VCs Will Not Save You from the Startup Death Spiral
November 11, 2013

VCs Will Not Save You from the Startup Death Spiral

by Brian de Haaff

Your startup is in a death spiral if the following is true — your team is making more and more radical bets, despite fewer and fewer indicators that your efforts will be successful. If you are a founder or leader and are constantly chasing the next big thing, this is for you.

Your chance to escape the startup death spiral depends solely on your company’s ability to admit it has a problem and take a deep breath. But be careful, because blindly implementing the latest management methodology makeover or thinking that “if we can only close that next round” will only lead you to the dead pool and closer to updating your LinkedIn profile.

We know this to be true because we panicked — and entered a death spiral ourselves at our last company (before we founded Aha!). We did this at Paglo (one of the first cloud-based IT management companies) but were fortunate to quickly gain our footing and enjoy a successful acquisition by Citrix [CTXS].

We were running out of cash and seeing limited customer adoption as our investors provided soft reassurances that they would stay strong. But it was obvious that they were worried too and would not save us. They were in their own death spiral and feared all of their portfolio companies at that point anyway. That is because the great recession was upon us and they were being forced to rent out their second homes in Hawaii and trade in their Maseratis for BMWs. But that is a story for a different time.

The reason we were out of control was because times were tough and we were constantly chasing the next big thing and not doing anything well. We saved ourselves by regrouping and focusing on the key aspects of the product and company that mattered most to customers and the market. We eliminated everything else.

The concept of  the “startup death spiral” came to me last week after a customer shared what was happening to his storage software company. He was able to articulate how his company was spinning out of control, without even knowing it.

After speaking with more than 200 product and engineer leaders in the last six months (while launching Aha!) I realized that about 20 percent of the companies are just like his — rapidly falling and making foolhardy decisions out of desperation. The good news is that most of the companies know something is wrong and that is why they are speaking with us in the first place. However, the real issue is that they do not know how to stop their desperate behavior and start product planning from a position of strength.

But how did they become panic-stricken and twisted in the first place? Entry can be swift and is typically caused by either one of more of the following existential threats to the business: lack of insight, lack of time, lack of money.

After my discussion with the team that was in trouble last week, a common pattern of how this startup disaster worsens became clear. It progresses like this:

  1. Realization that there is a major challenge to the viability of the startup shocks the system;

  2. Uncertainty sets in and radical ideas are chased; (or)

  3. Uncertainty sets in and the team is paralyzed;

  4. Which demotivates the team;

  5. Leading to lack of focus and effort and more panic;

  6. Resulting in more desperate grasps…

If this sounds familiar, your startup is in trouble. But, it is still possible to escape.

The key is to be able to identify the fundamental drivers of your death spiral before it is too late. If you sit down and keep asking why, you can likely get to the bottom of it. Here are common indicators to listen for across the organization and what to do about them.

“Why are we doing this?” The problem If you hear this directly or through the whisper network, the team is not clear on the overall strategy or worse, not aligned with it. This leads to second-guessing and misery for all who are simply trying to grow the business. This malaise is further exacerbated if you are in an organization that employs a new “strategy-of-the-month.” If you continually create new strategies which lead to new efforts and throw away work, you are already in the spiral or will be soon.

What to do about it Building great companies is hard but should not be excruciating. A collaborative process works best if everyone agrees with the product vision and strategy. Leaders and product management must involve engineering, sales, and marketing early in the process, starting with collaborating on “why” a product and the business is headed in a certain direction. Transparency builds trust and trust leads to great effort. Involve the key company builders early, so everyone has a chance to contribute to the product vision and buy into where the product is headed.

“We can’t do that” The problem This is often used as a delay tactic to avoid risk in demotivated or inefficient organizations. Rather than focusing on the upside of delivering new work, the emphasis is on “failure avoidance.” This is particularly true in organizations with angry or cruel founders who micromanage everything. Doing nothing often appears to be a better option than doing anything that might lead to a beatdown. So, it’s easy to stand behind “we can’t do that” or “it’s not possible.”

What to do about it In a healthy organization, teams want the reward of delivering what they have worked hard on so customers will benefit from it. Typically, building something meaningful is what pulled them towards the company in the first place. Productive teams focus on the upside and what is possible and learn to take risks. While failure really does exist and angry customers can defect, lack of progress is a far worse threat to sustained success. Moving forward takes leadership and leadership takes responsibility. So set goals, help the team accomplish them, “own” the problems, and throw credit when the team succeeds.

“We cannot sell this” The problem This is commonly heard at struggling businesses where finger-pointing has started. You know you have a problem when no one steps forward in the face of adversity to say “Why not? We can sell it. Let me help.” Calling out known customer names and describing pithy dismissals is a great way to throw blame and create confusion when it is not clear why a customer will not buy. Only when the entire organization feels a deep sense of personal responsibility to do whatever is needed to build what customers want in a sustainable way that success can be realized.

What to do about it Startup sales teams are typically wicked smart and committed, but in most sick organizations they do not act with informed urgency. They chase any customer who will talk with them because the organization has not found a reliable customer segment that delights in the product. Is it any wonder that sales folks in these organizations can not deliver results and start blaming the product, marketing, and engineering teams? End the madness by owning sales as a founder, CEO, or leadership team and modeling a successful and repeatable process that can then be taught to others. And consider hitting the reset button on adding sales until the leadership team closes 20+ deals and can articulate why and how.

If you are experiencing what is described above in your organization, beware. You are already spinning in the startup death spiral or about to be thrust into one.

Just remember that great product and startup leaders operate from a position of realistic optimism and are constantly on the lookout for threats that may keep them from building great software. If you are a leader your job is to humbly lead with conviction, ensure the team understands where you are heading, and put them in a position to shine.

If you are suffering with a poor strategy and your product is failing in market, you might need a better way to create brilliant strategy and roadmaps and bring the company together. You might also want to check out Aha! — we built it for you. Sign up for a free trial to see why the top software and web companies are now using Aha! to build what matters and be happy doing it.

Brian de Haaff

Brian de Haaff

Brian seeks business and wilderness adventure. He is the co-founder and CEO of Aha! — the world’s #1 product development software — and the author of the bestseller Lovability and The Startup Adventure newsletter. Brian writes and speaks about product and company growth and the journey of pursuing a meaningful life.

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