Steven J. Schwartz
So I talked about Start-up failures in a previous post, but I was specifically talking about STORAGE VIRTUALIZATION Start-ups, and how they have let down the public both in performance and features. I still stand by those sentiments.
However, I do have some experience in failed IT Start-ups in general, and this is what this post will be about.
The Idea needs a Business Plan!
I’ve found that many companies have very good ideas. These ideas are the beginning to the road to “greatness” or to “failure”. Just having a good idea does not mean success. Carl Marx had great ideas, not that he was a start-up! (You have to be so careful when you speak publicly, since folks are ready to jump at you!) Marx even put great his great ideas down on paper, which brings me to the first failure for a Start-up, the Business Plan. I have seen it a few times, and have made this mistake with my own software company. I formal business plan is critical. I’ve found that companies that are backed by the founders, or by an angel investor tend to skip this part of the business development process. How is this overlooked? Mainly because when you have your money already, you don’t worry about justifying your ideas and business goals.
I treat a new business idea with tight checks and balances. Looking at the market opportunity is one facet of a business plan. Just because there are 6 billion people in the world, it does not mean they are willing, or can afford, to buy a $100,000.00 screwdriver that will never strip a screw head. Now the idea of a screwdriver that will never strip a screw head is a “great” idea. Would millions of them be sold if the end-user prices was $5.99, I’m willing to believe that. If it costs $0.99 to make, that might just be a sustainable business. Any takers?
It is really the most basic mathematics that can make or break a solid business plan. However, if you are fooling yourself, and aren’t being honest with market size, and product costs, then even a fully developed business plan is doomed to fail. I’ll give you an example. I worked for a company that was informed that the Storage Software Market was a $14 Billion dollar market. This left a huge addressable marketplace for Storage Management Software (SMS). The fatal flow is this idea was that the Storage Management Software market was a significant portion of the Storage Software market. The reality is Backup & Recovery software and licensing make up the largest portion of the Storage Software market. Well maybe SMS was next in line? No, SMS fell into the “other” category of market share, and thus, regardless of how strong the Storage Software market was, the Storage Management Software market could not be a sustainable business…unless…a product could change that market share. The realization? No SMS software, no matter how strong in features and functionality, could drive enough revenue to and profit to build a Fortune 1000 company on.
Proper Funding
There are a few types of funding, some I’ve mentioned already.
- Founding Partners Funding
- Angel Investors
- Venture Capital Investment
- Friends and Family Plans
- Old Fashioned Bank Lending
So how a company is funded becomes critical to survivability. While most companies begin with Founder based or “Angel” based funding, this typically isn’t a sustainable model. The issues become with growth and continued forward direction. Typical impacts to this are product types. Software only IT solutions can typically last longer with internal funding and “Angel” investing. The reason for this is the nature of software development lends itself to a lower overhead run rate since most basic development can be done on traditional desktops, and test environments can be built out as needed, especially with today’s ability to do rapid development and testing via virtual environments. ***Note: This does depend on the type of software being developed, and assuming it does not rely on specialized hardware for deployment and testing.***
Customer Hardware development can be much more tricky with this type of initial funding. While prototyping and initial development might be able to be accomplished with little overhead, alpha and beta product testing will require a larger cash infusion. This leads me to the next level of funding. Venture Capitol Investing requires several keys factors. A solid business plan is one of those regardless of the type of VC you are looking to raise. If all you have is an idea, no revenue, and are looking to raise money to start a company expect to give away a significant portion of the ownership of your company. Expect to have both VC members as well as other outside technologists to be placed on a board of directors. However, you can also expect to get a serious amount of help with building a Sales organization, planning growth, managing capitol and operational spending. VC companies are a double edged sword. They can open doors to partners and channels that a small start-up would not be able to access, however, with those doors being opened comes a level of financial scrutiny that can be difficult to accept and understand.
Lastly are the two more difficult fund raising activities. Bank lending, while giving you lots of freedom in spending also typically requires personal exposure. I’ve seen banks look for founders to place their homes up as security for loans, and this can be very risky. Family and Friends can actually be one of the easiest ways to raise money for a start-up company; however, I live by a simple rule, “Don’t eat and shit in the same pot.” Family and Friends tend to get very involved and nervous when their personal money is at risk, and if that money gets lost, those relationships can be ruined FOREVER!
Stay Focused
One of the most upsetting thing to a new product developer is the customer! Each end-user typically has a unique set of requirements. Some of these requirements can become features and functionality that can make a lackluster product something amazing, but others can take years of development cycles and only fulfill the needs on a single paying user. Staying focused and on target is important. Monitoring requests, weighing those requests, and prioritizing requests become more and more important as revenue and gross profit become accelerated. A simple bug fix might drive more revenue than the highest new widget on the priority list. A quick cycle of development might be able to bring several lower priority features to a product line, thus driving more opportunity and entry into more markets. These are clearly going to be per product specific, so my only advise, find a solid product marking manager with a great track record. Pair this person with solid engineering manager who knows how to scope out projects. There are many ways to fail on this front, and this is, in my opinion, the biggest reason companies fail. The CEO of the company may think that a User Interface should be the highest priority, but in reality, product stability and reliability should almost ALWAYS come first.
Exit Strategy
The last component that I am gong to touch on is the idea of an Exit Strategy. Where, when, and how are investors, founders, and employees going to get money out of the company. Investors are the most eager to hear when there will be a return on the initial investment. There are basically 4 types of exits.
- Staying a private and profitable business
- Going Public
- Getting Acquired
- Closing the doors
Each of these is unique in the amount of money that investors will make. Clearly, a private and profitable business could buy out investors and take back ownership of the company. This is fairly rare. Going public might have the best return for investors at the time of IPO (Initial Public Offering). This is also something that employees can benefit from as well. This is also a very high risk exit strategy. Often companies go public and end up with stock prices below the IPO rate within weeks. Perfect recent examples of this are Compellent and Isilon. Being acquired can be very lucrative for VC investors and executives, as well as the employees. The most recent personal example of this is the intended acquisition of EqualLogic, Inc. by Dell for $1.4B. Finally, ideas, business plans, and investors aren’t always spot on with a start-up company. Sometimes the market isn’t ready, sometimes the product isn’t ready. Sometimes everything looks like it is the right, and the economy isn’t ready or sustaining. In the best situations, a well run company that sees impending doom will close early and refund some of the initial investment. The best example of this in the .com age was www.kibu.com who saw the end of the bubble and returned most of the original VC funds raised. The opposite of Kibu, was Cereva, which burned around $120 million dollars and left a fairly bad taste in the mouths of the east coast VC community.
As always, Comments Welcome!