I was fortunate. The first startup I joined went public.
The second startup I joined was acquired by a publicly traded company in an all-cash deal with a 3x multiple of the investments.
My third startup failed.
Most serial entrepreneurs fail a few times before they succeed. In contrast, I succeeded a few times before I failed. Even monkeys fall from trees.
I’ve spent much effort studying that failure, trying to determine the precise mistakes that were made during the four years of that company’s life. Some of that study has been productive and a great learning experience; resulting in much improved entrepreneurial practices. I’ve been able to apply many of these lessons to startups #4 and #5.
And I must admit some of that study has been totally counter-productive, in effect self-flagellating. The fact is even monkeys fall from trees.
I published an article a few years ago containing a detailed post mortem of the failure (see Davis, A., and A. Zweig, “The Rise and Fall of a Software Startup,” Journal of Information Technology Case Studies and Applications, 7, 2 (2005)), but I thought I’d summarize the primary lessons learned:
- Get Marketing Involved on Day #1. Lesson learned! For some strange reason (probably arrogance), we waited 6 months to get marketing involved in startup #3. What a mistake!
- Missionary Sales are Bad News. If the pain you are addressing is not one of the primary pains felt by your target customer, your customer acquisition cost will be huge. Our startup #3 suffered from missionary sales throughout.
- Sell a Simple Product Before a Complex One. Although this is how I expressed the lesson back in 2004, we all know now the value of a series of minimally viable products. Unfortunately we learned this lesson the hard way.We spent $1M building our first product, only to discover it was the wrong product. By the time we built a much smaller product and started learning from it, investor confidence had waned and the economy had crashed.
- Don’t Get Lured into Fancy Offices. We signed a 5-year lease for Class A office space. Not smart in retrospect. Felt right at the time. After all, everybody was doing it. In general, don’t spend money unnecessarily.
- When Accepting Investments, Get More than You Need. This was the subject of an earlier blog. Check out When Should You Ask for Investments?
- Be Careful When Partnering with Friends. In startup #3, I partnered with two of my best friends. At the end of the company, one relationship became cemented as a lifelong friend, based in part on having been in the battlefield together; the other disintegrated and I have not talked with him since.
- Avoid Bad Economies. This is meant to be tongue-in-cheek. Our company lasted four years from 1998 to 2002, during which a huge number of startup companies were destroyed in the unraveling economy. It would be very easy to simply blame the economy for our woes. It is much more useful to analyze decisions that are under management control.
- Keep Your Stakeholders Informed. This is one we did right at startup #3. With only a few exceptions, I’m still in good standing with the investors and former employees of startup #3. Many have invested in and come to work for companies I’ve started since.
- Every Employee Deserves Ownership. This is another one we did right at startup #3, and I continue to practice at all the startups I’ve been involved with since. I generally allocate a third of the company’s equity for the option plan, considerably more than most mentors recommend. But this fits well with my management style.Many years ago, my first mentor, Ed Bersoff, made the statement, “I expect to become wealthy as a side-effect of doing great things in this company. I would be extremely happy if many others became wealthy around me as well.” Thank you, Ed, for teaching me this!
- Principals Should Invest in Every Round. This is another one we did right at startup #3, and I continue to practice at all the startups I’ve been involved with since. Being the first to invest in every round has two great side effects: (a) when potential investors ask if you have skin in the game, you can answer yes, and (b) when potential investors ask if you’ve raised any money in the round yet, you can answer yes.
But even if you learn all your lessons, and you do everything right, you still may not succeed. And that’s okay. Just pick yourself up, and try again. Remember, even monkeys fall from trees.
ABOUT THE AUTHOR:
Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.
If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money?
Photo of Black Chinned Emperor Tamarin by Kevin Barret (Creative Commons)