Not every business is going to work. In fact, MOST businesses fail. The market isn’t there, the pain point isn’t that acute, or the economics just don’t pencil out.
That’s reality. It used to happen every day.
However, for the past few years, we haven’t been living in reality. All companies had to do was show topline growth and the next round investor would step in and then hand them off to the next one and so on – with the end of the line being a Chamath-led SPAC.
And for the last 5 years, it was a great way to make money as a founder or as an investor – as long as you timed it right. But it wasn’t actually a great way to build a good business.
What a lot of these companies avoided during this period was what I call the crucible moment – addressing the hard thing that, despite all your success to date, doesn’t quite work and will actually kill the business in the long run.
Almost no one wants to proactively step into the crucible, but to build a great, lasting business you must. And this is really hard because, for a lot of these companies, something or several things ARE working quite well. Revenues are growing, NPS is high, Fortune 500 logos cover your sales deck! It’s way easier to focus on the good than the bad.
I was guilty of this myself at Apartment List. We had just raised a $15M Series-A and the new marketplace we launched was growing quickly.
However, how we delivered the revenue was messy. We had built an expensive in-house call center to answer questions and book tours. Overnight we had 40 call center employees and terrible margins, but we kept telling ourselves – “We’ll just grow our way out of this!”
Five months went by and margins never improved, but we just kept shouting, “But look how fast revenue is growing!”
We were building a fast-growing, but unsustainable business. Thankfully, one of my co-founders, Chris Herndon, had the wherewithal to make us face the harsh reality of what we were doing and send an email to the entire executive team titled “A Fast Train To Nowhere.”
It was hard to face the truth and my first reaction was anger; I had worked so hard, how dare someone say it wasn’t actually good enough. I didn’t want to accept that we had to go back and rebuild what we had told ourselves was already working.
It was our crucible moment.
Revenue growth stalled for a few months. We laid off part of the team. We completely rebuilt our monetization engine. It was hard, but necessary. Thanks to Chris’ foresight we went through the crucible proactively and survived. If we’d been forced into it later, I doubt the outcome would have been good.
There are a lot of companies out there right now building grow-at-all-cost business models because that is what the market was rewarding. These companies need to step back and figure out if they are on their own fast train to nowhere.
Have your crucible moment early and you can still win. Have it too late and you’ll lose.