When we think about startups we always think about the success stories like Google, Twitter, and YouTube. You never hear about failed startups unless there was some sort of high profile founder or investor attached (like Joost, founded by the Skype founders).
Anyone who has experience with a failed startup, please share your story. What when wrong? Was it mis-identifying trends? Was it not enough money? Was it horribly written code? What would you differently this time around?
Learning from failures of others is difficult because there are so many reasons why startups fail, if you are very careful you may avoid some traps and hit others that you weren't ready for.
My first start-up failed because I had a bad choice in partners. I was going to do the development, but they didn't have the ability to get customers for custom Blackberry applications.
The next one may not have failed but no one has been paid since May, so many people (including myself) have sought some temporary work until some sales can come in, because they squandered the money they got expecting to have an easy time finding investors, but, when your product is optimization software it is difficult to get people excited about something they don't really understand.
Know your market, have partners you can trust, expect that it will take twice as long as you expect to get sales and you may have a better chance at success, but, most companies fail within the first couple of years.
Also, what is your definition of failed, and how would you define success?
OK - I've been involved in just under double digit start-ups. I started my career, right out of college, at a start-up.
The first start-up I worked with was developing software that needed a $25k sparcstation and extensive training to run properly - this was before pentium chips. We raised $6 million in the late eighties - in a nutshell - we jumped the market available technology - end result - dead.
I was in an internet start-up in '99-01. We ramped up a development team in Canada and a sales team in the US. The idea was great, execution was not. Our biggest problem was a very green founding team combined with 3rd tier VC's - end result - dead.
Another one, had a huge, hairy science problem that it was trying to solve. This one had a successful senior team and 1st tier VC's. Still going, $50M+ raised. Technical challenges are the driving factor of success.
Three different start-ups, three different issues that killed the venture or is impeding success.
My start-up experience (as an employee, not a founder) was absolutely terrifying.
Shortly after starting I found we had 6 employees (total, not including founders and funders). 2 of them were classified as HR. Turns out both founders were from a large corporate background and insisted on running the company as if it were IBM or Microsoft - not a small company. From reading some posts on this site I see that is not at all uncommon.
Our product was more geared towards the corporate market rather than public access or consumer. I can see how presentation makes a difference but it surely wasn't worth all the effort, time and money devoted to it (often more than was devoted to product development).
In the time I was there we released three major revisions of the product. At the end of each revision our workforce would triple (the additional people being sales people) who would traipse around the world (often with a developer in tow to answer technical questions) to tell everyone who would listen about our feature list for the next version of the product. Strangely enough most potential customers decided they would wait for the next version to come out before they would commit to buying anything. On the upside I got to visit Malaysia, the US and the UK on the company dollar during these periods.
The development team realised we could scale down our product to run on consumer level hardware and spent a lot of time ensuring a common code base could be compiled to run on a range of hardware (with features excluded or scaled down to cope with limited capability depending on the target platform). This was at the start of the whole Web 2.0 phenomenon but we still included support for XML/RPC calls back to a central server for long term data storage and common configuration.
The proposal we gave to the founders was that we should license this out to the firmware manufacturers for the consumer equipment and license the server side support to the major ISP's in our markets. The first approaches failed (possibly because we didn't have a 'name' for doing such things but - I personally believe - because of the huge prices that the company wanted to charge as well, per megabyte transfer on firmware licenses. Yes - you read that correctly - to use our firmware they had to pay a fixed price per megabyte of data that was routed through the device).
After this initial failure the solution was not to reduce our price (or at least reduce prices for our initial market to get the product out there) but to make a plan for global domination of all consumer networking equipment. Yes, we were going to buy hardware from Taiwan, load our own firmware and run all other manufacturers out of the market. In less than 12 months. After that we could charge what we wanted for the ISP side of things which would be the real money maker according to our CEO. This was in the business plan and anticipated growth charts.
I (and what remained of the development team) left within 3 months of that plan (it took a while to realise it wasn't actually a joke). We were replaced and within 6 months the company was defunct.
1/ Do not over estimate the value of your service. It may seem irreplaceable to you (and your friends) but most people will put a value of zero on its functionality until they have used it. If the entry cost is prohibitive people will not use it and your market will not develop let alone grow.
2/ A start-up is not a corporation (even though it may be listed as such). Things like HR & OHS do not require a separate staff - they require a damn good (and damn patient) PA until staff numbers grow.
3/ If you previously worked in a high profile position for a large corporate - perhaps a start-up position is not for you. If the only thing that got you attention previously was 'from XX corp' when you said 'This is Joe Blogg from XX corp' perhaps you are not as good as you thought you were.
4/ Start-ups are technology sensitive at the start - you need to get the technology out there and in use before you can capitalise on the business opportunities. This is not hard to do with minimal cost these days.
5/ Make sure your sales people (or sales information if you do it all online) concentrate on what your product does now (and perhaps compare it against what your product used to do to show how it is improving) rather than concentrating on what it will do. If I was trying to sell you this years version of the Prius would I concentrate on the differences between it and next years Prius (well, next year the brakes will really work - all the time)?
6/ Don't muck around your developers. Start-ups are technology sensitive (see point #3) - if your developers make suggestions about who that technology is good for don't ignore it if it fails the first time (hey - we go through several iterations to get your requirements implemented - can't you do the same for us?)
There are a million stories in this city - that's mine (Hope you are a Dragnet fan :P). I spent 4 years working between 60 and 100 hours a week on four continents developing a product I really believed in. At the end of it all I probably wound up earning less than I would have for a strictly 9 to 5 government job with no stress and spent 12 months or more recovering from the burnout. On the upside the work was always challenging, I made friendships with some really (really) good coders and learnt a lot in the process.
Statistics say your experience is going to be more like mine than that of the first Google employees - don't let that stop you though, the experience itself is worth going through at least once.
I have failed with a children['s credit card I patented 10 years ago because I went for a market with few potential customers (only major credit card companies) with no drive for innovation (they don't want to try a new card before their competitor tries it out first.
I learned that I needed to learn the market before investing my own money(well, my fathers money, I was only 17 at the time). I also learned how patents are a waste of money when you don't have an investor, and that you should get provisional status and look for investors, and if they are nowhere to be found, move on to the next business.
I know that you are asking for failure stories in order to learn from them, but in my opinion, anyone that tried cannot be a failure when compared to all the people that never tried.
I agree with what Yossi Vardi said in TC40 when he quoted Tedi Roosevelt in his speech The man in the arena
I was a day-one developer / tech lead (1 of 10 people in company) at a startup that eventually crashed due to the manic-depressive CEO. Very disappointing, since the people I worked with were the best coworkers I ever had, and the product had an excellent chance of making it long-term (not rocket-star rich, but dependable growth).
The lesson I learned from this is that technology isn't everything (or even the main thing) - bad leadership can blow it up and there's virtually nothing you can do about it other than jump off the ship before it hits the iceberg.
Throughout my career, I have failed as much as I have succeeded. And each failure actually taught me much more about myself and business.
At one time things went wrong because I took out earnings from one business and invested it in other things, only to find out that everything suffered as result. Wasted crucial 1 year in the process.
I've been involved in two startups where we ran out of fundings before we could fully bring the product to market. The key learning for me was one of focus. We weren't focused on what our key value was and what was driving the product. We were thrashing.
This was an issue in the leadership team in defining the product offering and in the engineering team for trying to build too complex of a product. Also we were constantly chasing the industry and some of our competitors. I think we've all heard of stories where the business guys return from a conference or read an article and suddenly we have a new direction or a dozen new features, we had this issue.
For any startup you need to define what your company and product vision is and then have laser like focus on achieving it. This is not to say that you don't need to be flexible but believe in what you are trying to do and have the will to stick with it.
If there is uncertainty in the vision then create an iteration or experiment to test the hypothesis and reduce that uncertainty.
Read up on "lean startups" and "minimum viable product" for more on this; Eric Ries and Steve Blank have some great articles.
The most notable implosion I've seen is where a company literally became a victim of its own success. They marketed well beyond their means of production while not considering the time (not just money) needed to scale.
They also failed to adequately research how quickly their own vendors could get things out the door. For instance, 11,000 units almost ready to go, just missing LCD screens and power buttons.
End result, they lost most of the clients and gained a rather poor reputation. Just at the time where they had finally scaled out .. there were no more orders.
They ended up just selling off what they built to a competitor.
Around 5 months ago a man came to me and asked me if could i make a program for him. I said ok, but that would cost you almost 10000 euros and it will take me around 7 months to have it ready and maybe even more.
The man said he didn't have such budget. So he said he could only give me 500 euros and give me the chance of having a percentage of the benefits once the program is ready and start to sell.The idea was sounded great, because this startup had a really good idea, also i was unemployed and this was the best offer that came to me in months so i said ok.
The development was going ok, but i was running out of time. I miss calculated the time and after 3 months i realised that i would need much more time to finish the product. I needed help from someone to speed up the project, but i had only 500euros of budget.
So i decided to do something about it: I meet this guy from Pakistan in a freelacers site and i asked him if he could help me with the development. He said that he and his team could do the rest of the program for 800 euros in 2 more months. I was really afraid to make a mistake, but i needed to do it, it was my only chance. I paid to this guy the the half of the money and the other half would be paid after the job was done.
That guy ripped me off i never again knew nothing about him. Now in 3 days is the deadline i promised to my customer, i don't have the software ready, and i am out of cash for covering some of the expenses that the Pakistani guy was going to solve out for me.
I made many mistakes:
-wrong partners pick
-bad budget administration
-letting emotions drive the project
I hope i learn from my mistakes so i can avoid them to happen again in the future.