Venture Capitalist at Theory

About / Categories / Subscribe / Twitter

3 minute read / Jul 20, 2015 /

Take Your Startup to the Limit

I learned to drive a car at age 19 on a warm Santiago de Chile night, in an unusual way. A friend named Jose Pedro resolved to teach me after dinner at his apartment, suprised to learn I didn’t know how. It was past two am, and without anyone on the streets, it would be safe, he assured me. As we sat in the car, he showed me how to manage the three pedals and the gear shift, and explained the how the clutch worked. Then the lesson started.

Jose Pedro instructed me to put the car into first, accelerate gently, then into second, then into third, and then floor it - max the car out. Once we hit top speed in his black Fiat coupe, with the tachometer reaching deep into the red numbers, and the apartment buildings whizzing past, he yelled “¬°Frena en seco!” - slam on the brakes. The car pitched forward, the seat belts cut into our shoulders, the tires squealed and left long trails behind us. My heart pounding in my ears, my fingers hurt as a I unclenched the steering wheel.

Immediately, he turned to me and said, “Now, you know the limits of the car. Everything else should be easy. Just drive within those extremes and you’ll be fine.”

I often reminisce about this story when I look at financial plans of startups. The same idea holds: it’s important to understand the limits of a startup in both the acceleration and deceleration cases.

When a startup is growing very quickly, the people, the resources and the business will be put under enormous stress. And some point, quicker than expected, the limiting factor of growth will become apparent.

Sometimes that limiting factor is cash; the company needs to raise money to seize its opportunity by hiring the right team, staffing sales and customer success. Other times, engineering scalability constrains growth. The product isn’t yet built to handle scale. Yet others, a startup might be hampered by its sales funnel. More leads are needed to achieve plan.

Often, through financial modeling and introspection, startups can anticipate this limiting factor and plan to mitigate it early. That’s the acceleration part. And founders will have to do this again and again and again. Because each time a limiting factor is managed, another one pops up.

A startup should be prepared to handle the deceleration case, for example, when it hasn’t discovered product market fit, is running out of cash, or suffering from a degrading macroeconomic environment. The company should understand how fast it can slow its growth to reach cash flow break even and profitability, while still remaining in control of its business.

This might imply reducing marketing spend, curtailing hiring, accelerating cash collections, cutting expenses. What would that look like? Does the company have enough capital to sustain deceleration?

Understanding the limits of your startup, and operating within them, is critical to ensuring long term success.

Read More:

How Similar is the Fundraising Environment Today to 2000?