Six months before a startup dies, founders tend to be delusional. Y Combinator co-founder Paul Graham has coined this phase the “final pinch.”
During the final pinch, growth slows while expenses increase. Founders find themselves with six months left of operating capital, after which their startup dies. But instead of making a change or throwing in the towel early, they wrongly assume investors will bail them out.
“There may be nothing founders are so prone to delude themselves about as how interested investors will be in giving them additional funding,” Graham writes.
Investors won’t give these pinched founders cash for a few reasons: They have higher standards for startups seeking a second round of financing rather than a first, and if a startup appears to be failing, what investor wants to sink additional capital into that?
Graham’s advice: avoid the pinch. Don’t spend the first round you raise frivolously; prioritise growth and reaching profitability instead.
If you’re already in the pinch?
Find a way to grow and monetise while minimising costs, or shut down the company (a.k.a., the founder gives up). That means you might have to fire great people or pivot to sell and offer another product to customers.
“The good news is, plenty of successful startups have passed through near-death experiences and gone on to flourish,” Graham writes. “You just have to realise in time that you’re near death.”