least half can be accomplished fractionally, reducing your burn rate period substantially. A balanced founding team should be able to get an MVP to market and do a lot of iteration with prospects within a couple of years.

How Do You Know When to Hold Em and When to Fold Em?

Hold onto your startup and fight on when you can see a logical path from MVP to MVR. But if you've hit 24+ months and can't see a path to a few hundred thousand in revenue at absolute minimum, it's probably time to cash in your chips. Founders don't like to hear that it might be time to move. But it's important to remember that you have MORE than one shot, particularly if you exercise discipline and set concrete timelines for success and failure!

More Posts from the Profit 101 Series

Business Principles

Startup Costs Video Series

Pursuit of Profits

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