About that one fatal mistake

[disclaimer: this post is related to my job as CEO in a previous startup. It’s aim is to learn from the mistakes I made there. I’m leaving out names as I do not wish or care to point the finger at anyone other than myself]

I once was responsible for a pretty cool startup that failed. The startup was founded in 2006 and had investors, that had already invested a lot of money into the business. When I joined in 2008 the company was still experimenting with technology, business model, service and didn’t make any money on its own. The original founders were not agreeing on the direction of the company, the investors felt there was potential that hadn’t been harvested yet, and I was asked to join and bring the company to the next level.
I accepted the challenge for several reasons:

  1. The company had a sympathetic goal and product aim
  2. I had met one of the founders, worked with him before and I had a lot of trust in him (still have btw)
  3. The product was ok, and had lots of potential for improvement
  4. The team seemed very competent and experienced
  5. I was tempted by the idea of becoming a CEO for a startup that could have the potential of becoming a huge success

About 2 years later the company has ceased activity, a huge nr of customers are left disappointed and I failed at my task.

During those 2 years I had reorganized the company completely.  The company had several problems. It had a huge burn rate, unacceptable for a company that made no money. It didn’t have a product direction or speed to the market because there were too many people (dis) agreeing about the product roadmap. The company had ideas for business models but failed to implement them until that point. There was a disagreement between the founders about the direction of the company. And while the company had access to a huge distribution channel it failed to grow its daily user base.

When I started I did 3 things. I defined a business model and a new product direction, I reduced the company’s operational costs to about 1/5th of its original burn rate (letting go of 2/3rds of the company’s employees, moving our infrastructure to less expensive services), and I started to work on a new team that would grow the company. For a while all went well, we increased quality, features, nr of users, we decreased costs and as a team we improved ourselves. I implemented a business model and we landed excellent contracts with 3 huge companies in the US (which was thought to be impossible for a Dutch based startup). We were starting to make money, and quickly went from a loss situation to a near-break even point. The shareholders were happy and we landed a new round of funding ($ 1M). At the same time we were drawn into a discussion with a large US-based corporation that was interested in helping us boost our service via their distribution channels. Either via a commercial contract of by taking over the business. We felt the company as on the right track.

With the new round and potential big partnership in place,  we worked on a new addition to the service (with a new business model), and focussed on more distribution. During this period the economy went down, making growth a difficult task. Despite our efforts we couldn’t grow the service beyond break even yet. Disaster struck as our main sponsor on the corporate side of the partnership left his company. The potential deal was immediately dead. The investors were losing patience, a (legal) fight broke loose in the background between one of the founders and the investors of the company, and I was constantly drawn away from the business to deal with investors, lawyers and broken relationships. We needed another round from investors that would help us to break even. We had a round within reach, but it was blocked by a majority of the investors because of a lack of trust in each other and the company.

Blocking that investment round left me with no other choice that to leave the company, disillusioned. I felt it was a lack of trust in me, although bottom line the investors didn’t seem to trust each other anymore. When I left, the company broke down further and the service was taken down after a couple of months. It could easily be booted up again, but that is another story.

Looking back I cannot point out a single fatal mistake. There hardly ever is. We made several, and the end result was failure. I’ve learned the hard way that being responsible doesn’t guarantee success. I’ve made mistakes that I don’t think I’ll make easily again. Here are some of the lessons I learned from this:

  • Choose your investors very carefully. Money should never, never, be the main reason for getting an investor on board. It is important to have respect for anyone who is willing to put money into your business. At the same time, ask yourself the following questions. Does the investor understand your vision and share it? Does he really trust your capabilities? Can he support and strengthen your goals with other means than money? Does he have a clear vision on his/the company’s endgame? Does he add something to the mix other than money (that is really the easy part).
  • Focus on growth and business model from day one. I’m not suggesting you should make money on day one. But you need to understand where the opportunities lie. By focussing on growth, you automatically need to focus on happy users. Are you building a product or service people really like? Are you iterating and improving constantly?Are your customers promoting you? Are your customers complaining (they care) or interacting with you? If people aren’t using your product/service, aren’t promoting it for you, then you aren’t getting it right.
  • Make sure you have distribution set up. People do not magically appear at your web site and sign up for a service. You need to focus relentlessly on distribution. Our startup had 1 huge distribution channel, and that was probably one of our biggest mistakes. We created a large dependence on that channel, and when it failed us, we failed.
  • Focus on a low burn rate for operations. If money is spent, spend it on customers, not on your organization. When I joined the company it had used up a large investment already and had a burn rate that was ridiculous based on the fact that it didn’t make any money yet. Looking back that probably caused most of the distrust that later killed the company.
  • Get yourself the best and smallest team you can afford to run the company with. Do not hire unless there is no other way. By keeping a small team you have huge benefits. You can improve and iterate much faster. You’ll make mistakes but you will spot and correct them faster. You are forced to focus on core features only leaving the nice to haves because you simply don’t have the time to build them. You will not only improve your product or service iteratively but you will also improve your way of working faster. There is less complexity in decision-making.  And maybe most important, you can keep your burn rate sufficiently low to make sure you can actually make it to break even.
  • Give yourself time to get it right. Forget about the rat race going on. It can take years to build a sustainable revenue generating company. You will need a clear vision, great execution, hard work, many mistakes, luck, and a lot of patience. The best indication is traction and growth. If you can grow, then you can make money too. If you can’t grow, ask yourself honestly if you are really building something that matters.
  • Don’t bet on just one horse. One distribution channel, that one deal that will boost your company. Deals fail, always. So don’t get hung up in one big one, but instead work on several.
  • Choose your founding partners very carefully. As founders you need to be in it for the long run. That also means you need to be able to trust each other in good and bad times. Think twice about stepping into a running train, especially if that train got stuck somewhere. Solving someone else’s problem is much more complex than creating and solving your own issues.

Now a new opportunity has come along and  I’ve decided to start a new mobile company. This time things will be different. I have partners that I trust. I have a small team with great people. I’ve gone back and started developing again as well as running the company. We have great ideas and a clear vision. We will choose new investors very carefully. Our burn rate is low and we are from day one focussing on customers, growth and distribution. I can’t say or promise yet that the company will be a huge success. We’ve only just begun. But I can say one thing. Success or failure, I will not make the same mistakes easily again. I will probably many different new ones. But we’re going to make it happen this time!

BTW: we are hiring ;-)

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About vanelsas

See my about page, http://vanelsas.wordpress.com/about/ ;-)
This entry was posted in failure, lessons learned, startup and tagged , , . Bookmark the permalink.

3 Responses to About that one fatal mistake

  1. Akram says:

    Alex,

    Apart from the tragic end to your last project, I enjoyed reading your story and sharing your SWOT analysis.

    Usually, I read your articles impromptu, only this past month consumed me and I couldn’t get a chance to read your previous post. If only I’d done so last week I would have circulated it at the NGMAST 2010 Conference that took place here in Jordan.

    I’ll post your link for my contacts who might be Android/iPhone devs nevertheless.

    Good luck :-)

  2. Akram,

    thanks! And I am definitely interested in Android and iPhone devs. Both as users of the service and as a possibility to work for us ;-)

  3. Remmert Braat says:

    Alex,

    Thx for sharing your thoughts here. I think it shows great character to discuss failure like this in public, share any valuable learnings and move on to new things. As a startup ourselves we’ll keep your pointers in mind! Best of luck with the mobile venture – another area that we also need to look into ;)

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