Startup Founders Need to Quit Lying
Employees deserve to know the truth before joining your team.
Good startup founders have an uncanny ability to suspend disbelief when it comes to future of their own startups. They’re always in sales mode — to themselves, their friends and family, their investors, and the world in general. While this makes sense in general there is one moment when you need to share the worst case scenario — hiring. Before you hire civilians (i.e. people looking for jobs/careers) you need to give them the harsh realities of the startup world. You need to tell them that fewer than 1% of startups ever raise venture capital and of those who do more than 90% fail. Your endeavor will almost certainly fail. Employees who don’t understand this reality will be perpetually unhappy when they hear rumors about the state of the company.
Startups that are on the brink of huge success are often on the brink of spectacular failure — the line between the two extremes is often razor thin. For example, last week I ran into a former employee who was working for a friend’s startup. When I asked him how things here is what he said:
We’re fucked. The monthly cash burn is over $200,000 and we’re going to run out of money in three months. Our idiot CEO is clueless. While we’re here dealing with this train wreck he’s on the road speaking at conferences, doing interviews for Bloomberg and the Wall Street Journal — if they only knew how full of shit he is. I hate my life.
Later that day I gave my friend (the CEO) a call to see if I could do anything to help and here is what he said:
We’re doing great. Our annual run rate revenue is now over $5M. Contribution margins are over 40% and we’re on track to reach breakeven in four months. We’ve got a second meeting with the partners at Sequoia — hopefully we’ll get a term sheet next week. Our existing investors have been fielding calls from them and are pumped!
The funny thing is that I know BOTH of my friends are telling the truth. I’ve been in the same situation before. It is all about perspective. My former employee is dealing with the struggles and stress that comes part and parcel with undercapitalization and a lack of communication regarding the realities of the startup world. My friend is excited that the company is finally hitting its numbers so they can raise their next round and yet he feels like he can’t share that information with his employees.
Three months of runway might be a little short (I recommend having funding sorted six months before running out of cash), but his existing investors are pleased and will bridge the company if the fundraising process drags on. Founders need to explain this reality to employees PRIOR to bringing them on board. They need to explain that the company will often be very close to running out of cash — that is the way the game is played. Make a commitment to pay them for their work no matter what happens and that you’ll attempt to pay them at least two weeks notice if at all possible. In return ask them to commit to NOT share their fears about the viability of the company with outsiders — those rumors can kill a funding round that would otherwise give a startup the runway needed for success.
The startup game isn’t for everyone — it isn’t really for most people. At the end of the day the most likely outcome is failure — even the guys investing millions in your startup expect it to fail. You better help your employees understand what they’re getting into before they join your team. You should ALSO stop lying to yourself — my latest post is for you: 90% of Startup Founders Get Fired…