We’re tired of hearing how small software companies usually fail.
The data show that the two most common causes are: (1) Product isn’t useful to enough people, and (2) Problems with the team.
But what about the companies that die even though they did sell some copies of software, and where the early team isn’t dysfunctional?
I don’t have data for that cohort (tell me if you do!), but informally I’ve observed the following things, which follow a pattern that can be identified and counteracted:
- The initial marketing channel quickly saturated, so growth stalled at a non-zero but unsustainably-low rate.
- The initial marketing channel was sustainable for a while, but got wiped away due to external forces. Examples: large bidders tripled the cost per click, Google’s SEO algorithm changed, the event organizers changed the rules or stopped doing the event, the link-sharing site became irrelevant, the hot blog lost its traffic, the magazine running the ads finally failed.
- The product was built on a platform, and the platform changed. Examples: A popular app drops to zero downloads after Apple builds it into iOS; A Microsoft Office add-on drops to zero sales after Microsoft builds that feature into Office; A Twitter utility breaks when Twitter removes functionality from their public API.
- The company landed one big customer representing 80% of total revenue, but that customer canceled. It wasn’t a mistake to sign that customer — it funded the entire company. But sometimes you experience the adverse end of that risk.
- A key employee left the company, which caused the company to fail. Early on, a 10x person can mint the company but also could be irreplaceable. A suitable replacement is too rare; it takes too long to find someone, convince them to join for almost no salary, and get them up-to-speed and productive.
When a company has revenue but is susceptible to the fatal afflictions above, I call it “brittle.” It’s a real business, but it’s easy to break.
The pattern, which suggests a remedy, is: Brittleness manifests wherever there is “One Thing.”
A technological example makes this clear. Suppose I have a single server that runs my website. Any number of things can cause this server to break — a power failure, a network failure, a bad configuration change, too much traffic arriving at once, and so on. How do you make this situation less brittle?
Let’s take power failure. Power can fail if the power supply inside the server burns up (typically because the fan inside it failed), or the power strip or power cord fails (maybe a wetware failure like accidentally unplugging it), or the power source running to the power strip could fail. You can address all this by having a second copy of the components — a second power strip with a second cord plugged into a second power supply. This is, in fact, exactly what data centers do! In short: redundancy — having two things that do the same job, instead of just one thing. It’s twice as expensive, but it buys you robustness.
But what happens if the power fails between the main power system in the data center and the cabinet where the two power strips are? That’s another case of “one thing.” So you could have two cables running to every cabinet, from two identical power units. Again this is what advanced data centers do.
But what happens if the city power fails? Data centers have their own gas-powered generators. Which means they have to stock large amounts of gasoline. Gas-powered engines that are used infrequently have a tendency to stop working, so they have to test and maintain those units. Data centers often have multiple generators. Robustness purchased at large expense.
In modern clouds we go yet another step further, because the entire data center itself is “One Thing.” So you have additional servers in other physically-separate data centers that draw power and network connectivity from different vendors.
The data-center example is applicable to all of the causes of failure above.
“One marketing channel” is brittle, because if anything happens to it, that could be the end of an otherwise-healthy company. The solution is to layer on additional marketing channels, so that variation in any one of them is not fatal.
“One platform” is brittle, because if they forward-integrate (i.e. copy you) or just fail, that’s the end of the company. One solution is to be multi-platform (which social media management tools did, and which we did with cloud infrastructure providers at WP Engine); another solution is to only build on platforms where you have a high degree of confidence that the platform owners are committed to supporting their ecosystem by never directly competing with them, and in fact promoting them. (Salesforce is currently the best in the world at this.)
“One big customer” is brittle. One solution is a long-term contract with a serious breakup clause, as insurance that pays for you to bridge to more customers. Another is to prioritize accelerating sales until that customer represents a percentage of revenue that you can stomach. Also, up-front payments, so you have the cash-flow to invest in that growth right now. The typical attitude is, “We now have a large customer, so pour extra money into development to make sure we don’t lose it,” but the right attitude is to use a lot of that money to land other customers.
“One key employee” is brittle. Not only might they leave, but what if they just get sick or need to take a vacation? The usual refrain in the startup world is that none of these are options — everyone has to work 70+ hours/week and never falter. Talk about brittle!
Solving these things takes time and money. These aren’t quick-fix solutions. You can’t just hire three more fantastic developers to create a robust engineering team, and you can’t just snap your fingers and find three new efficient, productive marketing channels.
Therefore, the right attitude is to maintain clarity on these risks and ask which one is best to work towards right now. For example, it’s cheaper and easier to experiment with new marketing channels than it is to find, interview, convince, and manage a second software developer, and plus if you can get a second marketing channel online, that will generate revenue, which in turn means you can afford a second software developer. In this scenario, the best thing is to focus all your energy on getting a second marketing channel running.
As you scale, the size of the “chunks” that create brittleness also scale, which creates new One Things, thus new risks and new investments. For example, with $260M in 2016 revenue, still growing at a blistering 60%/year, with a thousand employees, Hubspot is not brittle in any of the ways outlined above. But they recognized in 2016 that they were a single-product company. That is a “One Thing.” If there were a sea-change in the market for inbound marketing software, that could be fatal to Hubspot. It also limits long-term growth as the market matures and saturates. The way out is redundancy — becoming a multi-product company, but not where one product is 95% of revenue. They attacked that problem, and today (Nov 2017) they’re well on their way, as recognized by the media at large.
Finally, on a personal note, there’s another “chunk-level” that’s even larger than all of the preceding, and it’s a brittleness that almost all founders suffer from, including myself. The chunk of “the entire company.”
This is a component of why founders are almost always sad and sometimes permanently depressed even after a successful sale of a company. This was your “One Thing” for years. This is your identity, your life. You don’t have hobbies or even good friends anymore. You might have sacrificed family or health. Talk about a “One Thing.” Your entire life is brittle.
The solution here is not to have two companies or two jobs. That’s burnout; a lack of singular focus creates worse outcomes.
Rather, the solution is to realize that there were things you did and loved before and there will be things you will do and will love after. This is a chapter in a book. Even if one chapter is sad or has an unexpected twist, there’s still the next chapter which you can look forward to, even if you don’t yet know how that story will unfold.
Robustness, not in many things simultaneously, but in things serially. That’s the wrong attitude for solving tactical problems at work, but it’s the right attitude for thinking about the arc of your life.
Back to today and the here-and-now. Go list all the “One Things” which make your business brittle. Only tackle one or two things at a time — you have to manage risk, not pretend that you can eliminate all of it at once. Be thoughtful, and build steadily away from brittleness.