Community: 9 lessons from a failed startup

9 lessons from a failed startup

By Jeff Jenkinson on December 03, 2018

Building a startup is hard! Not so long ago, I co-founded a startup that was accepted into a seed-funded accelerator program in Barcelona, Spain. My co-founder and I packed our bags and moved there for 4 months to cash in what we thought would be our ticket to wealth and success. Yet five months later, I was back on the job market. Here are the lessons I learned the hard way about starting a startup.

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DISCLAIMER: What follows is a recounting of my experience and the lessons I feel I learnt from them. I have deliberately left out specifics, because I do not wish to implicate anyone and it doesn't really add anything to the story anyway. Others who were there with me, including my co-founder, may not share my views. They are mine and mine alone; your own results may vary.

1. You don't need investors

Our story

When we started, we were a simple consultancy business, selling our l33t programming skills to those in need. One day my co-founder was called in to visit a customer. They loved the management software we built. We started discussions to productise it, so we could sell it to other businesses like them. Deals were struck, hands were shook and we gobbled up some seed money to get started on the project.

What went wrong

One of the main reasons we started working for ourselves in the first place was to be independent. Having investors was kind of like having a boss again. There were other problems, too:

  1. We didn't have a controlling stake in the business. We didn't really have market validation, so we had a weak position to negotiate our equity stake. As a result, we got much less of the pie than we should have had. We were the ones doing the work, and — as our accelerator later pointed out — we didn't have enough equity to keep ourselves motivated. Y Combinator actually advises you try not to give up more than 25% in a seed round.
  2. Our investors acted like partners, but they weren't. Our early investors perceived themselves as partners but they didn't have the time to share the workload. This meant they were helping call the shots but often lacked the context to make thoughtful decisions. Our early investors also had board seats, which could have had serious implications.
  3. Getting investment didn't give us urgency. The mechanics of our investment (drip-feeding — I'll dive into this later) and the fact that we didn't put any of our own money in, did not put sufficient pressure on us to quickly get to a salable product.

Lessons learnt

I am not saying you don't need money to start a business, but there are other options. A few things I would recommend before getting outside investment are:

  1. Bootstrap your idea. Think about bootstrapping your idea after-hours so you can hold down a job. If you can get some traction first, you will be in a much better position to ask for investment and negotiate a favourable division of equity.
  2. Find the right investors. If you do take investment, try to find investors who have worked with startups before. It is hard to be picky when someone is offering you money, but some experience from their side will help: you'll get both money and a mentor.
  3. Invest your own money. Put your own money in first. This is a great motivator and measure of conviction. If you don't want to put your own money in, then what you are doing is not important enough to you. If you don't have your own money to put in, is a startup a risk you can even afford right now?

2. You don't need accelerators

Our story

A few months after commiting to the startup venture, we were invited to apply for a European accelerator. They found our profile after we had participated in Y Combinator's online Startup School. We figured it was a long shot anyway and getting in would mean more funding and mentorship, so what did we have to lose? We survived multiple rounds of interviews and were eventually offered 1 of 10 spots in a 4 month-long, funded program in Barcelona, Spain. We were still apprehensive about our business, but we felt validated by the all-knowing startup gods.

There was trouble in paradise almost immediately when we got to Spain. We were turned away from the promised office space and there was a lot of stalling with the contracts. We were also struggling to unlock the funding we were promised; we needed this to survive over in Europe. The short story was that a financial partner in the program had gotten cold feet, so funding was slashed by 25%. It took two months for us to see any money. The financial impact of this pushed us to do desperate and foolish things to get by. We acquired debt, financial and otherwise, that we are still repaying to this day.

What went wrong

We certainly felt like victims of circumstance but our decision-making had a hand in it:

  1. We should have known we were not ready. Sure, we had a product, but we did not have market validation. That meant we were not in a good position to be incubated at the time. That's a hard truth for me but in hindsight, it's clear.
  2. We allowed emotion into our decision-making. We thought we got in because we were hot shit, but there were other factors. We got in partly due to my co-founder's amazing ability to sell and partly because this particular accelerator was struggling to fill seats. The accelerator chose us out of desperation. After that, it was our emotions that lead us to accept.

Lessons learnt

Accelerators can have a positive impact on your business, especially the high-quality ones. How much of an impact? There are many different opinions. Quantitative analysis is divided and takes a bit of digging to find online. Here are some of the things I would consider when thinking about entering an acceleration program:

  1. They are not a silver bullet. Besides giving you some money, accelerators are there to support a startup through education and mentorship. The responsibility is still on you to make your business work.
  2. Accelerators have their own motivations, like filling a quota. These may not align with your own. Relocating to another part of the world may not be the best idea when you are just starting to make some high-touch sales.
  3. Accelerators are businesses. They have stakeholders they need to keep happy, employees they need to pay and money they need to make to survive. Don't think for a second that they will put you above their own survival.

3. Be wary of startup culture

Our story

We had unfettered access to highly experienced and intelligent entrepreneurs-in-residence and a star-studded cast of mentors from successful startups. In addition, we had a support staff of administrators and associates available to help us with business tasks, brainstorming sessions, design work, research, and so on. There was coffee, wireless internet, desks and chairs — although we did move offices four times — for the duration of our stay. We also had lectures, usually once or twice a week, from various professionals in the area, including a few very special founder stories. These were truly amazing. To top it all off, we were prepped and put in front of some major European angels and investment firms, so that we could pitch our wares.

What went wrong

  1. We thought of ourselves as a startup. There is this snooty perception that startups are different from businesses. In truth, startups are businesses like everyone else, but with the added complication of needing to grow rapidly. In fact, calling yourself a startup is kind of pretentious. Most legitimate startups earn their title. They have designed something "disruptive" that requires rapid growth. They need to capitalise on their competitive advantage before others realise what they are doing and catch up. Just calling yourself a startup doesn't make you a startup. This has become a deep-seated part of the culture: self-importance. We were an actual startup, though, so don't @ me ;)
  2. We got distracted. It was very easy to get drawn into the illusion that we were special. We already felt special just getting chosen for the program. We had one-on-one meetings with guys who sold their startups to Twitter and told us stories of boardroom meetings with Jack Dorsey. It was all highly intoxicating. And distracting. A lot of it was distraction. We kept going to all these meetings from fear of missing out. We should have been far more precious with our time and energy.

Lessons learnt

  1. Don't be naive. We met a lot of great people in the startup world, often very generous with their time and knowledge. But don't be fooled, everyone has their own agenda, and that agenda is almost always tied to money and/or ego. People want to meet you to see if they can hitch a waggon to your success. If you are not looking particularly successful right now, that's okay — come back and see me in a few weeks and we can reassess. You will never hear the word no, so you should start hearing maybe or later as a no. Situations can turn on a dime, so nobody wants to close the door on you in case you are looking good tomorrow.
  2. Watch out for stuff that is mainly time-wasting. Don't waste your time with startup culture. Build your business. Being in an accelerator and exposed to the startup culture is a bit like being in university, lots of lessons and talking. Sure, you can learn a lot from talking, but you can learn even more from doing. You know what Bill Gates and Steve Jobs have in common? They dropped out of university so they could make something.

4. Find the elusive product/market fit

Our story

In the early days, while we were still consulting, our progress was slow. Lots of things were happening all the time that gave us false hope, though. By the time we were six months in, we had lost a multi-million Rand deal to license our software to a 3rd party (HUGE distraction), batted away a possible aqui-hire that neither of us wanted (also a HUGE distraction), built and shelved a massive feature that could have been a product itself (sensing a pattern?). In their initial stages, each of these things gave us the illusion that the startup was working. Yet we still had not closed any sales.

What went wrong

Product/market fit is described as the degree in which a product satisfies a strong demand in the market. It is easy to mistake things for product/market fit. I know this because we did it. A lot. I learnt more about what product/market fit isn't than I did about what it is. For the record:

  • Your investors using your product IS NOT product/market fit.
  • Getting into an accelerator program IS NOT product/market fit.
  • Getting a follow-up sales meeting with a large potential customer IS NOT product/market fit.

Lessons learnt

If you think you have product/market fit, you probably haven't found it yet. When you find it you will know.

The best way to find product/market fit is to build an MVP: minimum viable product. I repeat: MINIMUM. VIABLE. PRODUCT.

  • It needs to succinctly solve a specific problem.
  • It needs to work in the real world.
  • Someone needs to pay for it.

This will put you in a position to validate your product. Tweaking the product to find market validation is fine, but if you find yourself adding features or struggling to pinpoint your actual market, something is wrong. You will know you have hit the jackpot if:

  1. Lots of people have the problem you are solving.
  2. The problem you are solving is an expensive problem.
  3. People are begging you for the solution.

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5. Success is not a given just because you are a technical founding team

Our story

My co-founder and I are both technical. This proved to be very valuable, beyond just being able to build our product. It also helped us negotiate stake and buy trust from other parties involved. When we got to Spain and uncovered huge scaling issues in our app it was a problem we could fix ourselves, albeit through many late nights of coding.

What went wrong

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  1. We were good at making software but bad at business. We assumed being technical gave us a significant advantage, but we lacked the business skills needed to succeed, some of which cannot easily be learned. Just because we made something cool, it doesn't mean people were going to pay us for it. I am extremely proud of software we wrote but making software is only a small piece of running a software business.
  2. We tried to solve business problems as if they were software problems. When things started to get difficult or we didn't know what we were doing we would try to solve the problem with software. For example, when it was time to sell, we set up a complicated and automated sales pipeline when all we really needed was to start picking up the phone. This wasted a lot of time and often garnered poor results.

Lessons learnt

  1. Don't avoid the stuff you don't like to do. We needed to work much harder than we did on the things we were not good at: administration, sales, marketing, market research, and talking to customers.
  2. Ask for help. If you find yourself struggling with parts of the business, for the love of god, get someone on board who knows about business. Even if it is just a consultant to help you with sales. Don't be too proud and don't think that googling "sales hacks" is going to make you an effective salesman.

6. You need sales

Our story

Our burn rate more than doubled when we moved to Europe: We had all our European expenses plus we still needed to maintain salaries at home to look after family. We needed more money. We moved our focus to selling but it turned out (i) the sales were complicated, (ii) businesses often already had other solutions in place and (iii) we were struggling to convince people we were worth their risk. It was a chicken-or-egg problem: We needed more time and money to compensate for a longer-than-expected sales cycle, but we couldn’t raise money without the sales. Even though investors liked what we were saying, they wanted to see sales first.

What went wrong

  1. We couldn't make money because we were struggling to make sales.
  2. We couldn't raise money because we were neglecting sales. We ignored sales to our massive detriment. We were struggling to close deals for a variety of reasons. Eventually, we decided it was a problem that could wait. We decided to rather focus on trying to raise more funds with our flashy and impressive software demos. We could worry about sales when we were able to afford a "sales guy". Unsurprisingly, most investors wanted sales figures before they would talk seriously about investing.

Lessons learnt

  1. If you are building a product, your focus should be on sales. Yes, there are many examples of startups that have cruised to delicious acquisitions without any sales, but these are in the vast minority. Investors or potential acquirers want to see value: technology that is innovative, a massive and engaged user base, and a shit ton of sales. Deliver on all three and you're headed for unicorn territory, but if you are going to deliver on any of them, the easiest is probably sales.

7. Don't fuck with the money

Our story

Our investment was not a lump sum going in. We were doing what is referred to as drip-feeding the business. Our early investors would give us money on a monthly basis to cover costs. This worked great for a little while. We had a small team and all our software was in the cloud so costs were as low as we could get them. We didn't even need an office.

What went wrong

Our investment structure eventually started to cause problems:

  1. Our finances were in someone else's hands. If our investors paid late, we missed payments of our own, like salaries. :|
  2. We didn't have a financial incentive to hit our deadlines because we knew the tap was always running.
  3. It was easy to get sidetracked or change focus because our deadlines were "flexible".
  4. Our investors took too active a role in decision-making.
  5. It denied us a war chest that could have allowed us the ability to make hires and take some risks.

Lessons learnt

  1. Don't drip-feed a business. It confuses accountability and softens resolve. Get a proper investment so you have some control and idea of what you need to do by when.
  2. Don't be flippant with cash. Avoid frivolous costs like high-fidelity designs for pitch decks, a cool video for your homepage or unnecessary legal meetings. Keep accurate accounts of all your things — even the small $5 monthly service costs here and there, The money disappears so damn fast.
  3. Don't neglect your personal finances. Make sure salaries are paid on time every month. The added stress of bouncing debit orders or cancelled services will wreak havoc on your morale.
  4. When it comes to raising more funds try to get yourself into a position of control. Raise funds because you need to grow, not because you need to survive. If you are raising money before market validation, that reeks of survival. If you are looking investors in the eye and asking for money before you have market validation you better have sold your last startup to Microsoft or you will not be taken seriously.

8. Choose your metrics wisely

Our story

When our accelerator told us we needed to start providing metrics to show the health and growth of our startup, we were worried. We only had a couple of customers — our numbers were going to be pathetic! So we dug around and found as many numbers as we could about all sorts of things our customers were doing. Some of the numbers looked great! We picked numbers we thought were useful, but we also picked numbers that made us feel good.

What went wrong

  1. We were scared of metrics that made us look bad. We avoided the numbers that mattered, because they looked bad. Thing is, it was okay for them to look bad. We were just getting started, after all. Because we ignored them, we did not focus on making them grow.
  2. We paid attention to the numbers that looked great, but they turned out to be meaningless. Not only did they have no bearing on the health of our business, but they would distract us for hours while we tried to figure out why they would spike and fall.

Lessons learnt

Metrics are the finger-on-the-pulse of your business. If you measure the right things, it can guide decision-making and help you grow.

  1. Beware of the dreaded vanity metrics. They look so damn good — just look at them! But that is the problem. It's super easy to cherry pick the metrics that make you feel good. You must resist this.
  2. Pick the metrics that mean something even if they hurt your feelings. If a number sucks, that's actually good news: Now you know what you need to work on this week!
  3. Measure the simple stuff. Focus on sales, revenue, user retention and so on. Don't be getting all fancy. You don't need to measure "user intent" by checking how many times a user hovered over a button.
  4. Find the metrics that matter. If a metric grows or shrinks without impacting your revenue, you can probably ignore it in an early-stage startup.

9. Don't start a startup

Our story

We had a nice little consultancy going before the startup. We had a little office and a handful of happy customers. It was early days and life was hard but it was working. When the opportunity to turn it into a startup came along, we leaned in with our usual optimism. When someone offered us some money, we said yes. When we were offered a trip to Spain, of course, how could we refuse?! It never occured to me at any one of those junctures that we should have said no.

What went wrong

"Yes" is a funny word. More often than not, "yes" is ceding something. You are agreeing to someone else's terms. With the benefit of hindsight, I would say we did that way too often and with far too little resistance. Most of the time we were doing "our" startup on someone else's terms. Perhaps we should have made more of an effort to do it our own way not the "startup" way.

Lessons learnt

Don't start a startup. There is a perfect rebuttal to this statement, from the father of startups himself, Paul Graham. He offers up a number of arguments to common excuses for not going the startup route. Depending on your specific circumstances, starting a startup might be a calculated risk worth taking. Yet it's not the right path for everyone. I am not saying don't start a business. I am saying that it doesn't have to be a high-risk, high-growth startup with an eye on world domination. Perhaps you would be content to whittle out a nice little space for yourself in a niche market. That's also a good option.

Would I do it all again?

So when all is said and done, would I do it again? Given the same set of circumstances as before? Hell no! We were poised for failure. We were naive and made so many mistakes that it’s hard for me to think about it sometimes. It’s easy to cast a judging eye on us from a distance and with the benefit of hindsight. I remember what it was like to make these decisions in the moment, though: Often under the duress of a bunch of things, some of which I haven’t even mentioned. I don’t think a do-over under the same circumstances would result in a significantly different outcome. I would never take back what happened though. It was an unbelievable adventure, full of ups and downs, and I learned at least nine things I didn’t know before.

Under the right set of circumstances, I think I could do it again. Like most programmers, I am a creator at heart. I will always be interested in making things that help people. If I did do it again, I hope I can look back on on my startup adventure and apply some of the lessons I learned: being more patient and thoughtful, making less compromises, and building a business not a startup. Next time, I want to make something sustainable. Until that time comes again, I’m content to use my powers for good, contribute to others’ business dreams, and hopefully help a few people along the way. So I leave you with one final thought:

"That place you're going, at breakneck speed, the one that requires shortcuts, hustle and compromises… What will happen when you get there?"
— Seth Godin

Resources

Here are the resources that shaped my startup journey:



Jeff Jenkinson was a founder of a failed startup. RIP. He’s currently building software for Medical professionals at Signapps, working remotely. 🌴


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