Friday, 30 September 2016

Startups and Expansionism - Just Don't

When our company first got some funding, we found some very inexpensive, pleasant office space and moved in. There was room for about 20 people in comfort. For the first few months the half dozen of us rattled around in all that space. Then we got our A-round, and we started to build up a team. I hired several really good engineers. Our product was, as we thought then, ready to start getting some customer exposure. We hired sales people, sales engineers, a head of operations... and so on. Quickly we were approaching the capacity of what had seemed until then our palatial office space.

It's human nature to anticipate the future, meet problems before they arrive, stay ahead of the airplane, all that stuff. So our new operations guy started worrying that we would soon fill up the space we had, and somehow we all tuned in to this mindset and agreed with him. This despite the fact that we were now operating at the burn rate assumed by the funding plan, and couldn't afford to hire any more people until we got a serious revenue stream. We had to get more space!

The ops guy started looking round, and then by chance a company in our building suddenly and instantly ceased to exist. They were in the pharma business and their new wonder drug failed its clinical tests. Instant death, in a way that doesn't happen in the computer industry. Literally, at 11am they told the landlord and their employees that they were closing down, and by 1pm we could go and look at the deserted space, which was about twice what we had - big enough for 35 people, including a huge board room. It was perfect for our "planned" (actually "dreamed of") expansion. Within a few weeks we'd reconfigured the space, got some more furniture, and moved ourselves and all our test systems into the new space.

I'm prompted to write this blog because this week we just completed an office move back into half of the new space, thanks to a very cooperative landlord. We never, ever needed more than our original space. The whole pair of moves, which cost us a month's runway in extra rent and moving costs, was completely unnecessary.

It's not just office space. We hired sales people before we had a product to sell. We hired even more sales people when we had a product, but no idea how to sell it. We hired operations people to make the sales process run smoothly when we had no sales. We hired support engineers to support the customers we didn't have. We hired an expensive CFO when we had no finances to speak of. All in the name of being "ready".

And it isn't just us. This has been the story at every startup I've been involved with. My first was in Germany, funded by some German banks who were desperate to jump on the high-tech startup bandwagon (this was 1998). They barely had a product, they had exactly one customer... and well over 100 people! There was a fully staffed support team of about 6 people to support the non-existent customers, there were about the same number working on a next-generation product before they'd either finished or sold the first one. All this to be sure of being ready when we did have customers - and guess what, they ran out of cash and closed down before those customers ever showed up.

The moral here is simple, but hard to get people to apply. Don't let expenses get ahead of income. Or even simpler: just don't. Wait for a problem to happen and then solve it. During the time when you have the problem but not the solution, improvise. Humans are good at that. Not enough space? Double up on desks. Not enough support people? Divert the engineering team for a couple of months. The worst that can happen is a bit of extra work, a bit of discomfort, maybe a few tricky incidents where you have to juggle customer problems. And at least you'll have the money still in the bank.

All this aggressive expansionism results from the belief that sales are suddenly going to surge ahead, leaving everyone struggling to deal with them and, much worse, losing sales because of lack of capacity. But the thing is, this never happens. In reality it always takes a while for sales to ramp up. There are lots of reasons for this: the need to build a reputation, the need to build channels, and many others. It's a different story if you're Apple launching the iPhone 7, when you know people will buy tens of millions on the first day. But that's just the next generation of an established product. It isn't a startup.

It's just so easy to seduce yourself into believing that you need to expand right now. And just about invariably wrong.

1 comment:

Rose Lugo said...

I hear this is more common now than ever before.