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This article was published on October 21, 2012

Survival of the fittest: failure in the startup world

Survival of the fittest: failure in the startup world
Martha Pierce

Remember govWorks.com, a site created so that ‘everyday citizens’ could interact with local governments? Yeah, we don’t either. Google Labs, the technology titan’s ‘playground’ venture that never truly even let go of the monkey bars? Or how about Zune, the portable music player aimed at breaking down sales of Apple’s now-ubiquitous iPod? (Author’s note: I had a Zune. It broke in two months.) Zune is still alive and running but I mean…come on.

These startup companies, along with billions of other would-be game changers in the technology and retail industries, became flops within the span of a few years — and faster than you can say ‘stock valuation’. Ideas for launching new companies, and the overly optimistic founders behind them, are a dime a dozen in this era of fast-growing knowledge. As the ability to share on social networks becomes second nature, so do small teams hoping to strike the kind of landmine Mark Zuckerberg first unearthed – or at least tap into it. More on that later.

But the million-dollar question hasn’t changed since Facebook launched with two web developers and a college dorm room: why have these startups failed, and why do others continue to go down the gutter, end their server agreements, drop off? Even better, how do startups move past fledgling territory and on to company status? Ride this train, techies: consider this your how-to-not-fail. Or try, and fail anyway — like Apple did before its return to power.

Know this: You’re doing it wrong

New York Times bestselling author and star of the reality TV show “Turnaround King” Grant Cardone has some answers. Also the CEO and founder of five ventures, three of which are multi-million dollar companies, Cardone’s ambition is to help people live more successful lives. His company, Cardone Training Technologies, provides consultation services and customized training programs to companies in various markets: automobile, banking and finance, sales and telecommunications industries.

He also advises startups in particular on the question that every investor’s going to want to know: what’s the ROI on this particular venture? “You have to make a profit,” Cardone advises. “All [startup failures] are financial in nature. When you run out of money, no matter how good of an idea you have, it’s over.”

Which then begs the question: why don’t startups generate the revenue stream they need to maintain the business? All of these tech-savvy 25-year-olds can’t get investors to continue emptying their 401Ks – but what’s the issue? “One thing that many people don’t realize is that failure doesn’t happen in a moment,” Cardone says. “If the [startup founder] is honest with himself, he saw failure coming.”

This viewpoint is not only interesting, it’s alarming: more than 74% of serial entrepreneurs indicated that their desire to build wealth was an important motivating factor when starting a business, according to Onstartups.com.

Alain Paquin, founder of the Montreal-based startup Komunik, isn’t one of those entrepreneurs – at least, he didn’t start out that way. Through savvy business deals, careful distribution of products and innovative marketing approaches, Paquin achieved $100 million worth of success in revenue within a few short years at Komunik. He started with a lean team of three and grew the company to more than 800 employees in a few short months. “We became known to do stuff that was impossible,” Paquin remembers with a quip in his voice. And it’s clear he likes to build brands and see them through; a majority of the employees he worked with came from acquiring other businesses under the Komunik umbrella.

“But I don’t work with people with large egos. The right person won’t be disappointed with [things that happen], because there’s going to be a lot of roadblocks.” Paquin is no stranger to obstacles and pessimistic viewpoints; burdened by the economic crisis of 2008, he and his team were forced to diversify Komunik and sell parts of the company to the highest bidder.

“I ended up being in a situation where I didn’t have any money because my money and my deals [with other companies] were frozen. I didn’t have any money in December of that year, didn’t know how I’d pay for my mortgage or my employees,” Paquin said. To add salt to an already gaping financial wound, Paquin was also going through a divorce. Emotional and physical distress took its toll, and the following year, in 2010, Komunik was sold in three parts to Intema, another technology company, and Tram, an investment group. (After it was sold, Komunik was renamed Datamark Systems.)

Paquin, though, smartly kept the IP from a five-person project that he had been investing in for more than a year. “We made it so we could start a new business with the IP. It’s the price you pay to get out of a [bad venture], I guess,” says Paquin. He’s not the only one.

But how many fail…really?

Alisha Outridge, an outstanding media professional with a stacked Linkedin page and more recommendations than most major CEOs, has been in the technology industry for more than seven years at global companies like AOL and KIT Digital. But even though her successes span corporations, industries and 15 years, she’s no stranger to startup hardships.

Outridge, currently the director of social and user engagement at Clear Channel, is a veteran in the technology industry compared with the other pros – she taught herself to code and was hired to be a full-time web developer at age 15. “McDonald’s wouldn’t accept me because they said I was too young,” said Outridge. “The startup, SpecSimple.com, said: ‘you can code? We’ll take you!’”

Two years and a boatload of HTML knowledge later, Outridge launched her first company, which outsourced professional services to agencies. The startup quickly grew to 12 employees. “I made enough to cover my college expenses and served as Student Government Commissioner of Hunter College’s Brookdale Campus,” Outridge recalls. “But…after a while, I decided to stop doing my own thing and focus on management.” Outridge quickly became the Senior Technical Project Manager at AOL.com.

Just a few quick years after Outridge made a plethora of tech-related connections and designed award-winning products such as KIT Digital’s Social TV Programming Guide app, her creative juices started to kick in. She saw a tremendous gap in the market for consumers and driven individuals to set standards for themselves and track them accordingly.

Others agreed, and in 2011, Outridge launched TapTank Inc, a personal-development focused CRM application created so that users could effectively connect with others to achieve similar goals. “This approach to personal development is typically one that life coaches do with you, and then you’d track your progress,” explains Outridge. TapTank Inc. traveled seamlessly through the beginning – and arguably, most crucial – stages of startup development: with the help of her colleagues, Outridge created a successful working prototype and website, and secured an initial seed round of funding from angel investors of $100K in June 2011.

That, along with $40,000 in bootstrapped cash and savings, was more than enough to bring eight team members on board (a number Outridge would later find was ‘way, way too many for this product.’). TapTank was even selected to be an alternate finalist at TechCrunch’s Disrupt in San Francisco in September 2011, where it launched in alpha. By March 2012, the product had more than 5,000 users signed up in the beta release. TapTank had plans to monetize the product, and things were running smoothly.

Despite the initial success and eight gung-ho employees, things started going downhill. “It’s true what they say: ‘startups don’t get murdered, they commit suicide,’” says Outridge. “And that’s really what happened with us [at TapTank].” Outridge insists that the problem in her failed startup was her core team; a completely separate school of thought from the financially sound Grant Cardone’s of the technology industry and other private sectors.

“Choose your co-founders well,” she urges. “People need to be really passionate about building a company with you, not just building a product.” One major problem she noticed? “You start making excuses for people, like, ‘maybe I’m being too hard on them.’ But they either don’t have the talent, motivation or desire. I needed to focus the business model, to scrap the old team and build a new one. Talking about [this is…] still really raw for me, but you have to have good leadership.”

Leadership is one thing startup founders are either good at, or they miss the mark completely on.

Enter Trevor Owens, a 24-year-old New Yorker with an incredible work ethic. Oh, and Owens is CEO and founder of Lean Startup Machine, which claims it’s the world’s “leading workshop on Lean Startup methodologies.” (Note: both the average and median age of company founders when they started their current companies was 40, according to onstartups.com.) They’re not lying, either: to date, Lean Startup Machine has launched a series of more than 50 founder-centric workshops in more than 30 countries and 5 continents around the world – and that’s just since 2011.

Lean Startup Machine has since generated almost a million dollars in revenue. Owens formerly worked at Polaris Ventures before sticking a leg out with a few friends to make Lean Startup Machine a reality. “When I was trying to start my own company, I noticed a lot of other [companies and brands] making mistakes and having difficulties, and I just saw the immense benefit [of going out on my own],” said Owens. “Over time I just started to get more and more passionate about the idea, and as of January 2012, we became a company.”

This turnaround time is impressive on its own, but even more so considering the vast majority of startups (somewhere around 85 percent) don’t make it past the six-month window, even with initial funding. But Trevor is the exception, not the rule. “Most companies have too much money and waste all of it,” says Owens. “I gave myself a year to make it: 50 workshops (and LeanStartupMachine hit 50 last month, in September 2012). Every company has a limited time spend, and if you don’t get there fast enough, it’s time to move on.”

But “moving on” to company status and staying in startup mode is a variable choice that even some monetized products and brands don’t choose to utilize. Sites like Match.com, a fully monetized online dating website that matches daters up based on personality and other selected preferences, are still LLCed up until the very last moment they can’t be. Some startups never even make it to LLC status, which costs a mere $200 in some states like Delaware.

Bouncing back

Fortunately, and unsurprisingly, Alain Paquin rebounded from what could have been a career-ending (albeit economic) failure. (Fact: a large majority of entrepreneurs are serial.) Shortly after Komunik was sold, Benoit Ethier, a friend and wealthy investor, cut him a check for a huge sum of money, which he immediately used to fund his current company, Whatsnexx, which specializes in empowering marketers to engage social media users across platforms. “I’ll forever be grateful to my friend for that loan,” says Paquin. Whatsnexx brings in a hefty amount in annual revenue now.

The bottom line: “Every successful startup founder knows that connections are everything and that you have to utilize them,” says Jeremy Goldman, former executive at startup-turned-company Temptu, founder of a digital marketing group called PEED, and author of Going Social, which is rated top on Amazon.com even before it’s release.

As any business-savvy CEO knows, revenue is one of the other invaluable keys to success, that elusive term. “If you don’t have a business plan, you have nothing,” says Cardone. “So many startups underestimate their business plan.” Cardone also notes that startups need to seriously consider the time and effort it takes to sell their idea to angel investors, especially in a culture where one in maybe 50 startups make it past an initial seed round. “A startup company needs to not save the world,” says Cardone. “I get approached about six times a week by people looking to get in on my new ventures. But the entrepreneur has to learn to cut through all of the noise.”

Zenophon Abraham, CEO of Zennie62, cut through the noise with online simulations (think fantasy football) used in several colleges and classrooms throughout America. At $12.50 a buy, these sims are much cheaper than your average textbook. In 2001, Zennie single handedly designed, developed and launched Sports Business Simulations with two sims: The Oakland Baseball Simworld and another one, called XFL Simworld.

Before that, he looked in the mirror. “I removed a 7-year-old umbilical cord of public service from myself, and I did not know what I was going to do,” says Abraham. “I had long hair and a beard – all of a sudden, I was just like ‘what am I doing here?’” Shortly after, Abraham met Dan Rascher, who was with the University of San Francisco Sport Management Program. In six years, Abraham taught himself to code and then deftly created Sports Business Simulations with Mark Anthony Jones, which grew to be valued at over $8 million. Then, “Michael (Bean, head of Forio Business Simulations in San Francisco and the server host for SBS) began to treat me as just another customer, after we had what could be called a brotherly relationship. Forget that SBS was the first business established around the Forio Tech. Forget that I went against the wishes of my EVP who wanted to have her husband program a new game because she didn’t trust Michael. But…after seven years of paying them more than 4K a year for server access, we started making late payments [due to issues with paying customers]. Michael sent an email that he was going to reduce our server cost and give SBS a new life. I was happy.” Then, Abraham got an invoice that took him by surprise. “I reacted with anger and threatened to sue Michael,” says Zennie. “On December 13, he pulled the plug.”

“It was like someone killed my son, and I don’t have kids.” Brutal? Sure. But a self-proclaimed early adopter of mobile and video-based channels, Abraham reinvented himself yet again and is now the CEO of his newest venture, Zennie62, a blog network based in California. 

Having a plan

Learn from Abraham’s mistakes, but maintain a sense of optimism: that not every startup is destined to fail. (There isn’t an exact number on how many startups fail each year, or over a five or ten-year span since most go largely undocumented.) Most startups have to learn to change focus – or change their audience entirely – before riding the (elusive) train to success.

Take the case study of Jason Goldberg and Bradford Shellhammer, for instance. The two fashion-savvy Internet moguls created a website they initially called Fabulis, a social networking platform that catered exclusively to the gay male populous. Initially, their revenue stream was fairly steady, but the drop-off was big.

On realizing they had to rapidly shift their idea or lose everything, a 10-person team shrunk down to three, and Goldberg shot into sales mode, landed a seed rounding of funding, and launching Fab.com, a successful flash-deals website now based in Manhattan’s Flatiron District. Fab.com is now growing at a rapid rate and even hiring across its individual business units (business development and editorial gigs are listed on Linkedin). But are Fab.com and sites like it (YouTube was almost a failed venture, too) the exception? “Absolutely, yes,” says Cardone. Without a business plan that spells out your revenue stream, he says, investors aren’t going to shell out. Be prepared to lay it all out there to get some gain.

Identifying the problem

Many companies get past the business stage and don’t quite know where to go – TapTank Inc. is a prime example of that failed methodology. “We were working for the clients for a long time,” says Outridge. “Whatever they wanted, we did.” Abraham, who’s agreed to partner with friend Outridge on a new venture, echoes that sentiment:  I would say keeping your focus is crucial. After a while, it got hard and I didn’t keep my focus. We weren’t making money, and I took my eye off the ball. I sought other sources of income.”

Grant Cardone cites another startup, a now-successful investment software company* based in Chicago with a similar issue: underselling their product and working in the wrong (albeit systematic) ways. Cardone advised company executives to raise the price of that specific software by three times the current asking price; in 30 days, the company doubled its sales numbers and clientele.

“Lots of people also tinker with the product’s features,” says Cardone. “They really should have been getting in front of investors, showing them what they had, getting criticism for it. Good content is not winning the day, unfortunately.” Other startup founders would disagree, but you have to admit: the guy’s got a point. Without the crucial combination of money, investors who are invested in the product, trust and focus, startups don’t have a chance.

Says Goldman, who’s embarking on a new venture soon with two designers, two community managers and one co-founder, “So much of being a success in the startup industry is building relationships, keeping them, and focus. [See…] Just because you focus doesn’t mean you’re going to succeed, but if you don’t focus you definitely won’t succeed.”

What is ‘winning the day’? What is winning at all, even? “One thing someone told me that really stuck with me is that culture beats speed,” says Trevor Owen, founder of Lean Startup Machine based in New York City. “In the long run, you have to focus on building that long-term perspective and a unique team who can execute something. Where another startup might look for someone who’s more experienced, we look for someone with the right attitude and the right talent and we help develop them.”

And if all else fails (no pun intended), startup founders should absolutely know when to call things off and move on, says Outridge. “[Ultimately] I learned a lot and made a great product. And I’m proud of that.”

And great products, well, they sell.

Just look at Apple.

* Name of the software company is undisclosed at this time.

Image Credit: David Silverman/Getty Images

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