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6 reasons why my VC funded startup did fail

Sorry for the inconvenience, got slashdotted by reddit. Never thought so many were
interested. And no, scaling was not one of the reasons the startup failed ;-) No ssh from my work so it took some time to fix it. Thanks for coming (back)

During the dot com boom I founded a software startup with some friends – with me as the CTO. We developed a software for knowledge management. It was a combination of blogs, wikis, a document management system, link managment, skill managment and more. We started in 1999 which was quite early for wikis and blogs (Moveable Type was announced 2001). The link management system was essentialy the same as Delicious later. Beside all those new ideas (for 1999 at least) there were three great features:

  • Everything could be tagged. Skills, people, links, documents, blog posts, wikis, something which is today called folksonomies. Tags could refer to other tags to form onthologies. Tags could link to other documents, blog posts, persons.
  • Everything could be rated from 1 to 5
  • We had a clever fuzzy search based on tags and ratings. Searching for “people with oracle knowledge” would also reveal experts for SQL Server – for example to stuff your project if an Oracle guru wasn’t available

We’ve got quite some money as a seed investment from a VC and were quite happy and successfully developing our application. We did show it to many users and received very favorable feedback from big companies. Why did the startup fail and I’m no millionaire? There are a myriad of reasons, but as I wrote in “Rules for a successful business”, the rules for a sucessful business are easy:

  • The customer is the most important thing in your business
  • The best business plan is to sell people the things they want
  • Your business is successful if your earnings are higher than your spendings

So the most important thing is to sell – a fact lots of startups forget. And we did too. After much thought it comes down to these six reasons why we failed (beside the obvious one that the VC market imploded when we needed money and noone was able to get any funding):

  1. We didn’t sell anything
  2. We didn’t sell anything
  3. We didn’t sell anything
  4. The market window was not yet open
  5. We focused too much on technology
  6. We had the wrong business model

In more detail:

We didn’t sell anything, Part 1

We didn’t sell anything because we didn’t have a product to sell. As good engineers we wanted to wait until the product is finished and then start selling. Midway we started selling nevertheless with a nearly finished 1.0. This led to too much focus on development and not enough on sales. Without a finished product we thought we couldn’t go to customers and try to sell it. We’ve slowly learned two things:

  • You don’t need a product to start selling if it’s software. The first sales meetings with managment were perfectly possible with screenshots, mockups and slides. As the topic was new to our customers, we first needed to convince them on the concepts (wikis, blogs, tagging) and that could be done without a finished product.
  • Start selling before you found the company. Start selling now! You do not need to have a company to sell new ideas to customers. Start selling now! When people really want to buy your product, start the company.

We didn’t sell anything, Part 2

We didn’t sell anything because we had no sales person. Bummer. Of course we were looking for one and the business plan said: High priority is finding a sales person for the founding team. This took time and resources and we didn’t have that. If you want to sell something, get a sales founder or hire someone from the start.

We didn’t sell anything, Part 3

We didn’t sell something because customers wouldn’t buy. The product was great, the customers favorable, but they took too long to decide. We wanted to sell a knowledge managment tool bottom up to project managers and through them to companies. But everytime a superior heard of knowledge managment he decided it should be on his agenda. So the topic of knowledge managment moved up the chain of command and we had no real decision maker. We talked to irrelevant people (because the topic became strategic fast for our customers) and lost lots of time. Ask people if they are allowed to buy your product. Get to the one who says “Yes” fast. We had several big companies in our sales queue and I’m sure they would have bought in the end, but as a startup we couldn’t wait. SAP for example compared to us could have waited and sold the product after 12 months. Selling enterprise software takes a lot of time.

The market window was not yet open

The market window was not yet open. Noone heard of blogs, wikis and tagging. We had to educate our customers on the benefits of wikis (Everyone can edit! Everyone! How dare they!) and blogs (Everyone can have an opinion and write about it! Everyone!) and tagging (They can build ontologies! We need a comittee to define an ontology for everyone! Otherwise chaos will eat us!) Several years later it would have been much easier to sell a blog, wiki and tagging plattform.

We focused too much on technology

All the founders were interested in technology. We’ve worked with EJBs (not mature back then), we made everything spit out XML and rendered that to HTML with XSLT (not fast enough), wrote our own OR-Mapper – what a stupid idea (Hibernate not available), tried CSS driven websites (not enough knowledge available back then). This lead to rewrites and took lots of our time. Discussions about technology – we should have talked about customers – took time too and led to frustration.

We had the wrong business model

Plain and simple: we had the wrong business model. Selling software can eventually reap lots of money, but it takes time. We had upfront costs, making sales deals took a lot of time and we burned money without income.

The better model would have been: Do consulting on knowledge management and start with an open source product.

We did consulting to companies on how to do knowledge managment, use wikis etc. But we didn’t take any money for it, because it was part of our sales process. Focusing on cosulting and billing people would have created a steady income.

I did get into open source later with SnipSnap. SnipSnap took (a small part of) the ideas from the startup (wiki and blog) and was relased as an open source tool. Lots of people downloaded the software and installed it on their desktops. We really made installing SnipSnap easy, so it spread fast. I’ve talked to a boss of a very big software and consulting shop and he told me, wikis would never work for them: too chaotic and not structured enough. Well – in fact I knew that there were several SnipSnap installations in his company :-) As others are practicing now we could have gotten our foot in the door with an open source project, then sell support and enterprise features on top. Companies later paid us money to put features into SnipSnap, make it scale better and for other enterprise thingies. But in 1999 we didn’t know as much about software business models as we know now.

What can you learn from my mistakes? Not sure, but start selling. I’ve learned a lot though about software managment, products, business models, money and being a CTO.

Thanks for listening.

About the author

stephan Stephan Schmidt has been working with internet technologies for the last 20 years. He was head of development, consultant and CTO and is a speaker, author and blog writer. He specializes in organizing and optimizing software development helping companies by increasing productivity with lean software development and agile methodologies. Want to know more? All views are only his own. You can find him on Google +

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