6 reasons why my startup, which received funding, failed

Original author: Stephan Schmidt
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During the dot com boom, my friends and I founded a startup where I was the technical director. We have developed a knowledge management system. It was a combination of blogs, wiki, document management system, social bookmarking. We started in 1999, which was a bit early for wiki and blogs (Movable Type entered the market in 2001). Social bookmarks, in fact, were exactly the same as Delicious would later become. In addition to these new and great ideas (at least for 1999), we had three great features:
  • You could assign tags to everything: skills, people, links, documents, blog posts, wiki pages. Something now called folksonomy . Labels could correlate with other labels and form ontologies. Tags could refer to other documents, posts, people.
  • Everything could be rated from 1 to 5.
  • We had a smart fuzzy search based on tags and ratings. For example, when searching for “people with Oracle knowledge”, SQL Server specialists also got into the search results, for example, to staff a team if there were no free Oracle gurus.

We had some money - seed investments that we received from the venture capital fund, and we were quite happily and successfully developing our application. We showed it to many users and received very favorable reviews from large companies. So why did the startup fail and I'm not a millionaire?

There were a myriad of reasons for this, but, as I wrote in the Rules of a Successful Business , the rules for a successful business are simple:
  • Consumer is the most important thing in your business;
  • The best business plan is to sell people the things they want;
  • A business is successful if your income exceeds your expenses.

Thus, the most important thing is to sell, but many startups forget about it. And so are we. After much thought, I came to the following 6 reasons for the failure (besides the fact that the venture capital market collapsed when we needed money and no one could find a source of financing):
  • We did not sell anything;
  • We did not sell anything;
  • We did not sell anything;
  • The market “window” has not yet been opened;
  • We were too focused on technology;
  • We had the wrong business model.

Now in more detail.

We did not sell anything, part 1

We did not sell anything, because we did not have a product that could be sold. As good engineers, we wanted to wait until the product is ready, and already then start selling. We started selling when we had an almost ready first version. This led us to be too focused on development and not enough on sales. We thought that without a finished product we cannot go to customers and try to sell. Slowly we learned two things:
  • You do not need a product to start selling it. The first meetings with clients were quite possible, we only have screenshots, slides and interface prototypes on hand. Since the topic was new for our customers, first of all, we had to sell the concept itself (wiki, blogs, tags), and this could be done without a finished product.
  • Start selling before you start a company. Start selling now! You do not need a company to sell new ideas to customers. Start selling now! When people really want to buy your product - register a company.

We did not sell anything, part 2

We did not sell anything, because we did not have a salesman. Bummer. No, well, of course, we were looking for a salesperson, and we even wrote in our business plan: “Hiring a person who will be involved in sales is a high priority task.” This took time and resources, but we did not have them. If you want to sell something, hire a sales cofounder or hire someone from the start.

We did not sell anything, part 3

We didn’t sell anything, because customers wouldn’t buy anything. The product was excellent, and the reviews are wonderful, it’s just that the customers took too long to resolve. We wanted to sell the knowledge management system from the bottom up: to project managers, and through them to companies. But each time, when the next boss heard about the knowledge management system, he decided that this decision should be on his agenda. Thus, the question moved along the chain of command, and there was no person making the final decision. We talked to irrelevant people and lost a ton of time. Ask people if they have the authority to decide on the purchase of your product. Leave only those who answer “yes” quickly. We had several large companies in terms of sales, and I’m sure that, sooner or later, they would buy our product, but as a startup, we did not have the opportunity to wait. SAP, for example, can easily wait a year for a sale. Selling enterprise software takes a lot of time.

Market “window” has not yet been opened

The market “window” has not yet been opened. No one has heard of blogs, wikis or tags. We had to explain to our customers the benefits of wiki (Everyone can edit! Everything! How dare they?), Blogs (Everyone can have an opinion and express it! Absolutely everyone!) And tags (They can build ontologies! We need a committee to define an ontology for everyone! Otherwise, chaos will swallow us!). A few years later, it would be much easier to sell the blog, wiki and tags.

We were too focused on technology.

As founders, we were passionate about technology. We worked with EJB (still not a mature technology at that time), we spat on XML everywhere and transformed it into HTML using XSLT (not fast enough), wrote our ORM - what a stupid idea (Hibernate was not yet available), tried to do everything CSS-driven (but we didn’t have enough knowledge). This led to repeated rewriting and took a lot of our time. Technology discussions took a long time and drove us down, and we would have to talk about our customers.

We had the wrong business model

Nowhere is simpler: we had the wrong business model. Selling software can one day bring a lot of money, but it takes time. We invested money in development, sales took a huge amount of time, and we burned all the money without receiving any income.

The best business model could be: advise clients on knowledge management issues and start with an open source product.

We advised companies on how to organize knowledge management, how to use the wiki, but we didn’t take money for it, as it was part of our sales process. By focusing on consultations and issuing invoices, we would ensure a stable income.

Later I worked on open source products when I developed SnipSnap. SnipSnap borrowed a small part of the ideas of our startup - wiki and blogs, and was distributed freely. Many people downloaded it and installed it on their computers. We made the installation process really very simple, because SnipSnap spread very quickly.

I once spoke with the boss of one very large company, and he said that the wiki somehow didn’t take root with them - it painfully somehow was unstructured and chaotic. In fact, I knew that they had several installations of my program in their company. :-) As many are doing now - we could put our foot in the ajar door with our open source product, and then sell them support and bells and whistles. Later, companies paid us money to add new features to SnipSnap, to make it more scalable, and more. But in 1999, we did not know as much about business models as we know now.

What can you learn from my mistakes? I don’t know, but start selling. I personally learned a lot - how to manage, how to create a product, what business models come from, where the money comes from and how it is to be a technical director.

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