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The Paradox of Startup Funding
Stephen Moore
January 23, 2024
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Hey readers! Welcome to EH weekly, where you can look forward to insightful lessons and practical takeaways delivered to your inbox every Tuesday.
In this week’s edition, we discuss:
How to fight the dreaded churn your startup will face
The paradox of startup funding
Fighting churn: Tactics that work
Every recurring revenue business alive is trying to reduce its churn.
Churn must be fought as early as possible in the user’s lifecycle. The better you get users to adopt your product and see the value quickly, the lower your churn will be.
There are some tactics that you should be aware of that work, as shared by Dan Layfield (formerly Head of Growth at Codecademy):
Collect the actual reason that people are leaving the product: The data in most user surveys as people cancel is notoriously inaccurate. If someone doesn’t see why they are canceling, they will click a random reason and leave. You’ll then try to fix a problem the user base doesn’t have and see no results.
Segment cancelation data by age of accounts: Break this data out by how long your user has used your product. You will likely see cancellation reasons differ based on how long the user has been on the product.
Drive “unintentional” churn to as low as possible: for 90% of companies, this is a payment processing problem. However, your company might be different. If you built a Chrome extension, you might see issues with a new version of the browser. You should be trying to fix 100% of these problems.
Appease all the reasons users give you in your cancelation flow: This won’t totally fix your problem, but it will help and is relatively easy to do. You can see examples from the NY Times, Grammarly, and Kajabi. Users are being asked why they are canceling, and each company is trying to win back 10–20% of those users.
👉️ For more tactics on fighting churn, head here: Fighting Churn 101: The Tactics that Work
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The paradox of startup funding
There comes a point of no return in every startup journey — when your business grows beyond the level where you can keep funding it with known resources.
When it happens, the pressure is both instant and permanent. No amount of startup experience points are going to earn you that mythical “Get Out Of Failure Free” card.
So many founders turn to VC money. But that comes with expectations, stress, management, and, if you fail to meet the targets, your access to capital is actually severely reduced, not increased. So what do you do?
Multi-exit entrepreneur, Joe Procopio, says the answer is to build your forever company —
Whenever I start a new company or project, at some point after I’ve fleshed out the idea, but before I go to market, I develop a plan to run that company on bare bones if I have to, for as long as I have to.
Then, for each funding decision I make afterward, I plan for that funding to get me not just to the next level but the level after the next level, and preferably a couple of levels after that.
Simply put, before I hire a person, I ensure I have the funding to hire two people.
Now, I know life doesn’t always work out this way. It rarely works out this way. And every founder has to learn to act before an opportunity becomes a sure thing. But in almost every case I’ve seen where a company suddenly couldn’t fund its way to the next level, it’s because they took funding without a plan to operate if it went away.
Damned if you do, damned if you don’t. So make sure you’re building your forever company, and at least you’ll have a better chance of sleeping at night.