Top 5 Reasons Why Promising Startups Fail

 

In the world of startups, death is a recurrent theme. 9 out of 10 startups crash and, invariably, money surfaces in all these cases. Many startups go bust either due to their inability to scale up or their product does not perform well on the customer’s expectation scale.

I have tried to investigate why these promising startups have failed this year. The purpose is to learn the lessons, avoid repeating those errors and move on to build a new startup.

  1.   Start-Raise-Hype-Raise^5-Burn^10-ShutShop

In 2013, a used-car startup Beepi was founded in San Francisco. Beepi provided the used-car market with an online platform, which would change the face on online car selling. Within two years, they went from nothing to a valuation of $525 million. The customers were happy to respond and venture capital poured in. However, their ‘untested’ business model, inclination to spend recklessly on a fancy office (SoMa) and high salaries spelled their doom. Then, in the beginning of 2017, they were sold in parts to pay off the investors.

 

  1. Crowdfund – KickstarterProject – Raise^20-Hype-Still-Not-a-Company

Hello was a sleep-gadget startup. The business model was built around Sense, an orb-shaped, bed-side sleep tracker, last priced at $149. In a crowdfunding campaign worth remembering, Hello raised $2.4 million, which was followed by an investment of a total of $40 million in venture funds from a Singapore-based investment firm, Temasek, and high-profile angels in 2015 at a valuation of $250 – $300 million.

The media loved to shower James Proud, Founder, and CEO of Hello, with attention and for a few reasons: One, he was young and was from the inaugural batch of Thiel fellowship, where Peter Thiel pays a group of college students to drop out of college for pursuing a career in entrepreneurship. The crowdfunding campaign by Proud was, by far, extremely successful. He had ventured into a trendy category, known as the ‘sleep and had an early-mover advantage’.

Still, before its closure, the company desperately tried to sell itself to Fitbit. The deal didn’t come through and Proud had to bid goodbye to Hello in June 2017. The reason why Hello was put to sleep comes from Proud, “The secret to making a successful tech product is to create something that works so well it fits naturally into your everyday life.”

Obviously, Hello faltered whereas Google Home and Amazon Echo continue to improve and gain traction. And Apple itself introduced HomePod in the same month.

  1. Startup Fundraising Mistake-Shut Shop

There is a time to raise money. Too early and the equity goes for a toss, too late and you are out of business.

Nearly three years ago, a restaurant reservation startup Table8 Dining Club (aka Table Now) set out to democratize the dining experience. They partnered with top restaurants to offer premium tables at peak, sold-out times at a fee of $20 and the reservation could be made weeks or hours before the meal. The fee was split-up between the startup and the hotel.   

The erstwhile San Francisco-based startup was founded in 2013 and they raised $4.6 million in funding. However, their inability to secure more funds pushed them out of the business, reported the note on their website.

  1. Startup-Strategy Error – Shut Shop

Investing 101 says diversify, diversify, diversify! Mitigating risks is crucial for a startup; more so, if the risk is a big client who eats up all your time and energy and weighs you down with an unequal contract.

Rather than being a business, you end up being a contractor to the client and the moment you lose that deal, your entrepreneurial dreams meet an unnatural death, like Audience Science. Audience Science was an ad-tech company known for building software and tools that are designed to help major marketers buy digital ads programmatically using a combination of automation and data. They were dealing with P&G, who was their major client. However, when P&G let it go, the writing for them to exit was on the wall.

“AudienceScience dedicated most of their energy to servicing P&G, and they jettisoned their media business, which was funding staff and development, to focus on growing their DMP business,” Ramsey McGrory, CRO of Mediaocean and former head of the Right Media exchange, told AdExchanger. “Taken together, it was a high-risk/high-reward strategy that didn’t pan out.”

  1. Startup-Raise-Hype^10-Burn^20-ShutShop

Claes Loberg co-founded Guvera, Australia-based music streaming startup with co-founder Darren Herft. In the span of 8 years, Guvera raised 185 million from self-managed-superfund-membership (SMSF) investors, through Herft’s investment vehicle, AMMA Private Equity.

The nature of streaming music business is such that it comes with considerable costs, mainly in licensing deals and technology. Co-founder Darren Herft accepted in an email that $50 million went to music labels and a large chunk went towards product development. Moreover, the ‘House of Guvera concept in Los Angeles, big-bang music launches, hefty salaries of the founders and commissions to Herft’s private equity fund also burnt a lot of cash.

The only way out for the company was to go the IPO route to raise more money, but Australian Stock Exchange last year blocked its initial IPO offering of $100 million.

The ASX said it has “exercised its discretion” to refuse admission to Guvera, based on material contained in Guvera’s application for admission.

Founder, Claus Hoberg, walked out of Guvera and blamed Darren Herft and the AMMA Private Equity for the company’s demise. Breaking his silence for the first time after the firm’s spectacular fall from grace, he said,

“The most important (lesson) is to choose your capital partners wisely.”

Startups are unpredictable, but still, there is a method to the madness. The companies that choose good co-founders, focus on building better products for their consumers, raise money wisely, and spend it modestly, succeed.

Why is Silicon Valley so biased against women?

Gender disparity in Silicon Valley is topic du jour. So when a few days ago, Wall Street Journal posted a piece titled “Facebook Blames Lack of Available Talent for Diversity Problem”, nobody was surprised. According to the post, Facebook has come to the conclusion that their diversity problem is due to there being too few underrepresented people who have the necessary tech skills to work for them. So instead of looking for better talent, they are shirking responsibility and conveniently blaming the public education system.

The public outrage at their statement is immense.

 A woman studying CSE at Dartmouth blogged about the article, and here’s how she responded: 

“When I saw this article I had to fight back tears. I thought about all the work I’ve put into to get to where I am today and wondered will it even matter when I start my job search in a few months. According to most tech companies, if I can’t pass an algorithmic challenge or if I’m not a “culture fit” I don’t belong. I haven’t even started my first full-time job yet and I’m already so tired of feeling erased and mistreated by the tech industry.”

It’s a white man’s world!

Facebook is not the first company shortchanging minorities, and it won’t be the last. Google is still 70% male and 2% black. Twitter’s leadership is 72% white, 28% Asian. At Facebook, again only 16% of Facebook’s tech team is comprised of women.

Minorities in Silicon Valley have always got the short end of the stick. At first, they are grossly underrepresented, and if somehow they manage to claw their way in, they have to deal with overt sexism, the ol’ boys’ club, and a toxic atmosphere.  

In fact, in 2014, when Sam Altman, President of Y Combinator, wrote a blog post about sexism and diversity (or lack of it), men at Silicon Valley disagreed. “I got a bunch of guys who were saying to me, ‘It’s not a real problem’,” Sam said.

 Another case in point: when found guilty as charged, investor Dave McClure of Startup@500 quit and apologized publicly, but a fellow investor came to his rescue with defensive blog post that put the onus on women; conveniently side-stepping the original issue of the bias.  

https://medium.com/@coolbearcjs/i-just-watched-the-public-neutering-of-a-good-man-dave-mcclure-and-cannot-keep-my-mouth-shut-about-477898b9b506

Excerpted from a blog post by Chris Sweis, Bitcoin investor, where he makes it pretty clear as to who he blames.

This under-representation continues in funding trends.

As per a recent study by Pitchbook, it was found that Venture capitalists invested $58.2 billion in companies with all-male founders in 2016. Meanwhile, women received just $1.5 billion in VC money last year. This massive disparity is due both to the differences in the number of deals and the average deal size by gender.

Source: Pitchbook

“There is a disconnect between perception and reality,” Aubrey Blanche, Atlassian’s global head of diversity and inclusion, said in the report. “Despite good intentions to support diversity, when it comes to looking at what’s happening within their own companies, half of employees think everything is fine and no improvements need to be made on gender, race and other key areas — despite a mounting pile of evidence that tech is very much not a meritocracy.”

Going beyond Sexism

Things get worse when you look at discrimination beyond gender and into racial and ethnic heterogeneity. For example, while Blacks and Hispanics constitute about 13 and 16 percent of the American workforce, at no major tech firm do they make up for more than 5% of employees.

“Silicon Valley is still too white, too male, and too focused on solving the problems of the young, single, and wealthy,” agrees Owen Grover, the senior vice president and general manager of iHeartRadio.

There’s a bigger issue: the culture.

At present, all attempts at solving this problem aim at educating more women and minorities to make sure they stand shoulder to shoulder and challenging hiring practices. While these are important initiatives, the underlying issue stays untouched.

The truth is that gender and racial bias is so ubiquitous in the tech industry, and so resistant to change, that a lot of talented female and minority employees give up sooner than later and leave.

To validate this idea, Kieran Snyder, a former manager at Microsoft and Amazon and now CEO and co-founder of Textio, interviewed 716 women who held tech positions at 654 companies across 43 states. On average, these women worked in tech for seven years and then left. Kieran asked these women specifically why they opted out.

Some 192 women (27%) cited discomfort working in these companies. The overt or implicit discrimination was a primary factor in their decision to leave tech. That’s just over a quarter of the women surveyed. Several of them mentioned discrimination related to their age, race, or sexuality in addition to gender and motherhood. They also stated that lack of flexible work arrangements, the unsupportive work environment, or a salary that was inadequate to pay for childcare all contributed to their decision to leave.

The picture is grim. But things are a-changin’. We started myStartUpCFO with the objective of closing the stark gender gap and keeping them in the workforce at all costs.

But more on this the next time.

 

8 Pieces of Advice for When Your Startup is Low on Cash

Originally published on Startups.co

***

In June 2013, I met the CEO of a data analytics startup here in the Bay Area. They had raised many millions already and I was on a mission to pitch them our services. However, as I stepped into their foyer, I was already filled with questions.

This was a handsome office for a company that had just raised a Series A round. Rather outsized, like a gangly teenager wearing his father’s jacket. Looked nice, but why does a small startup need a 5X office in one of the priciest real estate areas?

His answer caught me off guard. “I don’t ever want to feel cramped again!” he said, squishing his shoulders together.

Not far from this office, not so long ago, Steve Jobs had made a speech about “Stay Hungry, Stay Foolish”, and here was a company that got him exactly half-right.

I’ll let you determine which half.

This guy actually committed ~50% of the funds raised to the lease he signed for his “non-cramped” office. We never ended up working with this company, and needless to say, they ended at the auction block soon after.

Startup shows and the media flaunt the flamboyant lifestyles of entrepreneurs, and once the VC money hits the bank, this temptation is difficult to resist for even the saner ones out there.

If not personal extravagance, a lot of companies go on a wild hiring spree, or gleefully hand out big contracts to marketing agencies.

Founders often claim this defense: “But the money is raised to be spent!”

Of course it is. VCs did not invest in a Savings account. However, it’s important to figure out a scalable and sustainable business model first, before going out all guns blazing to promote a half-baked business with no product-market fit.

Mohit Bhatnagar, the Managing Director of Sequoia, agrees:

“In the new regime, startups are shunning previously popular buzz-phrases such as ‘growth over profit’ and ‘winner take all’ and adopting new ones instead — getting ‘unit economics’ right and reducing the ‘cash burn rate’.”

In an earlier article, I talked about watching the red flags that signal a #BurnRateZombie. Let’s now talk about how to avoid becoming one. Here’s how to rein in your spend:

1. Audit Subscriptions and Online Services:

I was going through the bank statements of one of my clients when I noticed that their AWS bill for the month was almost a $100,000. This was about 10X their usual bill and curious, I rang the CEO. He had no idea; he’d never even read the bill. After some legwork, we found out that every click on the website was spawning a new instance on AWS, and when we argued with the vendor, we ended up saving them $20,000.

Seriously though: read your bills. Especially for the online services you and your team has subscribed to. You need to make sure your licenses are only for the services you regularly use. Sometimes different employees authorize services to bill your card and then they leave the company, letting the billing continue for months or even years. There should be at least a quarterly audit checking the justification for each subscription, and an automated system to stop existing subscriptions when the person using them quits without bringing in a replacement.

2. Fire your Worst Clients, Not your Best Salespeople:

Don’t cut your best sales guys, instead fire your worst clients. 20% of your clients contribute to 80% of your stress. Focus your energy and effort on the good ones.

Good clients want you to survive. Ask them for an advance or best, a full payment on the bill they owe you.

3. Increase Performance Standards:

Firing your team is not an easy decision to make. Sometimes you might not even be sure whom to cut without affecting performance and team morale. Increasing performance standards might help make this decision easier.

4. Deferred Compensation and Salary Catch-ups for Employees:

If the situation is dire enough that you can’t meet the upcoming salaries of your key people, be honest with them. If they believe in your vision and sense a genuine opportunity, they might go for deferred salaries, freeing up your immediate cash reserves for more crucial expenses.

5. Fixed vs Variable:

Break down your burn into two subparts: fixed and variable. Fixed expenses are one you incur irrespective of the number of customer transactions. For example, salaries, rent, office equipment etc. On the other hand, variable expenses are directly related to your transaction volume. These are more flexible, because your cost moves proportionately with your revenue.

Try to keep fixed expenses at a minimum, and make them as variable as possible. For example, link a percentage of your sales team’s salary to a bonus linked to the business they bring in, or sign a lease agreement that gives you the right to expand your office at the same location, but doesn’t weigh you down if you don’t need the space right now. This will help you control the burn if business dips tomorrow.

6. Message Cuts:

Sometimes your team doesn’t catch up to the fact that you’re running low on money. They’re used to having free beer in the office fridge, Friday-night parties, and a daily gourmet lunch. You might have to get the message across the hard way: tone down the splurging. It might not make a big dent on the bottom line, but all the drops add up to make the ocean.

7. Be shy to commit to expenses that are difficult to reverse once committed.

Like a Vegas wedding that’s quick to get into, but harder to get out of, think of renting or leasing a big ticket item instead of purchasing it. Outsource instead of hiring in-house, to save money on benefits. This way, pulling the plug is also a lot easier if they don’t perform.

8. Quick Burn Vs Slow Burn:

Take the office space on lease, it will still burn your money, but slowly. Buy the same place and kiss that money goodbye forever.

Survival is tough. It is taking a series of decisions that go against consensus, and require continuously maintaining a shoe-string mentality when you have millions in the bank. It’s important to maintain this mentality consistently; cutting back after you’re used to splurging is very difficult. Like an always-broke college student suddenly on the payrolls of a rich company, who finds it impossible to go back to operating on his student budget.

Have you come close to becoming a Burn Rate Zombie? Which of these tips helped you survive? Share your story in the comments below.

Funding Downturn And What It Means For Entrepreneurs

Last night, I was sifting through my inbox, when I noticed a pattern.

Mail 5: CEO of a $1m seed funded company informing me that they’re shutting down shop since neither the Series A nor the bridge loan came through.

Mail 67: Another seed-funded company planning to wrap up operations at the end of the month.

Mail 96: A B2C startup with 1M active users but with no clear path to monetization. Unsuccessful in raising any money. Hoping for an aquihire, but planning for a shutdown.

Mail 128: CEO of a well-funded seed-stage company (high single digit, in millions) had to sell because they’d run out of money. It was an acquihire – so the team stayed intact, the product wasn’t shut down. They consider themselves lucky.

Should entrepreneurs be worried?

According to CB Insights’ annual report, the first quarter of 2016 saw the lowest number of deals worldwide in nearly three years, down by 15% from Q4 2015. Interestingly,  according to another report, Series A deals made up 48% of Q1 transactions, a level not seen in over a year. However, total dollars invested were the lowest since Q3 of 2014 for the U.S.. Even Asian markets have taken a hit, with funding down 32% (in dollars).

Yes, entrepreneurs should be worried.

VCs have less funds available. (No exits lately!) If they have a portfolio of ten companies, they’re analyzing them, and backing the winners, instead of equitably distributing the available funds between all of them. Think of a mother picking favorites when there are five kids to feed, and food only enough for two of them.

What can entrepreneurs do?

Raising funds is going to get even more difficult. Call it a correction or a normalization, the bottom line is that there are going to be more unicorpses than unicorns this year.

Here are some tips for early stage startups:

  1. If you are raising funds: Aspire to raise a larger amount than planned, since the next opportunity for fundraising may not come soon. This strategy is different than the past strategy of raising a very small pre-seed or seed round, getting traction, and then going for larger rounds.

Because, well, you will probably not be around for that round.

  1. If you are not or cannot raise funds: Cut down your expenses.Ruthlessly prioritize.

If you are still building your MVP, don’t invest in a sales and marketing team just yet, because they don’t have anything to sell.

If your product is ready, see where you can scale back on the R&D spend, and put all that you have in your sales team. Lean in. You are guaranteed to NOT get traction if you don’t invest in sales, so why not risk it?

  1. Track your KPIs. If they are looking good, you’ll survive. Focus on customer validation and your monetization path. Your metrics should prove two things:
  1. You’re actually solving a problem
  2. The problem is so significant that users spend a good chunk of time on your product, and not just two minutes a day.

Sad fact: If you are running out of money in 2016, and KPIs don’t look good – you’re in trouble.

  1. Approach your current investors, have a heart-to-heart. Figure out if you’re the favorite child, or the one who’s going to be left to die. If you think you might need money, discuss the possibility of bridge financing before you go for the next round.

I know the situation is difficult, but in the long run, this is a good change. Evolution is at work. The strong will survive. This will make companies more resilient, and will make sure the more deserving ideas get funded, and competition gets thinned. The capital to go around is limited, and with less startups clamouring for their attention, the money would be spent more judiciously.

However, if you’re the ones left in the cold…stop worrying.

Welcome to the graduation ceremony of the School of Hard Knocks. Learn from your mistakes, prepare for the next cycle, and come back with better ideas.

And if you need a sounding board for those ideas, I’m available on LinkedIn or email at sshroff@mystartupcfo.com.

Good luck!