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Tech Life

Entrepreneurship for Engineers: After a Funding Round Fails

Fundraising is taking longer than it did a year ago, and valuations are down dramatically. Here's some advice for how to survive when the money stops flowing.
Nov 3rd, 2023 5:00am by
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Entrepreneurship for Engineers is a monthly column by longtime New Stack contributor Emily Omier that explores the concerns of developers who want to build tools for other developers — and build a business around their innovations. We welcome your feedback and ideas for future columns.

If you’re a founder who’s fundraising right now, you’ve probably asked yourself at least once what you’ll do if the funding just never comes through.

Fundraising is taking longer than it did a year ago, and valuations are down dramatically. We’re not here to explore all the options for winding down a startup, however — we’re here to consider how to survive.

Survival Can Feel a Lot Like Failure

It’s possible for a company to survive after failing to fundraise, or after raising a much smaller round than anticipated. But it’s not pretty, because either scenario usually means layoffs.

“We had to change the team,” said Shayan Mohanty, CEO at Watchful, an AI accelerator for large language models, about the aftermath of raising a round that was significantly smaller than he had originally planned on. “That is a nicer way to say we had to let some people go, which really did suck.”

Pete Soderling is the founder of Data Council, a community and conference series aimed at data engineers, and Zero Prime Ventures, a venture fund aimed at engineering-focused startups. He said that the original business that would eventually become Data Council failed to raise money past the original $500,000 pre-seed round he and his co-founder raised.

“I had to disband the team and break up with my co-founder,” he said.

For Soderling — and certainly for his co-founder — that initial failure to raise a seed round looked, at the time, like the business shutting down. In fact, when he tells the story of his career, he said, he often talks about that failed company and the Data Council, which came afterward, as two completely separate projects. But they are definitely connected.

Though the original company hadn’t built enough traction to attract investment, Soderling had succeeded in building a community of engineers — and one of his attempts to monetize that community was a conference, which eventually grew into Data Council today.

“Data Council is the long-burn success story, cashflow-positive business out of that $500K angel round,” he said.

Slow Burn

The key to surviving is about keeping your cash burn low, according to Estaban Vargas, CEO and co-founder of Watermelon, an open source copilot alternative for code review.

In his case, Watermelon hasn’t been able to fundraise as quickly as he had hoped, but he hasn’t given up getting venture capital backing yet. But living primarily in Latin America has helped him and his co-founder reduce burn enough to continue working on the product and stretch the runway as long as possible. Even with frequent travel to San Francisco, the cost of living ends up being under 25% of what it would be in the Bay Area.

“If you can keep the burn low enough, you can sort of keep going,” Soderling said. For a while, his only expense was his own survival-level salary.

Running out of Enthusiasm

Even in a tough fundraising environment, running out of money is not the only reason founders shut down their companies. “We’ve seen friends shutting down their startups, not necessarily because they run out of money, but because they run out of enthusiasm,” Vargas said.

When Soderling’s company couldn’t raise money beyond its seed round, he didn’t want to just pivot to something new.

“Sometimes when you channel some deeper ambition that you as a founder have, that is durable,” he said. “It might produce multiple companies in succession, or it might produce one very long-running company, like what we had that became Data Council and became a fund. Which is extraordinary.”

It was the deep conviction that he wanted to create a company that made things better for software engineers and brought them together that kept him going. But he also recognizes that his dogged pursuit of that goal isn’t necessarily the norm in Silicon Valley.

“When I see founders cut bait and run and find another co-founder and pivot,” Soderling added, “sometimes I wish I could have been that person.”

The Path to Survival: Ask Fundamental Questions

So what do you do if you’re committed to making your startup work, committed to serving a particular customer? You start asking yourself some fundamental questions.

For instance, Mohanty suggested, ask yourself, “Do we have the right team to live in this market as it is right now?” It’s one he’s been asking himself as he thinks through Watchful’s strategy.

“Second, do we have the right product?” he asked. “And third, do we have the right fundamentals? Are we selling the right way, do we have the right pricing, do we have the right tiers, do we have the right partners?”

One concrete change the team at Watchful has made is to take a much more hands-on approach to customer success, to really ensure that customers are having a good experience and to reduce churn as much as possible.

And even if you’ve decided you’re not pivoting to a completely different market, that doesn’t mean you shouldn’t be iterating on your business model.

As Soderling noted, “There were like at least three, four different revenue models that emerged on both sides of [our] fundraise that enabled me to continue to build this community of engineers.”

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