Burn the Ships!

The past 6 months have been two of the toughest quarters in decades. Almost every company is struggling - but some are surviving and some are not. What separates them?

I want to share an observation. There seems to be one common theme across every Silicon Valley company that I've seen go out of business. For some reason, the management of companies that abruptly shut their doors thought that they would get more funding. It could have been VC funding, debt financing or some other source of outside capital. That was their back-up plan. They were counting on it.

If you are an entrepreneur, you should have the attitude that there will be no-one to save you. There will be no outside capital. You have to generate revenues, cut costs, make the business model work - or find some way to survive until you do.

This doesn't mean that entrepreneurs should not raise any debt or equity financing. It just means they should never, ever count on it.

In Silicon Valley, it almost seems as if entrepreneurs count on VC as a business model. They aspire to become adept at raising VC money and "exiting" in a few years. What ever happened to the idea of building a real business, funded by paying customers? How about building a company that can stand alone, built to last?

In a book called Predictable Irrational, I found a story that every entrepreneur should think about.

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch'in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off the attackers, but soon discovered that it was Xiang Yu himself who had set their ships on fire... With their ships gone, the soldiers had no route of retreat. Winning was the only option. 

They won 9 battles in a row before defeating the mighty Qin forces.

If you are an entrepreneur and you think that you will need some more funding to survive - or thrive - I have one piece of advice for you. Burn the ships.

Comments

[Ho Nam]

After reading this post, someone reminded me of what the book “The Millionaire Next Door” observed about trust fund babies. The more money someone inherited, the less they accumulated.

When it comes to VC funding, is there a sense of entitlement in Silicon Valley? Do certain entrepreneurs or companies “deserve” funding (and not others)?

If the back-up plan is that VCs will poney up for a little more cash, or that someone else will come in, the opportunities to fail will creep in. It might not be obvious at first. It could end up being death by a thousand cuts. But death is far more likely than victory.

[Jim Dai]

Well put!

VCs are in the business to grow companies not to rescue them.

[Al Cohen]

Ho, having been part of every business down cycle since 1980, the common thread for survivial that I have experienced is cut deep and conserve cash and key personnel. Find a business model that will allow the company to survive and fight on for another day.

[Susan]

Ho, I agree w/ you on need to build businesses that actually have paying users or revenues that exceed costs, especially after the fixed cost of building platforms are done.

However, akin to the Asian financial crisis when IMF/WB/Moody's valued all sovereign debts through broad sweeping credit specs, not sure if investors will "reward" those start-ups w/ quality revenues/biz model vs. those who are still getting out of the revenues gate? Rhetorical question, of course, especially in current financial climate.

Also, when entrepreneurs start a company, the ships should be burned...the "we can't fail...must succeed" mentality should be a pre-requisite, but wonder if this goal exists in those who've never seen a downturn in the market? Again, rhetorical.