Subtle Mid-Stage Startup Pitfalls

(This post is derived from a talk I gave at SV Angel's CEO Summit.) 

A lot has been written about the dangers that early-stage startups face. But startups face a different and equally lethal set of dangers in what we could call the mid-stage–the stage after the company has figured out what it's doing and has raised some money to go off and do it.

Because of where YC sits on the funding timeline and the volume of startups we fund, there is probably no one who has watched more companies negotiate the mid-stage than us. Twice a year we accept a batch of startups (the last one had 114 companies in it). We work with them for several months on whatever is their biggest problem, and then help them raise money from investors. After that, they go off into the world to execute their plan.  And you know what? A lot of them fall into traps of various sorts. I'm going to give you a list of the worst pitfalls I see, and explain how to avoid them.

We’ve now funded more than 800 startups. One advantage of having so much data is that we can recognize patterns pretty clearly. Every one of these traps is one we've seen startup after startup fall into. And many of you who read this post will fall into these traps, even though I've already warned you about them. That's how dangerous they are.

It never gets any easier.

The first trap is feeling that now you can relax. You told yourself that all you needed to do was get x–get that funding round, get that big deal, or whatever. Then everything would fall into place and you could relax a bit. So when the startup finally gets x, founders think they can relax. But they shouldn't. If you find yourself feeling you can relax, that means you're overlooking something, because the one thing all the most successful founders we've funded agree on is that it never gets any easier.

Pete Koomen of Optimizely gave a talk at a YC dinner a couple years ago and he said, “When I was sitting here at dinner during my YC batch and I'd listen to the successful guest speakers, I always thought somehow they were just coasting. And what I now realize is that they weren't just coasting. The more successful you are, the harder the job gets.”

It doesn't get any easier. It gets different. As your company grows, things stay as hard but the nature of problems change. In the beginning you are asking yourself questions. What should we build? and How do we get users? Later on you’ll have new questions to ask yourself. Are your employees happy? What should your culture be? What sort of structure should you have? Are your investors causing problems?  Did someone just poach your top engineer? Can your employee not get into the country? What should you do about the lawsuit against you? The list goes on. 

It's important to realize that it doesn't get any easier because it reminds you how tough you have to be. You can't let yourself get beaten down.

Startups are a long haul. If you want to be one of the really big successes you need to commit yourself for something like 5-7 years minimum. In cases like Facebook and Google, it's a life's work. Pace yourself. Because you can't keep burning the candle at both ends forever.

Sometimes, however, a startup is not your life's work. Maybe you’ll decide you want to get acquired after a few years. But even if that's what you want, you have to work on the company for those few years as if it were your life's work. (I'll talk more about that later.)

Don't go through the motions.

At Y Combinator, we sometimes see startups behaving after Demo Day like someone going off a strict diet. During YC they're virtuous: they work hard on their product, focus on users, and avoid distractions.  They’re also checking in with us regularly. But after they raise money, some founders go on a sort of bender. They rent a fancy office, hire too many people, spend too long shipping the next version, waste lots of time schmoozing and going to events, etc.

Why do they do this?  Probably because they want to seem cool. They see other startups with fancy offices and lots of people and grand plans.  They want to seem as impressive, so they do the same thing.

Do they know they're competing in the wrong race, and that the right race is not office space or number of employees, but revenue growth? Do they know that all these distractions will actually make it harder to compete in the right race? I think they're mostly in denial about both of these facts.  The money they’ve raised goes to their heads, like a 20-year-old musician who suddenly makes a lot of money.

I've seen many startups shift from doing more with less to doing less with more once they've raised funding. It's easy to think money can buy your way out of problems. Don't like sales and calling users? Hire a salesperson. No one’s using your product? It must be because people don't know about it. Hire an expensive PR firm to get the word out. Those are both not merely lazy, but the wrong thing for a startup to do.

When you don't have enough money, circumstances force you to be virtuous. Once you've raised a lot, you have to force yourself to be virtuous.

The even worse danger is that you stop holding yourself accountable. You kind of have to stop holding yourself accountable when you start doing the wrong things, because otherwise alarms would be going off all the time.  You stop measuring and you stop checking in with investors.

Then, you're doubly screwed: you're not only doing the wrong things but you've also turned off the alarms that warn when you're doing the wrong things. Why do founders do this? I suspect because in the back of their minds, they know they’re screwing up, and they want to hide it in hopes that things will get better. But denial is not going to save you. If you have to err in one direction, err in the direction of worrying that you're failing when you're not. 

(Incidentally, when I try to think of YC founders who always worried they were failing, you know who comes to mind? Brian Chesky. So it shouldn't feel like it's a sign of failure to worry that you are failing.)

Don't for a second be in denial if things are going badly or growth is flat. If you're vigilant about diagnosing problems like these, you'll be more likely to nip them in the bud. The sooner you acknowledge that growth is flat, for example, the more time you’ll have left to fix it.

You are going to have to become a recruiter.

One of the counterintuitive things about running a successful startup is that hiring tends to be your biggest problem. Who would have thought, back when you were desperately trying to build the product and get users, that you'd someday have to be a recruiter?

As a founder you're probably a product person. You probably don’t know or care much about recruiting. But once your company reaches a certain point, that's going to have to become a big part of your focus, and you'll only continue to succeed to the extent you do it well.

                           “The secret of my success is that we have gone to exceptional
                            lengths to hire the best people in the world. And when you're in
                            a field where the dynamic range is 25 to 1, boy, does it pay off.
                                                                                                                    —Steve Jobs

Steve Jobs was the quintessential product person. But do you know what he said was the secret of his success? Hiring the best people.

If you're based in the Bay area especially, recruiting will be hyper-competitive. You'll need to convince talented people to join your startup rather than the hundreds of others they can choose from.

When you first get started, you can recruit people from your immediate network of friends and colleagues. But as you grow, you’ll be hiring many different types of people for many different types of roles, so it gets much harder.

Don't hire too fast.

I've just told you that successful startup founders need to become recruiters, but I'd caution against starting to hire too fast.

Hiring too fast makes your company both expensive and rigid. Expensive shortens your runway and rigid makes it hard to change direction easily. This means that, unless you are pointed in exactly the right direction, you now have a recipe for killing yourself.

I've seen a lot of startups get a bunch of money and hire people almost indiscriminately because they think in order to be successful, they need a big team. They also may think that more people means faster progress, but that's not really true. In fact, as we've known since Fred Brooks wrote "The Mythical Man Month," it can sometimes have the opposite effect.

On a related note: don’t hire sloppily. Most mid-stage startups have already hired their core group of early employees. These are probably the most talented people the founders knew from their networks. And everyone knows how important the early people are for building great things and setting the culture of a company.

                                                  A players hire A players and 
                                                    B players hire C players and 
                                                    and C players hire losers. 

During YC’s very first winter batch in 2006, Excite founder Joe Kraus (now at Google Ventures) gave a talk and one of his points has stuck with me ever since. It’s the idea that as soon as you hire a single mediocre person your startup is in danger of being infested by mediocrity. And mediocre people are really, really bad for a startup, so you want to prevent this from happening as long as possible.

Don't be in denial about needing to fire people.

So when you have someone who’s a mediocre performer or is somehow toxic to the work environment, you need to get rid of him/her. STAT. The most common mistake YC dinner speakers say they've made is waiting too long to fire people. It's a mistake practically every founder makes.

Of course you always want to be transparent about performance and give people a chance to meet expectations, but if they aren't, cut them loose. And cut them loose quickly because it's not going to improve. It’s bad for productivity and also for the morale of the team.

No one likes to fire people–especially employees who are nice and trying hard. But you've got to do it. Remember that no one ever hires perfectly. So, once you reach a certain size, if you aren’t firing people, it’s probably because you are in denial. 

You will have to become a manager.

In addition to becoming a recruiter, you'll also have to become a manager. Some founders may think, “I’m a great programmer and have the product vision, but I'm no manager. What should I do as my company grows?” A small percentage of founders may be constitutionally incapable of managing people, but most can learn.  And empirically, management is learnable.

I recently asked a bunch of super successful founders how they learned to manage. I was surprised by how similar their answers were. Their first response was some form of self-deprecating remark like I shouldn’t assume they actually know how to manage or they are still learning on the job. One was a founder of a publicly-traded company!

Some of the techniques they used might seem predictable: they all said they learned by trial and error and by reading lots of books. But the least obvious technique was that they learned from executives they hired. They learned how to manage by watching people they were supposedly managing!

They all shared a certain humility about management. It’s interesting that these are some of the most successful startup CEOs yet they have more humility on this subject than a lot of CEOs of 5-person startups. Learning to manage is a humbling experience.

Another technique that several mentioned was getting together regularly with other CEOs in the same situation to talk about their problems. Maybe two or three other CEOs at the same stage, for example.

The bottom line is that managing feels very foreign to most founders because you go from making stuff yourself to operating through other people. You’ll also have to make tons of decisions about things that are unrelated to the product. I'm sorry to say it will never feel as good as the old days when you were just building stuff and talking to users. 

You may not like managing people, but once a company reaches a certain size you need to start doing this if you want to continue running it. And since it's good for the company if the person with the product vision is also running the company, founders should learn management if they can.

It's way harder to raise subsequent rounds.

Fundraising has changed a lot in the last 10 years. One of the biggest changes is that it has gotten easier to raise a "seed round” but harder to raise subsequent rounds. (I put seed round in quotes because a seed round now can be millions of dollars whereas back in 2005 it was in the hundreds of thousands.) Startups are often unpleasantly surprised by how much tighter the filter is in subsequent rounds. It's unfortunately very common for startups to raise a big chunk of money early on and then labor under the misapprehension that raising another round will be similarly easy.

In the seed round investors are betting on the vision, but in the A round, they need to see results. They want to see rapid growth and they want you to be profitable or able to make it to profitability on the money you have in the bank. We’ve seen many companies get burned by this.

And while you might think the fact that later stage funding depends on traction would make it more straightforward, it doesn’t. Investors are so skittish that even companies with great traction sometimes have a hard time raising money. Plus, investors misbehave just as much in later rounds as early ones.  Some of the dirtiest investor tricks we’ve seen have happened in later rounds of the companies we've funded.

One simple but effective piece of advice for dealing with investors is one I learned from Ron Conway: over-communicate with your investors and confirm things in writing. Even just a 1-sentence email can help like, “Just confirming our conversation that you will invest [this much money] at [this pre-money valuation].”  

And, if you want a good deal, always, always be willing to walk away. Another advantage of being profitable, in addition to making yourself appealing to investors, is that you can walk away from any deal. Which is why when you raise subsequent rounds you should always try to be profitable. In fact, I'd say that unless you are starting SpaceX, you should be profitable when you are raising your second round. 

Don't let yourself run out of runway.

Spend slowly, because the world is unpredictable.

At YC we often see a situation that is, for us, like a horror movie. We get a email from a founder who says they have $600k left in the bank and that they plan to raise an A round and would like our help. We then ask what their monthly burn rate is and they say "$200K." That's 3 month's burn and they expect to raise another round of funding!

It's like a horror movie because we are seeing someone walking toward the bush that we know the monster is hiding behind and there's nothing we can do. Once you start to run out of runway, you are in desperation mode. And if there’s one thing investors can sense, it's desperation. The best case scenario is probably that you'll get money on crappy terms and the worst case is that your desperate situation will make you seem lame and no one will fund you. And don’t take it for granted that your current investors will give you a bridge loan to save your bacon.  Because if you've let things reach this point, you don't deserve one because you’ve mismanaged the company. 

I highly recommend reading Paul Graham's essay, "The Fatal Pinch” to guard against this trap.

Why do founders let the situation get so dire?  A combination of denial and underestimating how much harder it gets to raise later rounds.  They did it before, right?

So how do you guard against the fatal pinch? Keep your expenses low. This seems like such obvious advice, but you'd be surprised at how often we have to give it.

You’ll face unforeseen problems and you can’t predict how long it will take to solve them. And you can't raise money while you’re still trying to solve them. So the more runway you have, the more likely you are to solve these problems before the company dies. 

Don't talk to corp dev.

On the subject of runway, getting acquired also takes longer than you'd imagine and you never want to be in desperation mode when you are talking to acquirers. In fact, in the first year or two, founders should not deal with acquirers, period. 

My advice for founders who are in the earlier phases of their startups: when you get a call from a corp dev person, do not meet with them. Corp dev people may say they just want to explore partnerships, but that is not what corp dev people are in charge of. They buy other companies. And they contact you speculatively, so chances are you won’t even get an offer and you’ll just wind up getting distracted. Although they probably don't consciously think about it, corp dev people are playing games with the strongest emotion a founder can have. 

Don’t tell yourself that a cup of coffee is no big deal and you’re just going to talk about ways to work together. Thank them politely and say you'd like to keep in touch, but right now you are too busy to meet.

I could write a lot on this subject and explain how these painful episodes play out because they are all too predictable. But basically it goes like this: one meeting is enough to get the idea into your head that getting bought is a possibility. Once you let yourself think about the possibility of getting a big chunk of money and not bearing the burden of running a company anymore, you may start to lean toward selling.

Once this happens in your mind, you have no leverage and that's when they turn the screws on you. If you get an offer at all, you’ll probably end up agreeing to a much lower price than you'd ever imagined. Much of that price will be tied up in some backloaded compensation structure where you’re required to work at the big company for the next 4 years. By the way, most founders I know who get acquired or acqui-hired end up leaving well before their time is up. My advice is to assume that you'll never see any money except the part you get up front.

M&A can also be dangerous for later stage companies. Even if you can get a good financial deal, don't be under the illusion that your acquisition will be one of those rare ones where you will go along working independently from the acquirer yet benefitting from its resources, brand and distribution channels. You have to assume that the acquirer will screw up everything.

Sorry if I sound jaded, but you need to assume the worst when dealing with M&A. I recommend reading Justin Kan's "Founder's Guide to Selling Your Company"—it's a very good overview of what to expect. And Paul Graham's "Don’t Talk to Corp Dev". 

The more successful you become, the more haters you'll have.

An unfortunate by-product of success is a greater amount of public criticism. Once you make it to the mid-stage, you may start to become well known, especially if you have a consumer product. Two things can happen at this point with the public that always catch founders by surprise: first, complete strangers will start to assign bad intentions to everything you do. Second, the media will only be interested in one thing about you: controversy. Because controversy equals page views. No actual controversy? No problem; they'll manufacture some.

You can't prevent yourself from being a target. It's an automatic consequence of being successful. So the best you can do is react in the right way when people attack you. To some extent you have to resign yourself to letting people lie about you. You can't engage with every crazy hater or troll. But sometimes you do need to react, especially if something happens that makes more people angry at you than usual. So someone should be watching Twitter, but perhaps not the CEO.

And be very careful about what you say, both as a company and as individuals, even in what might seem like private conversations. Anything you say can turn into a news story nowadays. And you don’t even have to have said something bad–just something someone could willfully misinterpret.

It sucks, but you can't ignore it. The more successful you become, the more you'll need to live your life as though anything you say or do will be willfully misinterpreted.

Ship great things.

I've described some things not to do. I'll end by telling you something that you should do. Keep delighting users by making amazing stuff.  That's probably what got you this far. Hold onto that idea. That will not only get you through the mid-stage. It keeps working forever.  That's how Apple got to be so big. Forty years later they're still trying to delight users by making amazing stuff.

In some respects, like becoming a manager or watching everything you say, you need to change as your company grows. But don’t change this. Don't let anything distract you from shipping great things.


121 responses
Thomson Nguyen upvoted this post.
Russell Smith upvoted this post.
Such a great post Jessica. Basically, keep your head tightly on your shoulders - harder to do than it sounds.
Garry Tan upvoted this post.
Excellent post. It's still tough out there no matter how much success you have.
A posthaven user upvoted this post.
This should required reading for every entrepreneur once they raise a Series A. Like, it should be in the term sheet. My only regret it that Jessica didn't write it 6 years ago. It would have saved me personally a LOT of heartache and painful lessons.
Thibault: “Cut!” upvoted this post.
Very articulate post. Interesting what you said about not speaking to corp dev - at the Startup Grind event in Redwood City March 2015, a couple of the founders gave a 20 minute talk on doing exactly the opposite - speaking to corp dev as early as possible, with the goal of always selling the company.
Scott Barbian upvoted this post.
Yazin Alirhayim upvoted this post.
Great post! Here is our take on the mid stage pitfalls. We call it the Series B trap: http://www.altosventures.com/2014/01/the-series...
Great points. Painful to read. Reminded me of Alto's article that Ho posted. These are both articles to file away and read once a year as a reminder.
And this is why we are not raising money :) Awesome post!
A posthaven user upvoted this post.
Great post. I agree that this should be filed away and read at least once a year as a reminder.
A posthaven user upvoted this post.
104 visitors upvoted this post.