· Marco Spaziani Brunella · Entrepreneurship · 7 min read
Three things I wish I had known before starting a tech startup
It's all about aligning interests.
Between 2022 and 2023, as I was wrapping up my PhD, I decided it was a good time to jump on the VC-backed tech startup bandwagon and give a shot at a couple of ideas I had throughout my PhD. In 2021, raising capital was easy; thus, bringing to life a couple of ideas was within arm’s reach.
I have bootstrapped small businesses in Europe all my life, but I wanted to experience some of the fast growth everybody in Silicon Valley praises.
I started two companies, one with fellow PhD students in my research group and one with my longest-time business partner, my wife. Both companies were valued at $2M+ and failed, as far as I see it, for very different reasons.
The first failed because we hadn’t seen much interest in the product during customer interview calls. We were already five years into the journey, and most of us didn’t have the energy to pivot and test out new things. The second one was weirder. The product was well received, and VC interest was there, but we decided to wind it down as we couldn’t see a path to profitability.
This post is a collection of random but essential things I wish I had known before starting a tech startup. Hopefully, it will serve as anti-BS therapy for all the romanticization surrounding starting a venture-backed company.
Idea != Product != Business
Ideas are a dime a dozen. And I’m not talking about the 80% of people who apply to an accelerator with a tarpit idea; I’m talking about the 20% of genuinely original ideas. An idea can be anything you want to build a product out of; it can be a piece of software, a shiny hardware object, or a new technology. Ideas do not matter.
A product is the natural evolution of an idea. It’s when you add all the bells and whistles to your idea to craft something your end user can use without bouncing off disgusted. There are many camps here on who/how/why you should build a product, but my experience is that you should invest your efforts in creating a product in a domain you’re first-hand knowledgeable on, AND you’ve experienced frustrations. This knowledge will allow you to develop and prioritize features as you go along.
For example, you should only start a company in the Short-Term Rental management software space if you have run an Airbnb for at least a year. You might get the first few things right, but then you’re at the mercy of customer interviews to understand what to implement next. Customers don’t know what they want most of the time.
The only thing that separates your company from a charity is the answer to this question: Can I PROFITABLY sell my product? Is that easy. Yet most people focus on sales, with each sale putting a hole in an already leaking bucket. YC preaches only half of the story: make something people want. You should be making something people want that you can profit from.
Relentless Focus On Profits
Profit is not a weird accounting shenanigan; Instead, it goes like this: if you sell a product for $X and it costs you $Y, your profit is $(X-Y) and should be STRICTLY greater than 0. Where most founders get emotional is that they fudge up the numbers on the costs. You have to include everything! Even that Starbucks coffee on the company credit card Elaine in accounting takes every morning to start her day.
The worst thing you can do as a founder is to lie to yourself, especially about how profitable your company is. Accounting principles have tried long and hard to develop metrics like EBITDA to make an underperforming company look like the best investment in town — more on EBITDA by the late Charlie Munger here. If you don’t know basic accounting, it’s time to start learning some. It is not something you can delegate; you have to understand it.
Whenever I talk to some Silicon Valley guy, they always point to some variation of the Sony PS3 story, where the actual console was sold at a loss to penetrate the market faster, hoping to recoup the loss with the royalties gained by the sales of the videogames.
When Sony pulled this off, they had something that you do not have: scale.
“So it’s easy then, just grow to get scale!”
Avoid growth-at-all-costs
How do you grow as a startup? Mainly three ways:
- Raising Venture Capital
- Using leverage
- Bootstrapping
Notice how this is in my reverse preference order.
Raising Capital
Raising capital is arguably one of the most explored aspects of all accelerator programs. Most founders focus their energy on pitch deck design, pitching competitions, and other nonsense.
What happens during a venture round raise is easy: you get money in exchange for a stake in your company.
Significantly, when you’re raising a pre-seed or a seed round, VCs don’t have much to do due diligence on, so a lot of emotion is involved, such as FOMO because you’re the new AI/Crypto/wathever-BS-comes-next out of the shiny accelerator or maybe a company in your sector did a spectacular IPO (happened to my second company), so they’re more willing to cut the check.
When VCs are not very responsive to your offering, it’s a good sign for you that you may have a profitable business. While you’re trying to determine if you can profitably sell your product, they’re trying to figure out if they can profitably sell their interest in your company at the next raising round. So, interests are misaligned.
The more you raise, the more your company becomes something to flip rather than nurture. Where does it end? It ends either with a sale or an IPO. Before that, every time you hear a valuation figure after a round, know that it’s a completely made-up number. The only valuation that matters is when you mark-to-market, when a company wants to buy your company, or when you go public.
Raising capital is the equivalent of taking out student debt. There’s nothing to celebrate in raising capital; it’s an obligation.
Capital injections will speed up everything, the good and the bad. If you’re on a successful trajectory, you’ll be much more successful. If you’re not profitable, you’ll be racing to the bottom.
The worst thing you can do here is raise capital for a business that’s yet to be profitable, hoping for eventual profitability, only to realize you wasted people’s time and a lot of money.
Using leverage
Using leverage in this context means taking on debt.
I prefer it to VC as there’s much less room for emotions, interests are much more aligned, and you don’t lose control of your company. Suppose you take out a loan to kick your company off the ground. The only thing that matters to the lender is your ability to repay the loan (principal + interest), which will be taken out from your profits.
So if you don’t have any, there goes your ability to grow, and it’s OK: you should be ruthless in not allowing any company you run to grow if it’s not profitable and you don’t see an attainable path to profitability. It’ll only make a bigger bang when it will eventually implode.
This option is rarely accessible for first-time founders at the early stage, as no lender will lend money to them.
There are many pitfalls in using leverage, but when you’re starting out, there’s little to no chance of being overleveraged simply because people won’t blindly lend money to you, even in the more exuberant, zero-interest-rate policy phases of the lending system.
Bootstrapping
This is my favorite strategy as it requires one thing and one thing only: showing up every day. As long you and your co-founders show up daily, you’re making progress on your business and intrinsically hardwired towards profits: if your company isn’t profitable, you’ll never be able to pay yourself a salary, and you’re wasting your time.
Not all companies can be bootstrapped because you may need a considerable investment upfront. Think about semiconductor companies. But if you’re doing software, bootstrapping should be the first thing that comes to mind, not the last.
Once you have successfully bootstrapped your company (meaning you have profits and healthy profit margins), you can consider growing with the other two strategies.