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On Zirtual, the Market, and Back to the Future

It’s been an interesting few weeks in the startup world.  The chatter around Zirtual quickly moved on to the market correction and general nervousness all around.

During this time, I happened to catch the second half of Back To The Future II on TV (yes, I still watch normal TV now and then).  This made me think of an analogy that Angus Davis shared at an Angel Investing event a few years back. Angus is the founder of our portfolio company Swipely, and was the co-founder of TellMe Networks.

Angus’ analogy is that running an early stage startup can be compared to driving Doc Brown’s Delorean in Back to the Future. The Delorean can only travel through time if it reaches 88mph, but inevitably, there is a cliff or a brick wall or some other obstruction ahead. Can the car get to 88mph with the limited runway? Unclear, but the only chance is to drive full-speed ahead and try to make it work.

This isn’t always the right approach for a startup, but often, it’s exactly what a company should do.  If a company has product/market fit and is confident about its unit economics, it’s quite rational to spend against aggressive growth and raise capital to support that growth.  This is even more rational for a company that has network effects or increasing returns to scale.

For an early stage company, this strategy can be pretty scary because raising capital may not be easy.  Lots of people will say no, and early stage fundraising is a search for true believers, not convincing skeptics.  When a fundraise looks potentially challenging, it could make sense to course correct or start working towards plan B. But usually, going back to the future doesn’t have a great plan B, so it’s reasonable to make the bet that the best thing to do is to just keep running as fast and hard as you can towards the brick wall.

There are two ways that this doesn’t work out.  The most obvious is that you don’t actually have a functioning time machine. To me, this is the equivalent of not really having product/market fit in a space where a meaningful company can be built.  It’s not easy to achieve this, and the explosion of companies and unicorn valuations in recent years masks the fact that this is very very hard to do. Raising too much money too quickly might mask this too, but doing so just means that you get to drive a very nice car very fast right into a brick wall.

The second way this doesn’t work out is that you don’t drive fast enough to go back to the future. If you have PMF, you need to show growth and acceleration, otherwise, you may hit a brick wall.  Following this analogy, I think that a bad macroeconomic environment or challenging capital markets is the equivalent to trying to achieve this speed while driving uphill or against the wind.  It doesn’t make the challenge impossible, but it does make it more difficult and may require more time to get to the same speed.

I tend to think that being too conservative can really hurt too.  We often talk about how some companies are “slow motion train wrecks”.  The wall isn’t right around the corner, but you kind of see the writing on the wall way before the inevitable collision happens.  Startups kind of needs to run hard and fast towards their goals, and I don’t think the lesson from Zirtual is that founders should take their feet of the accelerator.  It’s more a reminder that the risk of failure is very real, so you better know that you really have a time machine.

Being cash-flow breakeven is like having a vehicle with brakes and a steering wheel.  It gives you the option of veering off course, maybe giving yourself more space to build speed or finding a nice hill to drive down to get the velocity you need.  It’s an awesome thing to have and is more valuable the tougher the market environment gets.  But cruising around at 40MPH doesn’t get you where you ultimately might want to go as a startup.  You’ll still need to hit 88MPH at some point to go back in time.

Gotta run, so I just have one last thing to say:

great scott

 

Rob Go

Thanks for reading! Here’s a quick background on who I am: 1. My name is Rob, I live in Lexington, MA 2. I’m married and have two young daughters. My wife and I met in college at Duke University - Go Blue Devils! 3. We really love our church in Arlington, MA. It’s called Highrock and it’s a wonderful and vibrant community.  Email me if you want to visit! 4. I grew up in the Philippines (ages 0-9) and Hong Kong (ages 9-17). 5. I am a cofounder of NextView Ventures, a seed stage investment firm focused on internet enabled innovation. I try to spend as much time as possible working with entrepreneurs and investing in businesses that are trying to solve important problems for everyday people.   6. The best way to reach me is by email: rob at nextviewventures dot com