The Death Spiral

This slide from the infamous Sequoia deck is one of my favorites:

Running lean is something all startups should practice at all times, even if they are profitable. Keeping costs under control is an art and a science and is even more critical when you’re just starting out and don’t have any revenues.
So add in our economic woes and in the short term, the death spiral becomes a high probability and high burn startups can’t pull out of it, because funding has almost all but dried up. Venture funds are pulling back and getting super conservative; they have good reason too – the crappy economy does not allow startups with slow to prove business models to survive. At the early stage, it’s even worse; us angels and early stage funds can’t give a startup enough money to last out past when the bailout plan and economic recovery will begin. Early stage startups need enough runway to get to positive metrics so that they can raise the next round. If they can get to profitability, even better. However, if you try to raise money now and your metrics are average or not all that great, you won’t get your raise.
Hence you enter into the death spiral and you’re dead.
UNLESS…you reduce burn now. Do whatever it takes: layoffs, cutting salaries, removing non-essential services and perks. It’s all about survival now and for as long as you can, to give you as much time as possible to get your metrics to a positive place. Activate revenue generation immediately; don’t wait. Start getting cash in now and you’ll be able to last even a bit longer.
And if you’re starting a company right now, begin with good habits of running lean. Don’t get into thinking you can run the company as if it were a bigger, more mature company. You can’t. The bad economy exacerbates these problems.
It’s times like these when you really find who truly believes in the company and the idea. If you need cash in your life (ie. have a family), you should seriously reconsider being in a startup. Startups need to run lean to survive; it means that there is a huge amount of sacrifice that its employees take on to really run lean. Those who are truly believe in the company and idea will stay no matter what it takes; they will not leave when you cut salary or perks. And they will work their butts off for minimal pay and equity alone. If you can’t live in an environment like that, I would really urge you to look at what is truly important in your life before joining a startup.