The Simple Shapes of Startups

Inspired by this short lecture by Kurt Vonnegut on “the simple shapes of stories,” I thought it would be fun to sketch a few shapes of what starting up looks like:

Then I remembered Sarah Prevette already beat me to this:

[Full presentation here].

So I decided to sketch a different set of curves — ones that show various approaches to surviving until “the sloth of ascent.”

Startups that succeed are those that manage to find a plan that works before running out of resources. While not the most valuable resource, money is like oxygen to your startup — too little and it dies, too much and it can explode. The key is setting yourself up with enough runway to make it through the “humps of iteration”.

Here are some typical approaches for doing this:

The Shape of Side-projects

Most projects start as side-projects with little cash investment and run mostly in your free time. While it’s possible to build something this way and even stumble into something interesting, most of the time, these projects remain as side-projects because learning is slow and often absent customer learning until it’s too late.

Interestingly enough, you’ll see most of the other shapes to follow start the same way. I would argue that most projects start (should start) as a side project. The biggest risk we face is committing ourselves to build something nobody wants, and the biggest mistake we make is placing most of the emphasis on building (technology risk).

Rather than jumping into building something, I recommend spending time upfront validating you have something worth building (following a Lean Startup/Customer Development process). A lot of this can be done without any code.

That said, there will come a time (if you’re on to something) when you’ll need to double down because “starting up,” in my opinion, can not be done part-time beyond a certain point — It’s hard enough doing it full-time.

The Shape of Funding

This story starts the same way, but after some initial effort, the additional runway is provided through various stages of external funding. Some companies manage to build a healthy business using just the initial seed capital. Others go through multiple funding rounds — each bigger than the last, which usually also results in steeper burn rates (driven by the need to show growth).

After the early rounds, the startup is left with only three possible outcomes: run out of resources (deadpool), get acquired, or IPO. This is the case even if the startup starts generating profit because it was built on “other peoples’ money” (areas in red) which comes at a 10x rate of return. The hope here is that the acquisition or IPO event generates “off-scale happiness.”

The Shape of Consulting

This story starts with the company generating revenue/profit through consulting. Along the way, the company decides to invest in building a scalable product of its own. They are their prototypical customer and/or have access to clients that are the prototypical customer. The problem here is that building good products is hard, and consulting revenue is non-scalable, i.e., you have to actively earn every dollar. Every hour put into your project requires turning down billable work which is hard to do — the “consulting-product dip.”

37signals is the poster child for successfully making it through this dip. It’s interesting to note that they (and others who also managed to pull this off) had other things going on for them (e.g., great content/audience, books, workshops, ruby on rails, etc.) that most other consulting companies don’t have — making their story look more like the next one.

The Shape of Bootstrapping

This starts out looking a lot like the consulting curve. The major difference here is that there is a conscious emphasis on building multiple scalable and leveraged sources of revenue.

Scalable revenue is money you can make while sleeping or at a high enough “effective” hourly rate to buy you runway e.g. ebook sales, workshops, SaaS products.
Leveraged revenue adds more value to your company beyond the money it brings in e.g. licensing parts of your platform helps mitigate technical risks, selling an ebook helps build a channel platform, etc.

These passive income sources provide the means to experiment with multiple products and then double down on the most promising ones. The big difference from consulting is that you end up being time-richer. Time is your most valuable resource, and most startups die because of insufficient attention.

Finally, bootstrapping is not mutually exclusive with raising external funds, and many companies go on to do just that to accelerate growth.

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