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Startup Failures: Five Ways To Crash Your Startup, Which Will You Pick?

Posted by Dharmesh Shah on Tue, Nov 14, 2006




When talking about startups, it is interesting to talk about market forces, competition, product design and a variety of other things that founders believe they need to really understand and “get right” in order to survive. Though this is true (all of these things are interesting and important), it seems to me that more startups die from preventable causes than from external forces.

Sure, the act of crashing a startup startup is not sudden or immediate, but ultimately, from the company’s perspective, is still just as fatal – it just takes a while.

Here are the top ways that I’ve seen for startups to run a startup into the ground. Some take time, others are pretty quick. If you find yourself falling into any of these camps, I’d suggest reassessing and asking yourself: Why am I doing this? Can I control it? What’s the outcome that I really want?

Five Effective Methods Of Startup Failure:
  1. Death Before Life: I’m going to resist the temptation to dive into the metaphor of pro-life and pro-choice (which is a serious topic and I don’t want to belittle here). But, the concept is that the founder is “ready” to start a business. In essence, the startup is “real” (but it’s just in the founder’s head). At this point, the founder will likely start brainstorming. She will start coming up with ideas, bouncing these ideas off people she trusts and respects (and sometimes even people she doesn’t respect) to get a sense of what might work. The goal is to find The One True Idea that when it arrives in the founder’s brain will become this shining beacon of light that will guide the founder and the future management team through the dark wilderness of startup-land. Lots and lots of would-be startup founders fail with  their startups in the pursuit of The One True Idea. Quick tip: There are very few cases where a founder really comes up with the One True Idea, and even if she did, she’ll likely be talked out of it by friends, family and colleagues anyways.

  1. Failure By Isolation: Let’s assume that the founder does finally settle in on an idea. One of the most reliable ways to fail at a startup (this one takes a bit longer), is to keep the idea to yourself for extended periods of time assuming that you need to stay in “stealth” mode so that someone else won’t steal it. The idea remains in the founder’s head. Little resources can be committed to it, and the idea is never really brought out into the harsh light of reality to see if it can survive even modest scrutiny. Ultimately, when the idea is forced out, it becomes obvious that there is no way this idea will ever really work. Unfortunately, lots of time passes between the original idea and the ultimate realization that it’s not the right one.

  1. Failure By Founder Dissention: If the founder is smart, she will start early in trying to pull together one or more co-founders to help get the business off the ground. Here is where it gets tricky. Founder issues are very challenging. Everything from how do you divide equity, who will do what, who will take on what title needs to be discussed. The only thing worse than disagreeing about some of these things is not disagreeing about these things because you haven’t even talked about them. I wrote about this in “Important Questions Startup Co-Founders Should Ask Each Other”.

  1. Failure From Doing Nothing: When I say “doing nothing”, what I really mean is “doing nothing that is creating value for customers”. I am constantly amazed by how many creative ways founders can find to do things that have the illusion of moving their startup forward, but that has almost nothing to do with creating value for customers. Let’s design this fancy website. What about our business cards! What about this 120 page business plan? Surely we have to think through competitive analysis to make sure we build the right product. Don’t get me wrong, all of these things are important – but they are all trumped by the single act of creating customer value. If you don’t know how to create value: ask the customer! So many startups delude themselves into believing that all the activity around strategy and planning and marketing and “launch preparation” (yep, I’ve heard that one too, before the product development was even started) is what will determine their success when they “finally get out there”. I get really worked up about this one. I’m going to go get a cup of coffee and stare out my window so I can cool down.
    …Ok, I’m back.

  1. Failure From Determination: To clarify, what I mean here is when you are determined to make your original idea a success. You read somewhere that lots of startups die because they give up on their idea too soon and you’re not going to have that happen to you. Come hell or high water you will see this idea through! Here’s an insider tip: Most successful startups end up doing something that is different from their original idea. Dogged determinedness will likely keep you from building the business that you could have built. Yes, you can’t just drop every idea that comes along at the first sign of conflict or controversy. It’s a very thin line (nobody said startups were easy).


There are of course lots of other reasons could fail, but the reason the reason I selected the above ones are because they are all under the founder’s direct control. We have not talked about industry selection, competition or anything else. I don’t know about you, but I’d argue that a higher percentage of startups fail for one of the above reasons than the “we got our pricing all wrong and so couldn’t really get market traction” kinds of issues. What do you think? What are other methods of startup suicide are out there? Perhaps there are a few that I missed that are even more effective.



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Beware The Web 2.0 Walking Dead

Posted by Dharmesh Shah on Fri, Oct 06, 2006




Back in Bubble 1.0, um, I mean Web 1.0, when a startup failed to take off, it generally died a relatively clean and definitive death.  We all knew the company was dead because the assets were sold or auctioned, the servers shut down and the service rendered unavailable.

Now, with Web 2.0 companies, it seems that there is a risk of what I would call the “walking dead”.  Walking dead are companies that have essentially died (but have not quite been put to rest).  There is no longer effort being put into the software.  The founders have lost interest.  Support is no longer available.    In most cases, this is not a big deal.  A lot of these startups have a limited number of users anyways, or are providing a non-critical service – but not always.  Besides, one could argue that if they’re not really dead (i.e. still operating) it doesn’t really matter if the software is no longer being enhanced or supported (as long as it’s useful).  

Thoughts On The Web 2.0 Walking Dead
 
First, there are factors that increase the likelihood of the walking dead phenomenon in a Web 2.0 world:
  1. Lack of Investors:  In Web 1.0, many startups could (and did) raise outside capital – sometimes lots of it.  As a result, once it was determined that the startup was not going to “take off” as the investors expected, there was usually a reason to actually shut-down the company and write off the investment.  There was no reason for the investors to let the startup continue operating and carry the liability if there was little chance of a meaningful exit.  They were better off shutting it down.  Startups without outside capital (which represents a lot of the Web 2.0 startups today) don’t have this external pressure to have a “clean” shut-down.

  1. Lower Infrastructure Costs:  It takes a lot less money now to operate a hosted web application than it did back during Web 1.0.  Hardware, bandwidth and storage are all cheaper.  There’s an abundant supply of hosting providers (keeping competition high and prices low).  Open source has reduced the cost of systems software like operating systems, web servers, programming languages and databases down to near zero.  As such, it doesn’t take a lot of money to keep a Web 2.0 company “running” anymore (assuming there is no more human effort being expended).  Humans are still expensive (relatively speaking).

  1. Advertising Efficiency:  Now that online advertising has been made much more “efficient” by the likes of Google (and now Yahoo! and Microsoft), it is easier for startups to generate at least modest revenue through a semi-successful website.  Often, these revenues can be sufficient to cover the infrastructure costs mentioned above.  When this is the case, there is little reason for the company to actually die (it continues to exist as the “walking dead”).


There are also a couple of factors that decrease the likelihood of startups becoming the walking dead:
  1. Easier Exits:  One thing that argues the opposite of the above points is the availability of simpler exit paths for startups.  For example, I know of at least four startups that offered their assets up for auction on eBay.  By making it easier for startups to find a potential acquirer, they are more likely to do so.  Further, if they use a public vehicle (like eBay) for seeking an exit, it is likely that their users will know it.

  1. Perpetual Hope:  As the number of Internet users continues to grow and we see new “shifts” in the online advertising space (more competition, better models), startups can often have the chance to be rejuvenated.  There are enough cases where companies that to be “dead” later became alive again (with new capital, a new strategy and a new hope for exit).    Though this certainly gives these companies a chance to be reborn, this also increases the chance for the “almost dead” companies to hang-around while holding on to that hope.


I don’t think this Web 2.0 “walking dead” is a major issue.  As I mentioned, most of the startups that might be classified as “walking dead” are not providing critical functions without which their users could not continue to live productive, meaningful lives anyways.  The number of users impacted by one of these startups is almost by definition small (because if a given startup had a large number of users, they’d likely be living anyways).  I just find the concept intellectually interesting. 

What do you think?  How would you know if one of your favorite Web 2.0 applications is the walking dead?  Would you care anyways (or would you just use it while it was alive and find something else if it happened to be put to rest)?



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Web 2.0: Soft Landings vs. Hard Crashes

Posted by admin_onstartups.com admin_onstartups.com on Mon, Sep 11, 2006




I’ve gotten a bit of criticism for a couple of my prior articles about the Web 2.0 startup crashes of  Kiko and HuckABuck, both of which listed their companies for sale on eBay.  [Note:  Kiko sold for $258,000 whereas HuckABuck was not able to reach its $20,000 reserve price.]

Reflecting on this a bit more, I think the criticism around my use of the word “crash” was well placed.  Indeed, I think the term “crash” was not particularly accurate of what actually happened (such as in the case of Kiko).  If the companies had raised tons of VC and gone down in burning flames, the term crash may have been appropriate.  But, given that they did manage a graceful exit (well, at least Kiko did) and didn’t burn a bunch of capital in the process, they had more of a soft landing than a hard crash.

In Support of Soft Landings
 
  1. Capital Efficiency:  Startups are raising less money.  Gone are the days of tens of millions of dollars being shoved into many early stage startups.  Without anxious investors involved, a real crash is less likely, as nobody is pushing for the “grow fast” strategy. 

  1. Lower Price Requirements:  This is related to #1, but since startups are raising less capital, the price acquirers need to pay is lower.  As such, there are a larger pool of possible acquirers. Had Kiko raised $4MM in VC (like many VC-backed startups), they would have had a harder time finding an exit.

  1. Features vs. Companies:  Many of today’s startups are focused on building features instead of full companies.  As such, they are more attractive to specific types of buyers that are looking to enhance their product offering.  This seemed to be the case with Kiko’s acquirer Tucows.

  1. Quicker Market Results:  A majority of Web 2.0 startups are focused on traffic/user aggregation.  As such, they are usually closely watching the “uptake” in the market.  If they don’t hit the numbers they want, they may lose hope and decide to move on to something else.  Basically, they’re playing the Web 2.0 lottery.  Once the results are in, and they know they likely don’t have a winning ticket, founders may decide to just try something different.  In this case, they just generate what cash they can and move on.

  1. Efficient Channels:  It seems that there are now more channels out there for startups to find an exit path.  One striking example is eBay (the path chosen by both startups I recently wrote about).  By using more “efficient” markets online to sell their startups, founders have the option to not get up in the quagmire of locating a buyer and negotiating a price.  This makes it easier to “land softly”.


So, I think we’ll probably see more of these “soft landings” in the future.  One point I’ll still hold firm on (despite the criticism) is that no matter how you slice it, these outcomes are not really “successes”.  Sure, the founders learned a lot, had fun building something cool, were able to serve some number of users and have a great story for their friends and family (all good things).  But, it’s still a landing and not a take-off.  The good news is that these founders (like those from Kiko) will likely take another shot at it.  And that’s always a good thing.  We need more people taking risks, trying out new things and defying the odds. 



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Web 2.0 Crashes: Another Startup Being Sold On eBay

Posted by Dharmesh Shah on Thu, Sep 07, 2006




First, there was Kiko (which was widely covered all over the blogosphere, including here at OnStartups.com).

Now, we have HuckABuck being offered on eBay:  http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ih=008&item=180023313880 ..  This one looks like it’ll be quieter (current high bid is $9,100 and the reserve hasn’t been met).

I’m going to be that most of you have not even heard of HuckABuck.  So, why am I writing about it?  Because I found a number of things about this particular transaction interesting.

Here are the things that kind of piqued my interest (and that I filed away in my brain for future consideration):
  1. I was amused by the opening sentence of the eBay offering:  “We are proud to be offering HuckABuck.com, a Web 2.0 search interface for sale”.  They’re actually proud of having to auction off the company on eBay.  Now, if they had a ton of users that would be one thing.  But, they don’t.  See below.

  1. The product is what I would call a search engine aggregator (so it goes and searches for you on the primary search engines and customizes the results).  Relatively broad target market.

  1. Got some positive mention in the blogosphere, as they noted in the eBay listing.  If it hadn’t been the fact that they had been mentioned on LifeHacker and Seth Godin’s blog, I would have figured it was just a couple of guys that whipped out some Ruby On Rails code over a weekend.

  1. Despite the above two points their daily page views were still less than 3,000 on average. 

  1. Because of this, their average advertising revenue is only $1/day.  [Web entrepreneurs take note:  This is a company that had actually launched a product, had relatively broad appeal, got some positive press and that’s all they could manage to generate.  Traffic generating and advertising revenue by AdSense is not easy].

  1. Seems the team was at it for about a year (which seems to be about the time it takes for some Web 2.0 founding teams to get bored of their idea).  Why are they selling it?  “We have several projects that we are currently working on that are demanding more of our time, and we want to find HuckABuck a new home with owners who can take it to a new level.”  For some reason, this irks me.  If you’re running a startup, you shouldn’t have “other projects” that are demanding more of your time.  A startup is an all-consuming process.  If you start straddling multiple things, you’re almost predestined to fail.  It’s hard enough to get a startup off the ground when you’re totally focused on it.  It’s almost impossible if you’re juggling multiple projects.


I wasn’t a HuckABuck user, so I can’t attest to whether they actually created a cool product or not (just tried it out now while writing this article, and it didn’t really blow me away).

Moral of the story:  Clever Ruby On Rails code, some honorable mentions by A-list bloggers and a potentially sexy product are not enough to make a successful startup.  

It’ll be interesting to see how much this one goes for.  My guess is not that much.  Then again, I didn’t think Kiko would sell for over $250,000 either, so what do I know?



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Hindsight 2.0: Lessons From A Failed Web 2.0 Startup

Posted by Dharmesh Shah on Wed, Aug 16, 2006




Certain circles are buzzing with the news that Kiko is on sale on eBay. I first heard the news last week, but it wasn’t public until today so I didn’t want to write about it.

For those that don’t know who/what Kiko was, it was one of the prototypical Web 2.0 companies (a free online calendar with AJAX, written in Ruby On Rails and funded by Y Combinator). It doesn’t get much more Web 2.0 than that. I was actually present at the “coming out” party when Kiko presented at the local Web Innovator’s meet-up last year here in Cambridge (USA).

For those interested in tracking the eBay auction: http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=120021374185 (starting bid is $50,000).

Now, I actually like the people behind the Y Combinator companies . The ones I have met are smart, passionate, hacker types. As such, this article is not the Kiko guys from pursuing their idea. But, in my book, Kiko seems to have been a failure and it’s important to reflect for a bit and see what we can learn from it.

Lessons From The Death Of A Web 2.0 Startup

  1. Google Is The New Microsoft: Back in the day, lots of software companies made sure that their business models kept them out of the cross-hairs of Microsoft. They didn’t want to get stomped on. Today, though this is still the case in some sectors, Google is a much more formidable (and scary) competitor. Google has all the power of a multi-billion dollar company, but a lot of the nimbleness and energy of a startup. With Google’s introduction of Google Calendar, Kiko really didn’t have a chance with it’s original business model. Of course, they didn’t necessarily know this was coming, but if I had been them, I’d given this decent odds. That is, it shouldn’t have been that big of a surprise.

  1. Be Realistic: When original news of Google Calendar came out, the Kiko founders didn’t seem particularly worried. This is ok. You don’t have to look scared to survive. But you do have to be scared and make some adjustment in the light of an oncoming train. Chances are, there was something that could have been done with the Kiko business that would have shifted them away from competing with Google Calendar. They likely needed a small dose of reality.

  1. Factor In A Plan “B”: Lets say you’re calculating the expected value of your startup pursuit. The primary driver should be “Plan A”. That is, we have a small probability X of a large outcome Y. But, it helps to have a “Plan B”. That is, we also have a reasonably large probability Q of much smaller outcome R, should the need arise. This way, they could have made some money from the exercise. Some would argue that having a Plan B is a bad idea because it defocuses you from Plan A (burn your bridges and all that). If that’s the way you like to play it, that’s fine. I personally like to understand the tradeoffs and have some idea of a Plan B, if possible.

  1. Even With Web 2.0, Popularity Won’t Save You: Kiko had a fair amount of buzz when they launched. It’s not like they died because nobody heard of them and they lived a life of quiet desperation writing code in some far-off place. They were a Y Combinator company. They were one of the “chosen ones” by Paul Graham. They got a huge amount of visibility and free PR. They had a Google PageRank™ of 7. They likely got a bunch of registered users. But, nowhere in the eBay listing do I see a value associated to those assets (what they are valuing primarily is the domain name and the source code). I find that somewhat telling.

  1. Hindsight 2.0 Is Still 20/20: Of course, it’s easy for me to pontificate on how Kiko may have been doomed to failure from the beginning (and I personally thought it was). But, the reality is, I didn’t know what those guys had in mind and I have to give them credit for trying. I just wish all that talent had been spent doing something that was almost as fun and cool – but would have actually created something of value.


It’ll be interesting to see if anyone makes a bid (starting price is $50,000). I won’t be one of them.

Any other lessons you think we should all learn from this small example? The part that worries me is that I see nothing particularly anomalous about Kiko. That is, this is likely one of the early ones, but we’ll see a lot more.

Update:  For a more factual look at what actually happened (from an insider's perspective), please see Richard White's article.  Richard takes a much more in-depth look at the situation.  I plan to follow-up with an article next week that responds to many of the comments. 



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