How a Startup Blew 1M USD in 1 year
How to kill a Startup, and what we learned from it. Being in this industry for a number of years now, we get to hear all kinds of Startup stories. I will not reveal the founding team behind this to protect their identity, and also to respect their privacy. They have given me permission to share their story – so that other Startups can benefit from their mistakes and further grow the Startup industry. I will re-write the story a little so that it is from an investor point of view, so that Startup Founders can understand the mindset of an investor.
Note by the Founding Team:
Our Startup is one of the extreme cases of how things can go wrong in the Startup world. I hope our blood and tears can help future Startups avoid the mistakes that we went through. It was a great lesson in life, as not only we are affected, but our friends, family, and investors too. We are indebted by the kindness they have shown, and we hope to one day fix all this.
The Pitch – How They Got the Money That Killed A Startup
They pitched everywhere. They looked under every rock and went to great lengths to secure funding. In fact, that was their only goal – to get money for their idea on a piece of paper. There were nice hockey stick charts, beautiful promises, great problem & solution reasoning, and so on. There were even full Excel projections with all the metrics you can think of in the business model. This is of course with the help of their background – they were MBA holders from pretty good universities, and have worked at high-growth, high-profile Startups beforehand.
Looking back, they told me that the reason they got funding was that they looked hard enough. That’s how some Startups got their funding. The work done though, was not simple – as they were looking for a huge sum for an idea on a piece of paper. They also had to give out a larger piece of equity, somewhere between 30-40% and with some unfriendly terms. They easily went through 70+ investors and got their money from the last guy. In our experience, this industry is very new, and there are new Investors out there funding Startups – and often their first Investments are for learning purposes. If you are an Investor, we recommend that you invest via a Startup Investor Network or go through at least 20-50 Startups before picking one to invest in. At Nexea, we go through easily 500 per year.
Was it worth it? They say there must have been some better way to have done it. From our experience, we say that money kills startups faster than anything else – be it mistakes, founders mindset, market, or product. In their case, spending went crazy, all in the name of getting the Startup running faster. The faster you run, the harder you fall, right? Especially when you were still a toddler Startup. Money was being thrown away to secure more revenue – but the speed they were doing it meant that had to run at a negative gross profit.
The Little Things That Kill A Startup
Protecting the Idea
Not sharing the business idea with anyone else meant that not many were able to give feedback. It meant that they had no proof that people would use the product at the start. They did a test with some 20 people, but they were family & close friends – which meant biased answers. Not to point any fingers, but family & friends unintentionally tend to ALWAYS give good feedback – which is a sure way to kill a Startup.
They even went to the lengths of making investors sign NDAs to protect their idea – but what if I said that it does not really matter? Most ideas can be copied – but the execution, time, money, passion and talent that make the difference. Just look at touchscreen phones in Japan before Apple made a thing out of it. Share your ideas, get people to use your product, learn, and improve. Iteration is a key component of the product design process.
The founders thought that since they need to show the huge growth they promised to investors, they can just use they got to pump revenues up further. Sounds good, right? Maybe. Because of the speed of growth they promised, they have had to incentivise users to spend money with them rather than someplace else. This meant that they have a negative gross profit (buy high, sell low). Incentivised users are there mainly because there are incentives. The moment you take it away, they disappear. It’s why Startups have had to incentivise users in the first place. Many large Startups do this – including Uber who incentivises both passengers and drivers (That post talks about why Uber mimics a charity).
We chose to incentivise our users to grow fast. Many startups did the same. We had enough cash. What we did not know is that it affects our ability to raise more money drastically if we came short on our targets. Could we have chosen to grow slower but more steadily? Perhaps.
Trouble came when revenues did not meet our targets for our Investors to continue funding us. It’s very easy to set revenue targets but very difficult when it comes to getting in sales figures to meet those targets. Setting unrealistic targets to justify unrealistic valuations is a sure way to kill a Startup.
This is something that represents the chicken and egg problem. When you don’t have talent, you don’t have progress. When you have talent, you have a huge operational cost. Looking back, they gave away equity to raise money to hire expensive talent. They could have shared their equity with talent to be able to pay less. But they decided to keep more equity for themselves and increase the burn rate instead. That really burned their cash fast. At the idea stage, MVP testing stage, pre-revenue stage, or even revenue stage, the average Startup should definitely try to keep their burn rate to less than RM10k/month which means burning at least Rm120k/yr. This particular Startup we are talking about burned about RM100-350k/month in their first 2 years, translating to a negative cash flow of RM1.2m to RM4.2m a year – the final blow to kill a Startup.
Final words from the Founders:
There were many things we may not have done right. We have been told that there was not enough “real work” done. Some of us even think we believed in fake growth numbers.
We surely believed that a rock-star team can overcome any challenge we were facing, not realising that the costs of such a team would kill us first.
That’s all in the past now. We hope you fail enough for you to learn, but not enough to kill a Startup of yours – only for your Startup to come out stronger.