A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Zenefits founder Parker Conrad traded over-the-top growth predictions for the kind of excessive funding that gooses valuation and earns the company unicorn status.

In doing so he did exactly what Sam Altman warns against, “If a company is profitable, the founder is in control. If it’s not, investors are in control.”

Investors brought pressure (it’s what they do), so corners were cut.

Zenefits never was and still isn’t profitable and, worse still, was cutting corners when those corners are highly regulated.

Now Conrad is out and new management will pick up the pieces.

Conrad could have learned from serial entrepreneur Xenios Thrasyvoulou, who warns, “sanity is more important than vanity” when it comes to fundraising and Andrew Wilkinson’s belief that revenue-based horses have it all over funding-based unicorns.

Instead, once again, the emperor has no clothes.

Image credit: HikingArtist

Last summer David Bladow, co-founder and CEO of flower delivery startup BloomThat, had the worse kind of ah-ha moment after deciphering the company’s accounting — a self-described “convoluted mess.”

What he found was a monthly burn rate of $550K that meant the company would be out of cash in just 4 months.

That knowledge drove a laser focus to change.

Now instead of shutting its doors in November, its self-diagnosed death date, the startup launched nationally on February 3. The company that was burning through half a million a month is now down to $15,000 a month.

BloomThat did early what every founder should be doing now.

Yesterday Mark Suster wrote about how to figure the right burn rate for your company and last week we talked about doing more with less.

Actually, I think the tightening of funding is a very good thing, although it will create a certain amount of carnage, it will force founders and their teams to grow up.

If that sounds harsh, so be it.

Funding based on unproven future sales is driven by hopes that are heavily shaped by outside circumstances — circumstances beyond any founder’s control.

Sam Altman warns that funding is not a guarantee of success and in the next few years David Bladow, Andrew Wilkinson and dozens like them will prove that horses have the staying power that unicorns lack.

Flickr image credit: Tsutomu Takasu

I do brand outreach for my long-term associate NTR Lab, which includes working with Yana (always a pleasure) on its blog. Today’s post originally appeared there on January 28.

Salesforce CEO Marc Benioff and investor Bill Gurley, among many others, believe that 2016 is the year that many unicorns will morph into unicorpses as valuations tumble amidst tightening money.

So does that make 2016 a bad year to start your company? No, in fact, just the opposite.

According to Jason Calacanis, angel investor and founder of Inside.com “Great companies are like great captains; they make take advantage of smooth sailing times like now, but are not afraid of rough seas that eventually show up.”

Jeff Grabow, EY Americas venture capital leader says, “If you talk to venture capitalists, they’ll all tell you the best time to start a company is in a downturn.”

And Mike Abbott, general partner at Kleiner Perkins Caufield & Byers, made a great point when he said, “We’ll stop seeing particular folks starting a company for the sake of starting a company, because they see it as this romantic endeavor.”

But it was CB Insights CEO Anand Sanwal who said it best, “While it’s ‘fun’ in a schadenfreud’y way to claim some absurd number of unicorns will falter in 2016, it misses out on the fact that 2016’s climate may force many of these unicorns to become RABBITs.”

Rabbit? Who wants to be a rabbit? You should. Being a rabbit is much like Andrew Wilkinson’s horse that we mentioned last week.

Image credit CB Insights via Business Insider

 The biggest difference going forward means that your valuation will be based on real revenue as opposed to funding rounds — more like Apple / less like Uber.

You’ll learn to do more with less and will stretch not only your dollars, but also your pennies. And your team will learn along with you.

For those of you who haven’t experienced a tighter economy or worked through a real downturn the actual experience can be off-putting, if not downright frightening.

Click for a cornucopia of ideas and resources to do more with less.

Image credit CB Insights via Business Insider

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Yesterday we looked at the bootstrapped success of Tuft & Needle and before that at bootstrapping serial entrepreneur Andrew Wilkinson.

All very successful sans venture money.

Sure, thousands of bootstrapped companies fail, as do hundreds of funded companies; some go with a bang and others with barely a whimper.

But a few provide a cautionary tale for both founders and investors.

Lucas Duplan’s Clinkle is one such tale

Clinkle was supposed to be what Apple Pay is today.

In what is termed a “party round” 22 year-old Duplan raised $25 million dollars, mostly in convertible notes, from high profile investors, including Richard Branson, Peter Thiel and Marc Benioff, as well as VCs Accel Partners, Index Ventures and Andreessen Horowitz.

“In a typical party round, no single investor cares enough to think about the company multiple times a day,” wrote Y Combinator President Sam Altman in a June 2013 blog post. “Each investor assumes that at least 1 of the N other investors will be closely involved, but in fact no one is, and the companies sometimes wander off into a very unfocused wilderness.”

However, in the 5 years since founding, 3 since funding, the company has done nothing, gone nowhere and in an almost unheard of action investors are asking for their money back.

Clinkle had a polished demo that came before things like Apple Pay, said one former employee, who declined to be named. But most importantly that person added, Duplan “was charismatic when he wanted to be” and could “raise money in absurd abundance.”

“It was his one skill,” they said. (Emphasis mine.)

The takeaway is beware of great stories, charm and party rounds where the person at the helm has never sailed a boat.

Knowing the correct names of the equipment doesn’t mean a person knows how to use it in the real world or in what order.

Image credit: HikingArtist

You hear it all the time, “build a product that solves your own problem.”

That’s exactly what JT Marino and Daehee Park, both software engineers, did when they quit their jobs to create mattress company Tuft & Needle, seeding it with $3000 from each each of them.

They didn’t take venture money because they wanted to build the company for the long term and borrowed the money they needed to grow.

“The reason why we turned them down all those times is because we figured it would change the way we operate as a company.”

Instead, Marino, 30, and Park, 27, took out a $500,000 loan, at a rate of 10%, from Bond Street, one of the new breed of alternative lenders, in order to keep control of the company and continue doing things their own way.

They built the business online — no showrooms and no salespeople.

No hassles returning a mattress you hate. And, perhaps most important, no gimmicks on prices, which range from $350 for a twin to $750 for a king.

They’ve considered other products, even developed a few, but with no investors to force them to expand, they are focusing on the mattress business.

Is it paying off? Absolutely, so no problem meeting their loan payments.

By its first year in business, Tuft & Needle had reached $1 million in revenues. And then it just kept growing, hitting $9 million in 2014, then $42 million in 2015. This year, Marino and Park expect revenues to reach between $125 million and $225 million, a three- to five-fold increase over last year. And, yes, it’s profitable.

However, recognizing that not everyone, especially older buyers, are comfortable buying a mattress online, they are opening their first retail store at 637 King Street in San Francisco (where else?) — first and possibly last.

“It could very well be our first and last store, or it could be the first of many,” Marino says.

That’s the priceless reward for bootstrapping.

Call your own shots, experiment as you choose and stay true to your values.

Image credit: Tuft & Needle

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Amongst all today’s hype about unicorns Andrew Wilkinson stands out as a beacon of light and a voice of sanity for many entrepreneurs.

Wilkinson is founder/CEO of two successful companies, Flow and MetaLab.

He launched Flow in 2011 and has been growing ever since sans outside investment.

Although he has had talks with angels and VCs over the years he has no interest in taking money and has been publicly vocal on the subject.

He talks about being a horse, instead of a unicorn.

Meanwhile, there are thousands of internet businesses out there, quietly making tens, and even hundreds of millions of dollars, who have taken the same path as In-N-Out. They don’t need to be first, second, or even tenth, in their space, and have instead chosen to focus on a small percent of a massive market. They answer to customers, not investors, and focus on making their employees, customers, and themselves happy.

While In-N-Out is Wilkinson’s model, you can look to privately held SAS for a unicorn-sized software model.

SAS was founded in 1976; in not-quite 40 years it has grown to 13,660 employees who produced $3.09 billion in 2014 from 75,000 customer sites in 139 countries.

Whether the drive stems from the demands of the investor world or the need for instant gratification, Wilkinson’s attitude is a breath of fresh air.

Raising venture money is a high risk commitment to go big or go home, and it isn’t for everyone. It certainly isn’t right for me, but neither is the surfer lifestyle business. I’m somewhere in the middle, with the Snyders of the world. I’m not a unicorn, I’m a horse.

Give it some thought or, to paraphrase an old commercial, “try it, you might like it.”

Image credit: HikingArtist