Default-alive vs growth-at-all-costs: how founders can balance survival, PMF, and fundraising windows to play the long game.
As a founder, if you are *truly* in it for the long haul, it’s in your absolute best interest to get to “default-alive” as soon as possible.
Default-alive ensures you can play the right long-term game, adopt an operating strategy that doesn’t over-optimize for the short term, and execute in partnership with stakeholders (employees, customers, partners, investors) that are deeply aligned with you.
And then, when all the pieces of the orchestra are starting to come together in the beginning notes of a beautiful symphony, that’s when you raise maximum capital and step on the gas.
You know what the best part is? In this case, you continue to be the orchestra’s conductor for a long time, with maximum ownership & ultimate value capture.
Now, there is a Catch-22 here. Getting to default-alive usually comes at the cost of rapid growth. And as we all know, VCs index on growth while evaluating startups. So does the company become unfundable while on the default-alive path?
My response is, it depends on the market dynamics, competitive intensity, and progress towards PMF/ how much time & effort will it take to get PMF (eg. h/w vs s/w, large enterprise contracts vs PLG/prosumer etc.).
That’s why it’s a very nuanced and contextual decision that founders need to think through, ideally jointly with seed investors.
Private market windows are fickle and keep opening & shutting down based on sentiment around the domain, progress in the business, the founder’s storytelling etc. As a founder, one has to be able to survive (often at the cost of growth) when the window is shut. And then create momentum & raise again when the window re-opens and/or an inflection point gets reached in the business.
In the majority of cases I have seen, it plays out like this:
Company raises a round -> burns towards finding PMF -> is unable to raise the next round, either due to not hitting adequate milestones and/or market conditions -> founders raise a bridge and continue with less resources.
It can play out in 2 ways from here:
(1) No PMF possible, founder loses conviction, shut down, or
(2) Grind towards early PMF, still have conviction, try to raise again.
In (2), if you can raise, then it’s great. You have a PMF’d business + capital to deploy and accelerate growth.
However, if you aren’t able to raise and you aren’t default-alive, then even after finding that elusive PMF (which 9 out of 10 startups are unable to find ever), you can’t do anything with it and have to shut down.
But, if you have PMF and are default-alive, then you can still continue the journey (perhaps with lower growth) until you either hit another inflection point in the business and/or the private market window opens up for you. In which case, you then raise, accelerate growth, and continue building.
TLDR: If you can be patient and be willing to grind hard upfront without seeking external validation, being default-alive is one of the best ways to live & build!
Cutting losses is one of the hardest decisions in startups, investing, and leadership—but it’s also what separates winners from those stuck in the sunk cost trap. Here’s why mastering this mindset is essential.
Recently read this Forbes article on Igor Tulchinsky, a Billionaire quant trader who runs the hedge fund WorldQuant. In particular, this section on cutting losses caught my eye:
While I don’t come from the public markets world, I have taken a series of major risks as a founder, operator, and investor. Of course, now that I am a full-time venture investor, I live in a world where I take and manage risk every day, including macro, business, tech, portfolio construction, and people, among others.
Based on my journey so far, I can’t emphasize enough the importance of developing the ability to quickly cut losses. Interestingly, before making a major decision, most people are fairly good at identifying & mitigating key underlying risks. However, I have learnt with experience that even after executing the best risk management process, things will still go wrong. And once things go wrong, even the most intelligent organizations & individuals easily fall prey to the sunk cost fallacy (“throwing good money after bad money”).
Let’s take the classic example of finding your next job. As part of a thoughtful risk management process, an intelligent candidate consciously tries and figures out mutual fit during interviews, gathers feedback on the company’s culture, perhaps speaks to customers & competitors to evaluate the product, or, in the case of startups, even does a 1-2 week part-time project before commiting full-time.
A similar scenario is also playing out on the employer’s side. Most hiring managers give high weightage to candidates who come recommended from trusted connections or with whom they share a past history. The interview process consists of multiple rounds to stress-test skills & personality. The company does rigorous reference checks, often also focusing on off-sheet checks to eliminate bias.
So both employers and candidates follow a fairly rigorous risk management process. Yet, as most of us have seen in the real world, leadership hiring has a 50 %+ failure rate in Corporate America. Here are some summarized stats from ChatGPT on this:
In this case, even the most rigorous upfront risk management process can’t account for a variety of post-decision risks, including process weaknesses (a great hiring process can be undone by a weak onboarding & training process), uncontrollable externalities, and random one-off events.
In these scenarios, a willingness to quickly cut losses & limit further damage of time & money on both sides is the best way forward. And make no mistake, it requires a lot of courage. That’s why I found Starbucks firing their last CEO in less than 18 months of tenure to be a very bold move, especially for a company of that scale & history (you would expect them to be sluggish).
While exec hiring missteps can be major setbacks even for large companies, they can often become matters of life and death for an early-stage startup. A wrong hire for a critical role can do strategic & cultural damage that might be irreversible with the existing runway. That’s why the best founders believe in the “fire-fast” philosophy.
Zooming out from hiring, startups succeed by taking calibrated risks on top of a technology change that an incumbent would just find extremely hard to do. This requires running a bunch of iterative experiments with very limited upfront data, but balanced by an asymmetric risk-reward profile (if this works, it will massively move the needle).
By the very nature of these experiments, a majority of them will fail. Combine this with a very limited cash runway that even the best startups get at each stage to get to the next set of milestones, and founders need to combine controlling the cost of each such experiment with an active intent to cut losses once it’s clear that the experiment is not working.
Essentially, a mindset to cut losses early till you get to something that is clearly working is a key requirement for startups to successfully emerge from this maze of early experiments with real product-market-fit. Windsurf CEO & Co-Founder Varun Mohan framed this idea brilliantly in his recent interview with 20VC:
Never fall in love with your idea…
One of the weird thing about startups is that you don’t win an award for doing the same wrong thing for longer.
Coming to my world of venture capital, I have seen many instances where the aversion to cut losses has come back to bite the investor. The context I have seen this the most over the years is in ill-conceived bridge rounds.
Classic scenario – the company has exhausted most of its last round of capital, has created just enough progress to keep existing investors somewhat interested, but if looked at with rigor and intellectual honesty, is nowhere near product-market-fit. Combine this with a founder who is good at storytelling and can pitch “if we get just this much more money, we will break through”, and existing investors are highly likely to cave in & bridge the company.
Unfortunately, in my experience, a majority of these types of bridge rounds don’t end up working. Peter Thiel said this uncomfortable truth a few years back about what he has observed in the Founders Fund portfolio over the decades (paraphrasing):
Once something starts working, people often underestimate it. And when things aren’t working, people often underestimate how much trouble they are in
Everytime a company raised an up round done by a smart investor, it was almost always a good idea to participate…
Steeper the upround, the cheaper it was…
In flatrounds and downrounds, it was almost always a bad idea to participate…
This behavioral weakness is perhaps why Michael Kim of Cendana, a major LP in emerging managers, recently said in an interview that the biggest mistake he has seen GPs make is deploying reserves poorly. My logic is that reserves deployment, especially in rounds without quality external signaling or real business progress, is particularly prone to multiple human biases kicking in, including loss-aversion, likability bias, optimism bias, and overconfidence bias.
Funds with relatively large reserve ratios should think deeply about potential solutions to this problem. One thing I have seen a few funds do is have a dedicated GP whose sole job is to evaluate each reserves-deployment situation like a fresh late-stage deal from the ground up. This can help counter the personal biases of the lead GP on the original deal.
To summarize, the ability to avoid the sunk cost fallacy & cut losses early is critical not just for entrepreneurs & professional investors, but also for each of you as every contact with the real world exposes you to risks big and small, whether you realize it or not. Getting out of sticky situations early enough ensures that you stay in the game and keep compounding your advantages.
With millions in the bank post a seed round, Founders often face the challenge of maintaining disciplined execution. Excess capital often ends up slowing progress towards real PMF. I share a brain hack to counter this.
Was in a working session with a founder recently. The company is going after a huge market opportunity and has raised a low single-digit Mn seed round from some very good VCs.
Issues with too much early capital
The issue though is that, like most category-creating seed startups, the precise customer persona and pain points to be solved are not obvious right now. After just a few months of execution, it’s quite clear that the company will need a grinding customer discovery process, with long and deep engagements with early design partners.
In my eyes, this is all great. As an investor looking for non-incremental startups, I precisely expect this and in fact, get excited by it. Sharing an excerpt from my post ‘Building…one at a time‘ on my learnings as a founder on the 0-to-1 stage:
When the absolute user numbers weren’t met, my morale as a founder would get hit with each iteration. In hindsight, hitting numbers shouldn’t have been the goal at all. The ideal 0-to-1 mindset is like that of a scientist, with curiosity being the core driving emotion, backed by an iterative product development approach. The target outcome of this approach should be to gather insights that help refine the hypothesis.
Similar to how scientists drive their research process one experiment at a time, I have realized that building any new product or service from grounds-up requires moving one “unit” at a time. It’s up to you to decide what that unit should be – acquisition, activation, frequency of use, revenue or even just getting qualitative feedback!
The challenge is when a company has raised significant capital relative to its stage. While this de-risks the company from a runway perspective and opens up many options in each execution track, having money sitting in the bank often puts undue pressure on the founders to use that capital.
In my experience, this pressure starts manifesting in many ways at an operating level:
1/ While the seed stage needs founders to be directly talking to customers and building product, capital often creates a tendency to do premature functional hiring and delegating core aspects of PMF progress to new employees.
2/ Even as a seed startup is still figuring out the customer persona and pain points that it needs to solve, excess capital drives founders to invest in GTM even before the company knows what product needs to be taken to market. This could involve unnecessary paid marketing, attending events vs talking to customers, building PR rather than product etc.
3/ Excess capital can often create an environment where the team starts to feel victorious even before any material progress towards PMF. The mindset shifts from ‘doing things that don’t scale‘ to ‘doing fake work’ via mindless reps.
Ultimately, this creates a massive risk of founders not being honest to themselves about execution and learnings, while also setting wrong expectations with their Board/ investors. Most investors aren’t builders anyway, and given their primary concern is the next round markup, often push startups to increase burn and “show numbers” prematurely. Unless the founder can push back with a high-conviction execution philosophy that they believe the company needs at this stage (I espouse founder-led, lean, frugal tiger teams doing things that don’t scale), this Board pressure will create a negative flywheel.
Only founders who are honest with themselves about where the startup really stands can then push back on investors with the best model they believe is needed to make progress at this specific stage.
Drip-feeding as a brain hack
So, how can a founder create this disciplined, frugal, ‘doing things that don’t scale’ mindset even with millions sitting in the bank? During this working session I mentioned at the beginning of the post, I blurted out a brain hack:
“What if we just virtually ring-fence the funds, maybe even create a CD or something, and give ourselves say only $500k (the standard YC deal amount) or something similar for the next 6-12 months to execute? In a way, we use this artificial scarcity to discipline ourselves, and drip-feed execution till a certain set of milestones are reached.”
It’s almost treating raised capital like a 401k account – there to save your a** in the long run but not accessible day-to-day. It’s what HNIs do with trust funds – even with a large pool of capital, the kids still get drip-fed for their own good.
A similar spirit is reflected in grandma’s age-old wisdom that advises folks to minimize easily accessible funds in bank accounts and instead, lock them up in CDs. Adding that extra layer of friction itself acts as a nudge to avoid impulsive spending.
OG public market investors like Nick Sleep and Guy Spier have openly shared how they use behavioral nudges like keeping the Bloomberg terminal in an uncomfortable location or only placing Buy/Sell orders when the market is closed, to avoid unnecessary noise and the tendency to frequently trade at the expense of compounding returns.
This idea of drip-feeding immediately resonated with the founder and in fact, she encouraged me to blog about it. Hence this post! Am eager to see how the results of this execution nudge pan out. Will share the learnings on that soon.
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Heard an excellent conversation between Michael Seibel (CEO of YC) and Patrick O’Shaughnessy (top asset manager, also moonlighting as an amazing podcaster). It had many fundamental insights that would help any founder♟ Sharing my top takeaways here:
#1 Don’t be too “smart” for your own good: there is nothing like that one breakthrough idea that is guaranteed to work 100%. Teams need to be willing to iterate, pivot & execute in new directions all the time 🛶
#2 Launch!!! At the 0-to-1 stage, the most important thing is the ability of a team to build & launch a working product, as fast as possible. You can’t build a company if you don’t launch in the first place 🚀
#3 Startups are all about momentum: teams need to demonstrate forward momentum in whatever time they have spent building the product. The best teams generate rapid momentum to acquire users & fundraise with this tailwind 🏎
#4 What kind of problem is worth solving? a) high frequency⏰, b) high intensity🔦, c) high willingness to pay💵. Overall, founders need to have some special insight into the problem they are setting out to solve💡
#5 Founders essentially take 2 kinds of risk: a) product risk🛠, not sure if people need this product (typically taken by relatively younger founders) and b) execution risk🔨, I know this product is needed but not sure of execution (usually taken by more experienced founders).
#6 Be “real” when coaching founders: be upfront in presenting facts about high failure rates. And that to win, you have to reach out for extraordinary (be 2 standard deviations from average). Also, emphasize the importance of developing tools to manage their emotions & health⚖️
#7 Best way to create leverage during your fundraising process? Acquire users & grow m-o-m. Pitch with real users & data. It’s possible to raise money just on ideas/prototypes, but you will have zero leverage in these discussions. Your goal should be to fundraise with leverage💪🏼
#8 What is Product-Market Fit? It’s like a sledgehammer to your jaw. It’s that month or quarter where you get so many users that it breaks your systems. When the sheer market traction bypasses all your spreadsheet plans & projections. When you have PMF, you WILL know it🚰
To conclude, what I found most intriguing was the importance of “bravery” in founders🧗🏽♀️ 2020 has shoved in our faces a plethora of issues we are facing as a species. The need of the hour is a generation of founders that take on problems that are intimidating to solve⭐️
Note: this post first appeared on the Workomo blog here.
[Update on Feb 26, 2020] Rahul Vohra has recently published a super cool interactive tool so people can use Superhuman’s PMF framework for themselves. Check it out here.
As I am building-out my startup Workomo (helping knowledge professionals supercharge their professional relationships), have already used so many ideas from this method. My detailed take in this article below.
One of the best articles I have read in recent times is How Superhuman Built an Engine to Find Product/Market Fit by Founder-CEO Rahul Vohra. As I have been building Workomo over last few months, the overarching goal for me as a founder continues to be — how to achieve PMF while minimizing time spent & capital utilized? Having read Marc Andreessen’s legendary essay on defining PMF (“Product/market fit means being in a good market with a product that can satisfy that market”), as well as all YC stuff on the topic, I had developed a playbook for it in my head:
Eventually “delight” & consequently, “retain” early adopters
Test how much will they pay
Get to 10, then 100, then 1000 “retained & paying” users
Scale-up from there
As a founder dealing with so many unknowns, one is always looking for actionable insights, more than theoretical advice. Reading about the Superhuman experience just gave me so much execution color on this PMF playbook. I think every founder (and even venture investor!) should absorb these valuable insights so sharing my notes & key takeaways from this article.
Summary of Superhuman’s deconstructed product-market fit playbook:
#1 PMF takes time
#2 Quantify PMF via a single, North Star metric
#3 Structure & execute the user survey process well
#4 Create a highly detailed user persona of the High-Expectation Customer
#5 Focus on delighting a small number of users first
#6 To convert users that are “one-the-fence”, focus on what your fanatic users love the most about your product
#7 Two-pronged product planning approach to move towards PMF — focus on core strengths + address core concerns
#8 For feature prioritization, stack-rank to get to “lowest cost, highest impact” features
#9 Rinse, and repeat…
Let’s dive into these elements in detail.
PMF takes time
Superhuman team first started coding in 2015 and it’s only in last few months that they have attained a critical mass of vocal adopters, who are in-turn, making the product viral. A reality check for all of us in terms of how much time it truly takes to make something people want, and therefore, the value of patience in founding teams (& investors).
2. Quantify PMF via a single, North Star metric
A big challenge in working towards PMF is that it appears “fluffy”, especially when as a founder, you are trying to align your engineering & product teams around it and even more so, when you are trying to set an actionable & trackable process roadmap for it.
The best way recommended is to quantify PMF in terms of a North Star “leading” metric.
The Superhuman team used the following leading metric to quantify PMF (originally articulated by Sean Ellis in this article) — just ask users “how would you feel if you could no longer use the product?” and measure the percent who answer “very disappointed”. The threshold for having achieved PMF is 40%.
3. Structure & execute the user survey process well
Perhaps the most refreshing info in this article are the details Rahul shares about the user survey process they ran, to gather data on the PMF North Star metric:
a) Identify users who used the product at least twice in the last two weeks
b) Exact survey that was sent out given below (just the minimum number of critical questions were included, amazingly succinct yet effective!)
PS: I loved the 2nd question, where existing users are prompted in a way, to describe their own persona. Makes it so much easier to clearly identify who your real early adopters are. More on this later.
c) Classified the responses into 3 buckets — 1) Very Disappointed, 2) Somewhat Disappointed, and 3) Not Disappointed.
d) Assigned a persona to each bucket, to identify the “Very Disappointed” user persona (the actual early adopter)
To me, this entire user survey process is the core of the PMF playbook, and something I found exceptionally insightful.
As has been my learning doing Workomo’s customer development process, at this really early stage of the company, the number of respondents matter much less than you think. Some data is better than no data, especially coming from actual, retained users. Superhuman mentions anything more than 40 responses as an adequate sample size (at the time, their universal sample set was only ~100–200 users that could be polled!!)
I think the most clever trick in the above user survey structure is Q #2 — “what type of people do you think would benefit most from Superhuman?” ‘Cos, people tend to describe their own personas as a response. Analyze responses to this question only for the “Very Disappointed” bucket, and you end up with detailed personas that users themselves have pretty much self-created for you!
Going from this 1st level user persona…
1st Level User Persona
…to the 2nd level user persona.
2nd Level User Persona
PS: have been searching for what an optimally-sized user persona should be like for a really early stage startup. This is a great example — ~200 words, 2 paras; captures both professional & personal behavior, motivations, quantified behavioral characteristics, relevant life goals and desired outcomes/ end-state.
5. Focus on delighting a small number of users first
Paul Graham always says it; Superhuman case study just confirms it — define a narrow market, delight, dominate & then grow out from there.
Reproducing this quote by PG, just to drive home this point:
“When a startup launches, there have to be at least some users who really need what they’re making — not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, for the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.”
6. To convert users that are “one-the-fence”, focus on what your fanatic users love the most about your product
Key to converting more on-the-fence users into fanatic users is first identifying the core 1–2 strengths of your product. The reason being, non-fanatic users that fundamentally care about these strengths, are the ones most likely to convert into fanatics. However, this requires addressing their top 1–2 product concerns.
% of “Somewhat Disappointed” bucket users, who care about “Speed” as the main benefit — 30%
For these 30% of “Somewhat Disappointed” users, what are their primary concerns (as told by them in the survey)— lack of mobile app (MAIN) + integrations, calendaring, better search etc.
7. Two-pronged product planning approach to move towards PMF — focus on core strengths + address core concerns
Boom! Post the above 6 steps, now you have a clear roadmap of features needed to convert on-the-fence users to fanatic users, and inch closer towards that elusive 40% PMF benchmark.
Your PMF product plan needs just the following 2 strategies — 1) doubling-down on core strengths that are loved by fanatic users+ 2) working to allay concerns & feature requests from on-the-fence users.
8. For feature prioritization, stack-rank to get to “lowest cost, highest impact” features
Use a combination of survey data and your qualitative product instinct to arrive at the low-hanging features (low cost + high impact) that can start delivering immediate value to users.
9. Rinse, and repeat…
…until you get to PMF!
Hope you find this deconstruction useful for your own journey towards PMF. Would love to hear any specific strategies that have worked for you.
Side Note: am currently building Workomo, a smart & simple professional relationships management hub for the new-age knowledge professional. If you would like to transform yourself from just a “networker”, to a deep “relationship builder”, do sign-up to receive private beta access. Also, check out this post on Workomo’s long-term Mission & product thesis.
