The 'Collapsible Cost' mindset is key to startups surviving in times like this
I'm seeing a number of startups struggle in these turbulent times when funding is tight.... if they're lucky they either:
But if they don't have either of those two things... then they're heading into a storm unprepared.
And this is one of the things that I think are not talked about enough in the startup world... ie. how to prepare for this in advance as it is a mindset thing in my view.
I've started 5 startups that ran for at least a year (and a few that ran for less).. a few were even profitable (but were often limited in some way in terms of scalability).
And since most of them were boostrapped or had relatively small funding... i'd learned this 'collapsible cost' mindset out of necessity and through experience.
Let's begin.
Startups often think that they will follow a typical funding path
By this I mean that they will raise some seed money.. then raise a Series A a bit later at a higher valuation, and then a Series B at an even higher valuation, etc.
And thus they spend and budget assuming that this funding will happen. It's kind of like the old Amazon story... ie. they were losing money for like 20 years but growing.. and then finally they hit a scale at which they were huge AND profitable.
The problem with this story is that for many startups it just never has that happy ending.
And rather more often than not.. investors get turned off and they run out of cash and die. This is more often the rule rather than the exception.
The problem is typically that they underestimate just how difficult Product - Market fit is
Meaning that startups often continue spending money thinking that at some point they will hit this PMF (Product-market fit)... but underestimate just how hard it is to achieve.
Achieving PMF means in my view that you're not just growing relatively easily but you're getting very close to a viable business model (ie. cash flow positive). And doing this essentially means that you have found a business model that the millions of businesses that have already existed in the world for many years.. have not yet found.
It is hard. Very hard. And not to be underestimated.
Spending conservatively till you find product-market fit is absolutely key
Many startups pay too much attention to their topline sales growth and think "oh.. i'm close to PMF". But they are still in fact burning tons of cash and still a fair bit away from making the model viable.
So if they were to spend their budget assuming that they need to raise more funds in 6 months.. than it is like driving full speed at a river... assuming that there will be a ramp that will help you jump to the other side.
A very BIG assumption.
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Part of spending conservatively is what i call 'Collapsible Costs'
The logic is contrary to popular startup thinking... in that my view on costs is that you should be able to cut your spending very quickly to an acceptable 'survival level'.
By 'survival level' I mean that you can continue on almost indefinitely at that level because either you are cash flow positive or the burn is so slow that you can last a very very long time.
One key element to a cost being 'collapsible' is that it is flexible. You can turn it on or off at the drop of a dime. For example... if you're still unsure of the business than you can use a lot of contractors and only keep a small core staff of official employees. This way if times get rough its easy to temporarily part ways with them.. but then pick them back up when the sun is shining again.
And the key here is.. that you are 'waiting for the clouds to clear' or 'waiting till you find PMF'. Survival is key.
Example of Collapsible Cost structure mindset at work: Therapada
I'll give an example with my Therapada, which is a side hustle and therefore not a perfect example. But good enough.
I started the business with the premise that tons of Americans would appreciate paying 2-3x less for mental health therapy and thus would be willing to do it with a therapist from India.
But what I learned as i started my acquisition marketing.. was that it is expensive/tough to find these customers... because in a way you're trying to convince them of a new behavior. And not just giving them what they are already asking for. And all of the content marketing channels are quite mature and competitive.
We tested MANY channels like Tiktok, Youtube, Facebook Groups, Google ads, etc. And tried partnering with call centers, mobile apps, etc.
I kept testing and searching for potential paths to scale that had an acceptable CAC and reasonable retention.. ie. Product Market Fit.
And I did this without ever incurring heavy fixed costs. Meaning I didn't hire anyone full-time and didn't take on any inflexible costs. Over the evolution of Therapada i've used at least 10-20 paid contractors to do things like marketing, operations, the site, etc.
But as I did not yet see the 'path to PMF' I did not want to take investor money.. and I did not want to hire people full-time.
Because in a way.. I do not view it as being a business yet until you find a route to PMF. Rather you are just idea testing and validating whether or not there is a biz model that can be viable.
So now.. we are focusing more on b2b services for therapists.. and testing the hypothesis that we can be a 'multi-channel order management system' for them that connects therapists to tons of sites globally to get them customers.
And our focus has strayed from B2C where I kind of view it as a bit of a 'red ocean' at this point.
But what enabled me to do this quickly and easily? Collapsible costs.
Within a week I shrunk my B2C spend to a few hundred dollars a month... which is a level that i have no problem sustaining till however long i want. As it isn't painful.
Do i know whether this new B2B approach will work? No i do not. But i will test and iterate while keeping my cost base low. I have "COLLAPSED" my cost base.
And if an opportunity presents itself to achieve PMF... i will have survived to capitalize on it.
And survival... is the absolute key in this startup game. As any entrepreneur knows all too well.