6 reasons why my VC funded startup did fail

Stephan, great advice! Particularly, “do consulting on knowledge management and start with an open source product.”

I had a similar experience of a failed start-up: http://softwareindustrialization.com/BridgewerxProductSuccessBusinessFailure.aspx

The one critical juncture in our company was not continuing with our successful consulting services, we gave that up to become a products company and the moment we did, was doomed for failure.

Again, excellent advice from someone that has been there. Cheers!

Too many tech oriented people think “selling is evil.” Problem is: Nobody gets paid until someone buys something.

Great article.

The word is “successful”, not “successfull”.

@Anon: Thanks.

@Mitch: Very good post!

@Aaron: Exactly. Unless you’re facebook ;-)

Great post! I think an underlying theme you’ve got going here is “release quickly, then iterate”. If more companies focused on getting their product out the door in 3 months, then releasing updates every quarter at the worst, then I think the customer feedback would be integrated into the product so much quicker, and startup cash wouldn’t get burned so early in the cycle on features that don’t matter! Great info… thanks!

Sounds like quite a brave venture for the first nuclear winter. Thanks for sharing what you learned

Nice post, learning it hard way. but I would say this should give you a lot of experience which would make u successful in future.

Adopt Buddhism, and you’ll be happy and successful. I have never heard of a Buddhist startup that failed.

@Malai: Mu!

I think another thing tech startups failed to consider during the bubble was whether or not there was an actual demand for their product. It may have seemed cool and useful to them, but would their target market agree?

Nine years later, what percentage of companies use wikis, blogs, or “skill management” software to any large degree? My non-empirical estimate is that very few do. Far too many startups in those days were peddling solutions to problems that no one knew they had.

@Dave: Atlassian is well and rich and bought some other companies. And they are mainly in the enterprise wiki sector.

@stephan,

I always considered JIRA to be Atlassian’s main product, and that’s something for which a market has long existed. Maybe I’m wrong about commercial wiki software, though. But in my own experience deploying free wikis for a couple of former employers, they would invariably be forgotten and unused after a few months.

@Dave: Ah. Yes, maybe. I did quite some Wiki research and from my impression you need a gardener for a wiki to keep it attractive. And keep people posting everything in there (post it there, send a link instead of sending a mail)

But I’ve seen companies use wikis for a long time. In some they don’t catch on, you’re right. And some use bad wikis (like MediaWiki) which are not very usable for company work.

Thanks for sharing this post, it really hammered home the fine line between keeping a lid on your project until it is complete, and the need to create awareness and sell it as it moves forward.

Cheers,
Mike

Terrific post, which I stumbled across via Reddit. I was in a similar situation in 2000-03, working for a high-tech startup tasked with using GPS as a Web authentication variable — tying one’s password or other login credentials to a physical location based on the simultaneous transfer of encrypted GPS data. (For those wanting more info, check the Wayback Machine for http://www.cyberlocator.com in the 2001-02 time frame) Our slogan: “Your location is your password.”

We had similar problems: 1) No customers because of no sales team because of no immediately deliverable product; 2) A tech team whose allegiance was torn between the brilliant but whacko founder and the business-savvy CEO who put most of the money into the company (we never did achieve VC funding); 3) Lack of decent indoor GPS receptivity (which only came available a couple of years ago, long after the place folded); 4) A legacy ownership group (pro-founder) that seemed more interested in suing potential patent infringers (OnStar was one such target) instead of backing a viable marketing plan; 5) Frequent internal debate as to whether we were offering a product or a service, how it would be priced, what was the roll-out profile, who were our customers, and what markets were the best to go after first.

By the time we figured out most of these answers, the company was out of money and our tech team had scattered to the winds, finding gainful employment elsewhere.

When do you know that you have chosen the wrong business model?

I mean, you managed to receive some fundings, that is already an achievement imho (ok, perhaps not in 1999 ;)). So when is a business model proven wrong?

@KoW: Wrong – depends on the definition. Wrong for me is: We should have chosen a different one.

With an open source / consulting model we could have made it through the dot com boom and the crash, I’m quite sure.

Selling enterprise software needs more time and more money – which doesn’t work if you haven’t enough VC money.

So it could have been right when our money would have lasted for 3 years. It was wrong for a model with the money lasting less than that.

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I agree with you on “We didn’t sell anything, Part 2″ – you need a salesman, but I disagree with your conclusion. At the beginning the best salesman is YOU. You know what the system is, you know what the point of the system is and you know its limitations.

Great points. It’s easy to forget about selling when you get so excited about the product you’re making. It’s also difficult to imagine that anyone would consider buying something that isn’t written yet… but I suppose people do it with manufactured goods all the time. You sell a prototype and then you start building thousands of them… not the other way around.

A few corrections –
noone is two words – no one
In a few places you use “lead” rather than “led”, although you’ve got “led” used properly in there too. :)

As I read this I can’t help but explain it another way.

You didn’t have a product yet, and worse, you didn’t have a product that, even completed, necessarily did anything anybody at the time understood.

You keep saying you didn’t “sell”. Great! So you’re not some capitalist sociopath who wasn’t confident that his organization yet had a viable product yet was willing to “take orders” from customers nonetheless. That’s called being ethical, so deal with it. Part of the reason we in the United States are suffering so much now is because too many people learned enough about business to sputter out the buzzwords and even round up play money from VCs, but not enough to curb greed and avoid marketing products outside the bounds of development or conceptual viability.

A better approach would have been to market your product to your VCs as strictly a research and development project to pilot a few ideas you thought might have a future. Maybe you’d take longer finding VCs, but at least you wouldn’t have had to pretend having a product when in fact none existed yet. At least you wouldn’t be left complaining years later about your “failure” for not succumbing to blind greed and a desire for relevance.

You didn’t yet have a product, you curbed its presentation as a result, and you know what, you should be damn proud of that. Next time, just plan it that way at the outset.

John

Hey Stephan,

thanks for the tremendous insight. I too came in from the reddit post and am also part of an online startup that can make great use for tips like this. Although we aren’t funded yet, there’s nothing saying that the above points can’t apply for a group in their boot-strapping phase.

We too are stuck in a state of feature-creep and refinement while development on the sales front is definitely lacking.

We’re building an online video conferencing system based on flash that can be embedded into your site like a youtube video (www.projecho.com) but are having a hard time defining who our target audience should be. Reading this post made me realize that we should start selling everyone and then target those that look most likely to for over the cash instead of spending time trying to tailor our pitch for a specific market.

Time to start selling – tonight! Thanks again, and I will definitely be keeping my eyes on your blog going forward.

Cheers,
Beau

[...] October 28, 2008 at 1:24 am · Filed under Business [From 6 reasons why my VC funded startup did fail at Stephans Blog] [...]

Dear old friend,

totally agree, but Stephan, i am also still thinking about it :)

Greetings

Maiko

@Maiko: Maiko! Me too as this post shows :-)

Stephan, great post… I was a Co-founder of a funded company and a CTO back in the dotcom days too. Failed.

You’re dead right about selling. And I wanted to add — there is in that a deeper piece of wisdom it’s taken me many years to fully grasp….

Businesses are logical entities first and foremost. A lemonade stand is a business even when the kid who runs it is off at the playground. The lemonade stand ceases to be a viable business for the kid when he gets a little older and realizes he can make more money doing other things; or he’s one of the Nantucket Nectars guys that never gave it up and made millions…

The point is, businesses really fail when the logic that brought them into existence no longer holds — and that’s what the dotcom meltdown was really about. Too many of us all had ‘billionaire-in-a-year’ dreams, and when the bubble badly busted, far too few of us had the personal fortitude to look at our businesses and say, “Even if I take away the possibility of gazillions, if it takes struggle and difficulty and sidejobs and long, long years where the only reward is the chance to do the work itself — I will still carry on.”

I know a few small companies that made it through and even prospered after the bust because they were just grateful for the chance to serve, and even in a down market, people are powerfully attracted to that, and will pay. Turns out, selling people isn’t the painful, distasteful work a lot of techies think it is — when people feel you really want to serve them because it’s who you are, not because they’ll help make you rich, selling them isn’t nearly so hard.

But the rest of us gave the tech boom a bad name by doing it for the money we might get, not for the difference we might make for someone else. Really, that’s the selfishness, arrogance, immaturity that needed to be rooted out — and it was the exact thing at the heart of why customers weren’t foremost on my mind.

A great piece of advice I learned too late, only by experience: before you write a business plan, write a life plan, and get some real long-term success implementing that. And only start a business if it fits into your vision for your life whether it succeeds or it fails, because you just need to serve people in that particular way to continue on your journey. The logic behind the business has to be an organic extension of the logic of the lives of the people who start it, and that both have to based in real life, and have heart and integrity … It can sound kinda hokey, but it’s the key to the attitude of the guys we love and got into the business to be like — Steve Jobs, Sergey Brin, etal.

After a number of fits and starts the last 7 years, I’m finally trying again. Docspire.com will be launching soon — look out for it! And wish me luck…

Hi Stephan,

Sorry to hear the startup didn’t work, sounds like it was a really great product.

Thanks for a good read.

Regards,
Sean

Great advices, thank you Stephan. I personally started to think that failure stories are more enlightening than success stories.
By the way, I want to write a blog post about your story. But I can’t find your surname to give a reference. What is your surname?

@Mert: Right side: “About – Stephan Schmidt is currently a team manager at ImmobilienScout24 in Berlin.”

;-)

Stephan, a nice nice post. You have rightly said, Techies are so involved getting the tech to its best that they forget to focus on important aspects. I met with the same fate, and trying to learn from my mistakes. Hope you still have your Entrepreneurial dreams alive and will get into a new venture again.

Good Luck

Very wise words, it doesn’t matter if you’ve the best product in the world and another company has the worst – if they sell more than you, they are more successful. As well as sales personel, marketing can make or break you. Just look at the role Apples marketing has played in their recent success.

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[...] Schmidt shares 6 reasons why his VC-funded startup failed. His case study is a good learning experience for all new startups that are popping [...]

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This is one of the best advice I’ve ever read about running a startup. I’ve been too careful to dedicate my resources on a single project till now, just because of the same reason, ‘We need to sell’.

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Yes, selling your product is important. However, if you’re bleeding edge, you can focus on building a better mousetrap and still come out on top.

How? You sell your company.

Any number of cash-rich technology consulting companies would pay for your software, especially if it was a feature-rich solution they could bill for consulting services later.

Did you try this route?

@Head Pumpkin: No, but we’ve discussed this, and also talked about selling ourselves (another reason for big companies to buy startups is to buy talent), but when the dot com bubble did burst those technology consulting companies lost a lot of their customers and were not in the mood or position to buy startups. At least that was my impression.

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With hindsight things are so clear. There was no market..you were not selling
Can we define some parameters which a startup can use to judge whether it is in trap?

[...] Schmidt shares 6 reasons why his VC-funded startup failed. His case study is a good learning experience for all new startups that are popping [...]

Thanks for your story. It’s very interesting to me that a large percentage of the people learning hard lessons at startups go on to try the open + consulting option as a one or two person company.

Perhaps we should be starting companies to support those people!

Anyway, here’s my startup postmortem.

Even with customers interested in paying for your product it can take months (years) for the purchase decision process to mature, especially with bigger companies. Get an early adopter as soon as you can, so that you can showcase your product in a real-life situation as soon as possible, this generates trust for your prospects.
http://www.transwide.com
Eventually the company became profitable and we sold it. There were 2 really tough years.

In our current company sales people outweigh IT people by a factor of 5.

Thanks for your code.

“In our current company sales people outweigh IT people by a factor of 5.”

Thanks for this insight, something along that line would be my ratio the next time too.

The company I work for uses Atlassian products including Jira and Wiki. They work well together.

What Atlassian does really well is sell you one part of their enterprise software as a product and then upsell you to the other products so you end up with their entire solution.

I agree with not waiting till you have a “complete” and “perfect” product till you sell it. The beauty of software is constant improvement.

Setting expectations early and often can mitigate a lot of customer complaints.

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Great insights, Stephen. I am currently working as a CTO in a two years old dotcom start-up. We have a very successful sales manager (and he has a bunch of sales people in his team) and very experienced dotcom business people.

Although, we are generating money, we are not profitable yet. We are paying our expenses evenly each month. And, we are still breathing.

We have switched to an agile delivery process which I think will make us more profitable by delivering more.

We are becoming a profitable company, after two years without seeing money :) All goes in goes out. But, because we are started with a prototype-like application which lacks most of the features, and because we are the first movers, and because we were doing sales at the day first; we are still breathing and will be.

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