Wrong money. The Story of a Startup - Part III

After a long lull, we continue our series of articles on creating a startup. In this third part, we will tell how we got financing for our project in a month and how and why we lost it after 4 months.

This will be a story about money that is easy at first glance and how important is the understanding and trust between the developer and the investor.

For those who have not read the previous parts: Part I about ideas and Part II about the pilot.

As you remember from the second part, we built and rebuilt the project pilot for 4 months and at the end of this period we had a service that can already be was to show and start moving forward.

December 2008 New Year's gift.In the fall of 2008, the executive director left us. He left for a higher paid and promising position. This in some way affected the general condition of the company, but as they say, life goes on. In December 2008, he visited us and offered to finance the project from his employers. Even more so - to finance not only our current project, but also several subsequent ideas. The head of this company was the same executive director.

At that moment, it seemed to us a real gift in the midst of an economic crisis and we agreed without hesitation. For this business, a company was organized that paid all the costs of developing the project. It seems that this only happens in a fairy tale.

January 2009 Quick jerk.Encouraged by the fact that not only we believe in this project, but also investors, we have significantly advanced in the development of the project: we licked it, concluded all the contracts, rented equipment and much more. At the end of January, we were ready for the big launch, which was scheduled for early February.

Everything seems to be cool, the money is going, the service is getting better, but the alarming calls are beginning to make themselves felt. The more you go into the forest, the more persistently you ask questions about when will we start earning and a big agreement (Joint Venture Agreement) is not signed (the investor is always traveling). We naively attribute this all to the investor’s insufficient understanding of the business and explain how it all happens. It seems everyone is calm.

February 2009 Barcamp Baltics 2009. To present the project to the general public, we chose BarCamp Baltics 2009, which was held in Riga. Our service was the general sponsor of this event. After the presentation and long and interesting conversations, we became even more convinced that our service is in demand.

During this event, and for some time after it, we received a huge number of comments, suggestions, and tips, which largely determined the fate of the service. Against this background, we again heard alarming calls from the investor. The alarm was that it seemed that the third month had already gone, we were the sponsors of the event, I still have no money. Here we began to think about the need to go into another direct conversation with the investor, without an intermediary represented by the director.

March 2009 The end of illusions.In March, we realized that the “fairy-tale” option did not fail :) The investor refused to talk, the main papers were not signed, the financing was simply stopped. The director described the situation with inarticulate lowing.

All this month we were in limbo and did not know what to do with all this ... but it turned out to be just flowers.

April 2009 Fake. In April, we decided to continue the project, take over all contracts with suppliers and move on. Then three wonderful events happened ...

1. The first - the latest version of the service with the entire customer base and with all backups was disabled. It turns out the company in the person of the director and investors did not pay a single bill for the hosting and server. 2,000 euros hung around his neck in one day, which had to be taken out of his own pocket.
2. The second - it turns out in recent months no one bothered to pay taxes, which also hung on the company in the amount of 3,000 euros.
3. Third, and most fun, it turns out that the money that came to the company was given as a loan with a repayment period and many other wonderful conditions that were specified in the agreements between investors and the notorious director. Of course, we were not aware of these cases :) After taking over all the cases, we got a debt to investors in the amount of 35,000 euros.

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Total according to the results of work with the investor: minus 40 000 euros, which we remained owed. So we lived these four months. It seems like getting the money, we literally immediately had to stay :)

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And now the conclusions ...

From this, I tell you, a very unpleasant experience, we have learned for ourselves very clear and clear principles for working with business angels and investors.

• Joint Venture Agreement (JVA) - this is your bible for the entire period of work with the investor. Without this paper, do not even lift a finger. It will be complex, voluminous and very confusing, but do not be too lazy to study it in detail.
• Never work with an investor who does not understand for whom and what exactly you are doing. This will be the greatest mistake.
• “I’m a developer, let other people do business” will lead you to a very similar situation. Very fast. Therefore, you need to understand with whom and what contracts are concluded. Who, to whom and what should.
• The output should be clear and transparent. Exit - this is how you will diverge from the investor in different situations. The investor will lose interest, the project will not burn out or you will get tired of it, all this should be clear from the very beginning!
• Request a report! You are required to report on what has been done, you can demand a report on money, where it was received from, when, how, where it was spent, etc. It is very important.
• Respond to “wake-up calls” immediately and quickly! If you feel that something is wrong - immediately meet with the investor, if he does not want to, then stop the project until everything is clarified.

We strongly advise you to adhere to these rules, they will allow you to avoid major failures in cooperation. All the same applies to situations when you just start a business with a friend (a friend is money, you are development). This is absolutely the same situation and you can step on the same rake.

Further in our cycle:
Part IV - do not hang up your nose. About our experience in negotiations with venture funds.

Previously:
Part I - how ideas are born and part II - building a pilot