The Fine Line Between Success And Bankruptcy

Editor’s note: Eric Paley is a managing partner at Founder Collective.

When seed capital hits the books, the outlook of every startup is one of unbridled optimism. Founders, team members and investors are inspired by a singular vision and believe it can materialize into a world-changing company.

If things go right and the product gets amazing results, optimism turns into euphoria. There are few experiences more rewarding than making big collective bets and winning together. This is the ideal of every startup that we all aspire to be out of the gate.

However, somewhere between raising money on the promise of a great vision and a unicorn valuation, almost every startup endures a challenging purgatory that requires patience. The longer this “patient stage,” the greater the natural strain on the key relationships in the startup become, eroding away the ideal that everyone hoped for at the start.

This strain comes with significant risks. Both for investors and founders, but also between co-founders and management team members that might have different solutions for how to emerge from the patient stage. How you manage this stage is often the difference between your company thriving or dying.

Recognizing You’re Stuck in the “Patient Stage”

The patient stage typically looks something like this: Your startup raises money and, after a bunch of product delays, finally gets something into the market. Everyone expects a hit and the results are somewhere between okay and disappointing.

Not to worry; the team thinks it knows what needs to be fixed. After all, this was the minimal viable product and the entire point was to learn. Albeit delayed, everyone learned a ton from the MVP, and the company needs time to make some fixes.

After more delays, a new version ships. The results are better, but still far from the aspirations of everyone involved. The process repeats, possibly shedding some team members along the way. You pass the messiah T-shirt to various new hires who suspect they know how to fix the problem, but ultimately are only another piece in a very complicated puzzle.

While this example focuses on product, the same spiral of purgatory can apply if your company is stuck trying to find the right sales approach, marketing channels, operating plan, business model or supply chain. Whatever the company’s struggles, if the progress isn’t incredibly clear, more and more patience is required to support you and the company.

Escaping the Patient Stage

Unfortunately, this is the typical path that must be overcome by even successful startups. The question for founders and their boards is how to get through the inevitable patient stage together.

Your leadership credibility is the key to success through this stage. If investors or team members lose trust in your leadership through challenging results and frequent iterations, the company can find itself in a very precarious position.

The biggest mistakes you can make in the patient stage are either denying the problem exists or pretending that ill-conceived solutions will fix everything.

Your investors are there to help and want to be supportive, but as your credibility declines with every disagreement about the problem or the next failed solution, your investors will start to doubt that there is a solution in hand or that you’re the person who will lead the company to that solution. Skeptical team members will look elsewhere for jobs. Doubt will slowly kill the company.

Below are the keys to surviving the patient stage.

Keep it short. First and most obvious, the shorter each patient stage the better. As long as there is clear forward progress, things start to get a lot easier. It’s extremely valuable to demonstrate the small wins. An overall sense of constant movement against the key challenges will build confidence that the company is getting closer and the patience is well-deserved. Having emerged from previous patient stages and achieving a new level of success, will actually make the company more resilient through the next patient stage.

Stay aligned. Second, it’s important to be precise with your board and team on what problem the company is solving. There are few things more frustrating than finally feeling that you’re making progress only to realize that investors, founders and team members had a different view of the problem to be solved, and many don’t agree that the company is progressing.

Don’t develop product myopia. Third, while sharing product progress, don’t overestimate investor reaction to product. Remember investors aren’t product experts. They’ll typically react positively to any product hypothesis that they believe will move the company forward, but be careful not to keep showing them product iteration after iteration, only to keep getting poor customer results from each new iteration.

Product iterations are hypotheses and not progress. Investors will likely be tempered in their enthusiasm until they are seeing results. At some point, seeing the next version, after many previous underperforming versions, will lead to a loss of all credibility and investors will think that your strategic product instincts are not going to get the company beyond this stage.

Don’t fundraise against patience. Avoid fundraising at all costs while in the patient stage. Your own investors will struggle to write a check and even worse they will lack the confidence to inspire new investors to write you a check. When fundraising, it is important to anticipate that things can go wrong and that you will likely find yourself in the patient stage at some point.

Plan accordingly and raise enough during periods of great optimism to fund the company through purgatory. The combination of being in the patient stage and also running out of money can be a death blow to startups.

It’s a matter of survival. I’ve seen companies stay in the patient stage for a few years and others that cannot survive through this stage for more than a few months. The patient stage is inevitable, and it is the riskiest phase in terms of how the relationship between investors, founders and team members can impact the success or failure of a business.

Erode credibility during this phase and investors and team members will lose patience and throw in the towel. Collaborate well, be clear on the problems and the planned solutions, show steady progress and you will sustain through the patient stage for however long is necessary.