I agree with this article. Founders overspend once they get their first initial investment, and rely on the next investment too much. Founders should be paying more attention to burn and churn rates.
I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong.
1) Spent the whole investment on Founders salaries. They had 4 tech programmers (top notch guys), and used the money to pay for their time whilst they were building the platform.
2) They had the wrong product market fit. They expected to sell their services to Universities for 50K. In my opinion, they should of targeted college students, and add a tutoring service and take a small commission.
3) They built a fully finished product. Their was no room to scale it or grow.
4) They expected that the product would just sell itself. We all know, that's not how it works in the real world.
5) They didn't do any market testing and validation = wrong product market fit.
The end result, they got an investment and spent it quickly, they didn't try to pivot, tried to get another investment and failed. The team broke up pretty quick, or as you referred to in your article, they got an unwelcoming 'pinch' on the backside.
I learnt a lot from seeing my friends fail, and their failure has helped me out a lot with my startups. When startups first get their investment, they should have a 1-2 year plan for that money (burn rate). Divide the investment by a specific time period and that's how you spend it.
Realistically, after you get through the TechCrunch 'trough of sorrow' as Andrew Chen puts it, you have to stay motivated and plan for the future. The future looks dim if your startup is heavily reliant on receiving additional investments to keep you alive.
More on the pinch, startups shouldn't be getting an investment to keep them going. They should have this already sorted out. A very wise person once told me, you should seek investments when you don't need them, as this means you have done your homework and can also find the best deals.
Great article, and I appreciate the awesome content.
Selling to big colleges is not too different than selling to large enterprises and/or to Uncle Sam. Product quality and features are much lower on the list, than lobying, networking, marketing, developing contacts. Learn to play golf (or whatever the CEOs and administrators of big institutions or companies are doing today to socialize). Or instead of hiring another programmer hire someone who was in charge of making buying decisions for the industry you are trying to sell to.
That is also the reason why many colleges, or governments, end up with crapy overpriced software. You look at it and say "I can do 10x better and sell for 10x cheaper". The problem is you are not aware of the size of the iceberg lying under the water.
I think they had the options to target Universities or college students. The product connects college students to other students to for help with problems. It's mostly suited for the mathematics, engineering and computing faculties.
The big issue is, they didn't have anyone to do marketing for it or test the market to see whether it wants their service or not. They should of done a pilot system. Focused on one university in Beta mode, and then expanded. They were too fixed on selling it for 50K a piece.
Actually I am not so sure that your friends did the wrong thing here. Sure the business failed, but if they got to transfer all the investors money to themselves while at the same time learning how to run a startup (all with someone else money) then it was pretty smart.
Now they need to take the cash they saved and wisdom accumulated and bootstrap their next business up without any VC money.
Yeah, they used all the money on themselves. A free learning period so to speak. But, I wouldn't want to do that with investors money, reputation might hurt them in the long run.
One of the guys is a product manager at Google now, another moved back to his home town. Only one of them is still doing the startup thing.
They definitely got a lot of experience, this only counts if they learnt from their mistakes. Which, I really hope they did.
Nothing that you said suggests that there's something going on besides an honest rookie mistake. And if you are not willing to loose some dime because a rookie did something that in retrospective sounded stupid... well, it doesn't seem you will enjoy Venture Capitalism very much.
If and when these guys try to make a business model out of it, and there is a track of investor's money dilapidated in building technically sound products with zero market value... well, word can spread out pretty fast.
>I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong.
>5) They didn't do any market testing and validation = wrong product market fit.
How does this happen? How do startups receive funding without doing some level of marketing testing and validation?
I ask because in Canada it seems extremely hard to get even angel funding (beyond family members) without demonstrable traction and growth. Is that not the case in the US?
The investor they got, was actually doing something similar. Running a tutoring company that became quite profitable. Two of the guys working at the tutoring company got the idea to make this service, and sold the idea to their boss at the time.
Raising money is hard work, these guys got lucky in that respect. I think they made the absolute rookie mistake, afraid to talk to as they might 'steal' their idea. They thought it was a sure thing. Especially when they received the investment.
Founders overspend once they get their first initial investment
Interestingly enough, Joel Spolsky wrote about this danger in http://www.joelonsoftware.com/articles/VC.html , where he discusses the relationship between revenue, PR, fundraising, and code. Any of those can get wonky if one substantially outpaces the others.
I am not sure that spending it all on yourself is the worst thing you can do with the money. If you continue to live on raman then you will be accumulating a lot of cash that you can leverage later. I am surprised that any investor would sit back and let this happen - I certainly wouldn't if I was an investor in such a company.
I'm also very surprised this happened. I've done my fair share of Ramen, can barely eat it anymore. I'd assume they sold the investor on selling the service to Universities at 50K each, the investor believed in them and that he'd get a good return in his investment.
Well in cases like this the investor should have known better. I really think your friends did OK.
I sell into the university system and I expect that each sale will take me at least 12 month to convert. The positive is that once you sell a university customer you rarely lose them.
Yeah, I'm a little disappointed in my friends. I still think they have a product. But the whole team broke up. Awesome your making sales, and your right, universities will most likely continue using the same service once it's been adopted.
The market size wasn't too small, it allied to college students everywhere.
From what I know, a startup should look something like this. Build your MVP, get some traction, add on another feature, get more traction... A continually process of expanding your features and user base. Every time you add on features, you want to see growth.
The same goes for getting investment. Seed A, MVP with traction, add on a feature and go through Seed B stage etc etc. Adding on features to get more users which can lead to more investment. Investors want to see a plan for what a startup will do with that money.
I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong.
1) Spent the whole investment on Founders salaries. They had 4 tech programmers (top notch guys), and used the money to pay for their time whilst they were building the platform.
2) They had the wrong product market fit. They expected to sell their services to Universities for 50K. In my opinion, they should of targeted college students, and add a tutoring service and take a small commission.
3) They built a fully finished product. Their was no room to scale it or grow.
4) They expected that the product would just sell itself. We all know, that's not how it works in the real world.
5) They didn't do any market testing and validation = wrong product market fit.
The end result, they got an investment and spent it quickly, they didn't try to pivot, tried to get another investment and failed. The team broke up pretty quick, or as you referred to in your article, they got an unwelcoming 'pinch' on the backside.
I learnt a lot from seeing my friends fail, and their failure has helped me out a lot with my startups. When startups first get their investment, they should have a 1-2 year plan for that money (burn rate). Divide the investment by a specific time period and that's how you spend it.
Realistically, after you get through the TechCrunch 'trough of sorrow' as Andrew Chen puts it, you have to stay motivated and plan for the future. The future looks dim if your startup is heavily reliant on receiving additional investments to keep you alive.
More on the pinch, startups shouldn't be getting an investment to keep them going. They should have this already sorted out. A very wise person once told me, you should seek investments when you don't need them, as this means you have done your homework and can also find the best deals.
Great article, and I appreciate the awesome content.