As I outlined last post, the company I founded in Colorado on 11/11/11 no longer exists.
And while it wasn’t really a surprise, that final email still hit me kind of hard.
If startup success could be predicted by raw effort, we would most certainly have knocked this one out of the park. Everyone on the team put heart and soul into making something out of nothing. There were multiple occasions when I was amazed at each one of my co-founders, and even when the death spiral was in full force, the guys did not stop putting their shoulders into making something happen.
But that’s not how they keep score, is it?
This is off the top of my head, so I will miss stuff… but here are some of the more important things we did right and wrong.
What We Did Right
We chose an industry ripe for disruption, with customers desperate for us to solve their pain
The world of small-business financing is still operating primarily under rules drafted in the 1920s. Literally. There are major inefficiencies, and the industry as a whole has not yet figured out the Internet — both of these often set the stage for great disruptions.
Further, the potential customers that we talked to were hungry for what we were promising… capital is the lifeblood of business, and due to the incentives of banks and venture capital, there are vast swaths of quality companies starved for cash. This was way more “pain killer” than “vitamin”.
We shared significant stakes in the company for the extended founding team
At our peak we had 6 people involved with the company. The people working with us were fully aware of the risks, so one approach would have been to share as little of the company as we could “get away with” while keeping great people on board. I believe that is the wrong approach.
The root of that path is a mentality of scarcity. “I only have 10,000,000 shares of this company… must keep it all to myself if I want that big exit some day”. But keeping it all to yourself makes it infinitely harder to build that hundred million dollar company you are envisioning… wouldn’t you rather have 12% of a wildly successful company than 90% of a clunker?
So the hoarder keeps their chips close, and ends up creating a split company from the beginning — us (founders) vs them (very very early folks; don’t want to call them founders but can’t pay them and don’t want to give them too big a slice).
And let’s consider the rosy scenario for a moment. Suppose the company is indeed a huge success. After 10 years let’s say there is a $50 million buyout offer that also makes great strategic success. Or an IPO; whatever.
You and your two co-founders just put in 10 hard years to make this happen, and you absolutely deserve your success. But what about “employee” #1, who has now been there for 9+ years, and frankly was integral in making this happen (and for the first couple of years probably took a sub-market salary)? Does that person truly deserve only 1/60 of what you as a founder should take? 1/20? 1/10? When they came on almost from the beginning where it was, frankly, just as risky to them as it was to you?
I’ve seen it happen that a company has a nice liquidity event, the founders take home seven figures, and the other folks who were there almost from day 1 essentially got “back pay” for the years they worked sub-market. Ridiculous.
Look, as the original founders your name is on the door and you undoubtedly invested more intellectually and emotionally in birthing this company; so you should get more… but things work best when incentives are aligned. It never pays off in the long run to short-change the people who are helping you make your dream a reality.
If you couldn’t post the cap table publicly and discuss it with anyone in the company with a clear conscience, you’re doing something wrong.
We set up for distributed work from the beginning
This was born out of necessity — two of us were in Boulder, and two were in Denver, but it did prove advantageous on many occasions.
It is not hard these days to keep all shared working materials online and universally accessible. But that’s the easy part…
What people worry about with remote work is missing out on spontaneous communication and collaboration opportunities that happen when everyone is in the same building. And there is something to that; but when you break it down, there are ways to overcome these problems and end up with an even better overall level of productivity and happiness.
First of all, some face-time is very helpful. Especially at the beginning. But it doesn’t take long to develop an sense of how to use various channels to stay in sync, once you work with a given person for a few weeks. Public chat room or emails for asynchronous stuff, video chat when richer communication is needed, etc.
(IMO, if communication is a problem when you’re not in the same room, there are problems with your communication. Most people don’t communicate clearly and proactively; working remote forces you to do that. Deal.)
But the other thing is developing a company “circadian rhythm”. Just like an organism, startups work best when there is a weekly (and quarterly) pattern to life. And let’s be honest — it takes more than sitting around talking to build a company, it also requires lots of heads-down work and plenty of getting out of the building… neither of which require having everyone sitting around the same big table in a hip renovated warehouse.
For Funding Launchpad, a weekly flow quickly emerged. Once a week the whole company would get together, take stock of where we were, make decisions, and tie up any loose ends best handled in person. While we didn’t always achieve it, the idea was to emerge each week with a clear path for the next two weeks — and then spend the next week executing before pausing again to regroup.
“But only once a week? Things change so fast in a startup!”
(a) I never said we only talked once a week; just that we didn’t all meet in person for an extended period of time more often than that.
(b) If the plan really changes more often than once a week, you have major problems.
(c) During unusual times, we worked in person more often.
Looking back, I think it would be very possible to extend this to a completely distributed team working remotely 95% of the time. Others seem to agree.
We avoided reliance on forthcoming legislation
This is fairly specific to us; but in early 2012 hundreds of folks posited crowdfunding startups based on legislation that was working its way through congress. How long could it possibly take, right?
First of all, it can take forever. And in fact people are still waiting. We’ll get back to that.
The other thing about the new law was that every startup was at the same disadvantage; yes it was a new legal opening, but it was a very public one that every player in the industry (existing companies and would-be startups) was watching closely. So just jumping on something like that with a “first to market” mindset was a guaranteed loser of a strategy.
In our case, we were either going to do it differently or not do it at all. We had zero interest in being one of hundreds of me-too startups competing on speed in a race to the pricing bottom.
After much research we put together a strategy for 2012 that, if a few aspects of our chosen legal vehicle had proved more tenable, would have given us approximately 18 months to build a brand and find our footing ahead of most of the wanna-bes. The crucial bit was that it was based entirely on existing law, no changes needed.
What We Did Wrong
Well, a lot. But startups are filled with mis-steps and path corrections. Here are a few that might just help you avoid the same result.
We didn’t pick an industry that was right for us…
While the industry we picked was large and ready for disruption, ultimately there was no reason our particular team belonged in this space. No deep history in the industry, few long-time connections to leverage, and no personal deep abiding love for the space.
We had tons to learn, and set about it with vigor. Over the first 12 months we became very fluent in the nuances of the securities industry… but frankly we were still at a disadvantage to those that had been living and breathing finance for a decade.
Ours was a problem we wanted to see solved; but there were other teams better suited to provide the solution. As a result, we set ourselves up to be a potential player only in Colorado, and merely because we were one of the few providers in that area.
We tried to build momentum via “dominios” rather than a flywheel
Visualize a giant flywheel. I mean a really big one… like one of those old stone wheels they used to use to grind corn… and it’s spinning fast on well-greased bearings. Really picture it for a minute humming along.
It’s hard to imagine stopping that flywheel, isn’t it? This is what momentum should feel like at a functioning company. One little bump isn’t going to stop that flywheel; it’ll just keep turning until the next positive input comes along and speeds it up again.
Now granted it takes an almost superhuman amount of pushing to get that flywheel up to speed (while you are building it, no less) — but that’s part of the challenge of building a business.
Now in contrast, picture a long row of large dominos, each one bigger than the last. If all goes well, each falling domino will topple the next, and continue the chain reaction… but if something were to interrupt one of them, or if were to fall the wrong way, the whole thing would just cease. No real momentum.
That is the customer pipeline we built in 2012.
Our strategy was dependent on getting one successful customer funded, then turning that success into a few more clients, then turning those few successful clients into more clients.
On paper that seems to make sense — hey, it’s how nuclear fusion works, after all — but in the early stages that kind of strategy is very brittle, and in our case it was also far too slow. Since it would take months to get the first client all the way through to success, the other clients we were nurturing started to drift away… we essentially built our own chicken-and-egg situation, unintentionally.
Our more successful competitors took a different approach by using creative tactics like business plan competitions to engage with hundreds of startups and investors all at once, and then building out deal-flow channels and investor acquisition engines which became their flywheel.
Don’t fall into the trap of thinking “well we need one before we can get to ten… so let’s just focus on one for now” especially if your business has a long inherent cycle.
We spent too much time on improbable partnerships
As we contemplated our “cold start” problem, we came up with a few potential partners who would provide a nice work-around. Essentially, we would piggyback on their existing marketplace.
We spent a good amount of time wooing said partners, and in the end none of them came to fruition.
1. When you are time limited, as startup founders are, you have to 80/20 the shi* out of your activities. While this sounded like a good use of time, in retrospect it truly wasn’t; because:
2. We didn’t bring enough to the table. These partnerships were just daydreams, due to the imbalance in what each player would have brought to the table. They simply didn’t need what we had at that point nearly as much as we needed their networks and deep industry experience.
We should have built more of a track record (and probably a more complete product) first.
Partnerships can be crucial in building a business; but don’t spend all your time trying to date the prom queen. Especially before you’re ready.
We ran out of money
In the end, most startups fail because they run out of money before they find product-market fit.
You will make mistakes; but if you adapt fast enough those become merely bumps along the road to success.
In the end, we were in a situation where bootstrapping was not possible, and we failed to generate enough early traction to justify another round of funding.
Although I was not with the company for the last six months or so of the death spiral, it was still a striking moment when it finally ended.
This company was a life-changing experience, and I am grateful to everyone who helped out along the way — the team, my family, the Boulder entrepreneurial community, and the investors who backed my first run at building a “rocketship”.
What About Those Investors?
If I found another scalable company in the future, I have this idea of granting my prior investors founders shares in NewCo, gratis — it just seems like the right thing to do since they backed me this time. Any thoughts on that plan? Has it worked for others in the past?
If it works, let’s make it part of the entrepreneurial ethos. Pay it forward, pay it back. Would love to hear your thoughts!