Why startups fail – and why Moonfruit didn’t

What I’m listening to while I type: Time (The Revelator)

Couple of interesting things this morning via the UK Business Forums’ e-flyer that I thought worth a quick post.

First, the infographic below on ‘Why startups fail’ out of research by the Startup Genome Project.

 

Their ‘five core dimensions’ for success are pretty obvious: to succeed you need customers, the right product, a good team, a good/innovative business model, and a funding cushion. These are things all startup founders know but, as I’ve said before, knowing isn’t doing.

What’s interesting about the research is that they link success directly to keeping those  five core dimensions in balance during the scaling of the business – that ‘proper’ scaling means moving all five forward at the same pace, while allowing any of the five to grow faster than the others, leads to premature scaling and to startup failure. 

I’m not sure how much the concept equates to the reality, where growth is more like The Blob than those nice neat graphs, and when founder vision is half panic, half lightbulb moments. I’ll be looking in more detail at the project in a future post, in the meantime, here’s the story on Techcrunch.

The other useful piece in the e-flyer was this video interview with Moonfruit’s Joe White.

I mentioned his wife, Wendy Tan White, in my earlier post about women founders, and his perspective on the differences between running Moonfruit now and running it in the early days, pre-2000 dotcom crash, is interesting.

Among the points he makes are:

  • Despite the recession, the UK tech sector is “crazily buoyant” right now compared to other sectors
  • The recession is good for businesses like Moonfruit because, as they saw in 2008, the recession prompts more people to set up online businesses, as a secondary or main income, that make use of the sort of services Moonfruit supplies
  • It’s easier to launch a new web-tech business now because it’s cheaper, you need less startup capital to get going
  • The downside of that is that VCs expect you to be further down the road before you come to them.

His advice to startups? “Get as much done as you can before you go after funding.”

Women founders and web creativity

What I’m listening to while I type: Balls and Hello Love

Had a nice email from Poppy Dinsey last week, of the fabulous WIWT (What I Wore Today).

Dinsey, in what I suspect is fairly typical female founder self-deprecation, said it was too early to say what worked and what didn’t with WIWT: “we’re such babies still”.  But it’s an interesting project, not least because in its first incarnation, WIWT was very much about Dinsey’s personality and a simple idea with minimal tech needs.

I used WIWT in an earlier post as an example of founders who can’t code but who find creative ways to build their personal online brand into a successful business.

Women seem to be doing particularly well at this – building what are fairly traditional businesses at heart (selling products, ads, mags) on the back of a strong personal web presence. Think Natalie Massenet or Tavi Gevinson , but also women founders like Wendy Tan White who, after having children, switched direction from computing and tech to doing an MA in Textile Design and finding a new creative vision that revitalised her company, Moonfruit.

One of the things that particularly interests me is that creative element in relation to these women founders. Dinsey is a  great writer. I don’t believe that just sticking pictures of her outfits online would have worked without the writing and the personality that came through her blog and Twitter writing.

As Dinsey points out in this video, her web writing had already kick-started the large following that she took with her to WIWT:


 
Similarly, Massanet’s Net-a-Porter was as much about giving an authoritative perspective on fashion trends as about selling the clothes. As a fashion journalist, she understood what makes women spend £4 on a copy of Vogue, and the pleasure they get from windowshopping the magazine. She knew that content was integral to building Net-a-Porter as an experience worth the site visitor’s time.

Here’s Massenet (back in 2007) talking about how they fused scorching customer service with good content:

“We very much believe in investment in the experience and making it richer, having more content, more video, but always fused with this idea that there’s an end experience, an end user who’s going to be expecting a delivery.”


 Except, I have several problems with what I’ve written so far.

First, by talking about women’s business creativity (particularly as an alternative to tech skills) am I reinforcing the generally-held belief that women’s businesses are inherently soft and fuzzy and, well, female (ie selling frocks not gadgets)?

Or is the problem that the decision makers around them are a largely amorphous group of men: middle-class, white, educated, married…, who assume that selling, or even better building, gadgets is a safer investment bet than selling frocks

However apologetic the interviewer in the Massenet video is, he doesn’t show that he understands the market she’s successfully engaged in, nor seems to believe he should understand it – there’s not a lot of evidence of good prep in his questions.

(And, as an aside, while I’m pleased that Hu was pleased, how’s this for undermining a CEO when she’s working! A TechCrunch Disrupt proposal)

There are several great projects out there trying to get more attention for women founders in web-tech;  TheNextWomen and Women2 for instance. But the reality is that women face the same barriers to progress in starting their own business as they do in the corporate workplace – only 14% of UK businesses are owned by women and women are half as likely to be entrepreneurially active as men (source: Prowess 2)

That’s something I saw myself, doing the rounds of VCs and Angels in 2010, with events like Seedcamp – great though it was – still overwhelmingly male, white and under 30.

According to those Prowess figures, “the most entrepreneurial age group for women globally is 35-44”  but when was the last time you saw a women in her 40s pitching at Seedcamp? (Aside from me!)

Women are more likely to take a break from fulltime work to have children in their late 20s and early 30s and, either because we find we can’t just step back on the career ladder again on the same rung we stepped off it, or because we don’t want to (if ‘coding twists the brain’, try giving birth), we’re more likely to look for alternative career paths post-children because family life means living life differently.

I don’t agree with everything she says, but Penelope Trunk writes with authority about the combined pressure of serial start-ups and family life, including why women opt to slow the pace  (Women don’t want to do start-ups. They want children).

But, just to get back to the creative vs coding idea. I still think that web-tech founders should know how to code, at least a bit, if only because knowing some code makes it easier to manage the tech in your web start-up.

But I do worry that there may be too much emphasis being put on knowing code (yes – including from me) and that that in itself is creating another barrier for women start-ups.

Not because fewer women can code, but because coding is part of the tech thing, part of the guy web thing (not for nothing are porn, sport and gambling among the biggest online money earners).

The web is ubiquitous. We use it without thinking about the tech behind it – like we use dishwashers without thinking of the electronics, or watch TV without seeing the pixels moving.

So maybe the tech isn’t actually what matters on the web – it’s the creativity of the idea; coming up with a different way for people to use the web tool to do something they already want to do (surf porn, gamble, buy frocks) or to do something they didn’t know they wanted to do (tweet, fight, manage a cartoon farm…).

I’m not suggesting that’s something women are better at. I’m not making any generalisations about women and creativity (where’s the data?). But I am suggesting that the assumption that every web-tech start-up team needs a tech-hot partner  may be missing the point of the web.

What didn’t work. Part 2: funding

What I’m listening to while I type: Let England Shake

“I love this idea of wrong thinking – of encouraging people who have ideas to go see if they work and not dismissing them just because they sound like the wrong solution. No one has the right answer at the beginning. I made 5,127 prototypes of the bagless vacuum before I got it right.” James Dyson

So, and in case you hadn’t yet spotted it, there’s a page on this site called ‘What didn’t’. Right now it’s just a handful of web-tech ideas that didn’t last, written up as a list. What I hope to create eventually is a database of great ideas that launched and folded – Dyson’s “wrong thinking” legacy.

 @duncanburbidge  pointed me to Techcrunch’s fabulous Deadpool, which tags stories of closures and likely closures. It’s an interesting list but difficult to work with in terms of useful data.

I want the information in the WWWD database to be a) written by the founder/s who were there at the birth and death of the project to provide valid qualitative data, and b) structured so that it can be interpreted by researchers (I’m still working on that, suggestions appreciated).

Anyway, this post is part two of my look at the things that I believe make web-tech start-up success more likely, based on my experience of things going wrong. Number two on my list of five critical things is:

2. Don’t only spend your own money.

It’ll cost you to launch your own web-tech business. You’ll have to spend some of your own money, maybe a lot of it, but my advice is that if you only spend your own money it will fail. You need investors.

I left newspapers in 2006 to work on my first web-tech project, a user-generated news site. Since then I’ve launched Sweeble (web/print self-publishing) and a couple of traditional websites.

But over five years, I’ve only earned about £7k in salary from all these projects. My time for the last four years has been paid for by working part-time at Staffordshire University, teaching web-based journalism for c£17k pa.

The most I earned in newspapers was £35k pa, in 2002 when I was managing editor of a bunch of Northcliffe’s thisis… local news websites. Allowing for the fact that my salary dropped when I went back to the newsroom ‘proper’ as news editor, I could still expect to have earned around £30k a year had I stayed in newspapers and not gone all entrepreneurial on myself.

So far I’ve lost around £75k in salary over five years.  Potentially more if you add that, when I worked for the man instead of myself, I was promoted most years (I’m a bright woman – just clearly bad at being an entrepreneur).

But let’s stick with that figure of £75k as theoretical lost earnings. That’s one cost of my investing time in my several start-ups.

The other is a bit more direct. I’ve also put £18k of my own savings into my business, and expect to put in a further £5k in this financial year. And I owe £10k to family investors that I’d like to think I could repay one day.

So, cost to me of spending five years trying to get my web-tech start-ups to fly – £108k.

I mentioned investment.

The Government has invested in me and my bright ideas with two R&D grants in five years, totalling £27k. Thank you Tony and Gordon.

I’ve had private investors interested several times, had meetings with Angels and VCs and, in 2010, had an offer and term sheet on the table from Midven Ltd for £255k.

However, the issue is not about me chipping in cash myself vs spending someone else’s money, it’s about the importance of investment, and in particular Angel and venture capital (VC) investment in making it more likely that a start-up will succeed.

There is plenty of academic research in this area (I’ve quoted from a little of it) and the research shows three things:

1. There’s a link between Angel/VC  investment and growth for start-ups. Researchers disagree on whether this is primarily linked to VCs ability to ‘pick’ winners or ‘coach’ them:

“Although prior scholarship uniformly associates VC investment with positive outcomes for startups, this relationship is predicated upon two distinct mechanisms. VCs may be able to identify, preinvestment, those startups that are particularly likely to exhibit superior future performance, thus picking winners… Alternatively, VCs may provide postinvestment management expertise and connections, thus building winners” (Baum, Silverman, 2004)

2. VC investment in start-ups is not necessarily based on evidence of prior growth. Nor, despite what VCs say, is it about the quality of the founder/s:

“Given that venture-backed startups grow faster than their non-venture backed counterparts, we examine whether this distinctive growth path is already identifiable before the first round of venture capital funding. Our results indicate that the growth path of venture and non-venture backed firms cannot be distinguished before the former companies receive their venture funding.” (Davila, Foster, Gupta, 2003)

3. VC investment “signals” quality to other investors and makes further investment more likely. VC funding tells other agents in the network that a start-up is worth supporting:

“VC firms implicitly decide the survival and death of start-ups by choosing which of them to fund… By investing or refusing to do so that signals the level of risk for each start-up and indirectly modify the risk evaluation and the behaviour of the other agents of the system.” (Ferrary, Granovetter, 2009)

Basically, if you get VC cash your tech-web start-up is more likely to attract further investment and more likely to get to market ahead of competitors.

Let’s add some figures to that .

VC funding accounted for 21% of all investment in UK firms between 2000 and 2009. However, there have been year-on-year falls in VC investment since 2008 and investment is around a third of what it was in 2000. The first quarter of this year saw a 4% drop in UK investments and, in the US, the  fall has continued into Q3.

Alongside the fall in investment, a 2010 report by Nesta identified that seed and first round funding had been hardest hit with VCs concentrating on re-investing in their existing portfolio, or focusing on later stage companies.

The report also pointed to a fall in the number of exits; an increase in the length of time taken to exit; and increase in firms needing more rounds of funding before reaching the exit stage.

There’s a nice outline of that process in Robin Klein’s post on TAG  about his involvement with Fizzback from first investment in 2005 to this year’s $80m exit sale. What you see is the close personal relationship between investor and founder and the ‘coaching’ role  Klein took on as first investor. He writes:

“Our relationship with Rob Keve, Fizzback’s founder, goes back about 15 years and we invested in IMI (Instant Market Intelligence – its former iteration) in 2005 – as part of the company’s small seed round. I well remember the 4 hours Rob and I spent driving to and from the Cotswolds every month during 2003 for the board meetings.

“Its initial vision was to address demand for rapid market research and new forms of customer insight – kind of vox pop via SMS. Selling a product to the market research community didn’t seem to me to be a place where we’d find good sized budgets. Rob had another much more appealing idea which he was running in parallel. A service to retailers and service providers which enabled consumers to provide feedback at the point of experience – in store, on the train etc – via their mobile phones – via SMS… This latter idea got me excited. I agreed to invest and join the board as Chairman.
 
“Rob and I pulled together a small group of angels – including Jonathan McKay – and what a great decision that was! Jonathan, who is a real enterprise software/services guru, took over the Chair in 2008 and helped Rob build the stellar sales team and been an invaluable guide to the business.
 
 “Step one back in 2005 was hire a small team… Operations head was Jonathan Morris (my son-in-law) – still the Operations Director of the group, often holding things together …. another reason for the soft spot for this company.”
Back in 2006, Robin and Saul Klein (I’ll return to their importance in UK tech-web) considered investing in my user-led news start-up. They didn’t in the end, but our paths cross again – Robin put me in touch with Richard Morross, at Moo, when I was still working out how to move forward on my self-publishing project, and Saul led Seedcamp and picked Sweeble as one of his ‘wildcard’ finalists in 2010.
 
To pull all this together – without investment you will run out of steam.
 
It’s hard to keep going on your own and having (the right) investor onboard does two things.
 
First, it ‘signals’ that your business is better than rest because of that VC’s reputation for ‘picking winners’. That attracts interest from press, other investors and the tech-web networks. 
 
Second, the investor brings ideas and people to the table. As ‘coaches’ they push you and help things happen faster than you could on your own.
 
Investors oil the wheels of your project’s progress.
 
Pre-investment

Pre-investment

 
 

Post-investment!

Post-investment!

 

What didn’t work. Part 1: coding

What I’m listening to while I type: Hunky Dory

I’ve had two failed start-ups and maybe I’ll have more over the next decade, so I have a vested interest in understanding what makes it more likely that one web-tech start-up will succeed and another one fail.

I’m hoping the research I’ve begun will come up with answers born out of the sweat and tears of entrepreneurs, investors and helpers who have been there and worn the start-up t-shirt. However, I’m going to get the ball rolling by talking about the things that my own experience has taught me.

Starting a web-tech business is like starting a band. You might play some gigs and get a decent following, but the likelihood is that within a couple of years you’ll have split up, given up, or reformed as a tribute band.

But… a tiny few of you will start selling records CDs downloads, and a smaller number will get a contract, and an even smaller number will get some Radio 1 airplay, and a tiny, tiny number of you will become Adele.

It’s like dreaming of winning the lottery, but winning because you’re actually good at something, not because the tooth fairy said your £1 would be the one. It’s not (just) about the money, it’s about standing in the sunbeam of peer recognition.

I digress. Where was I?

Ok, these are the five things that, based on my experience, I believe make web-tech start-up success more likely. There’ll be different and hopefully better lists as I talk to some of you and, if you’ve got suggestions, do feel free to comment or get in touch.

My list below might see obvious, but obvious doesn’t mean do-able. If there was always a direct link between us knowing what we needed to do and actually doing it, we’d all be a lot more successful and the planet wouldn’t be dying around us. So, my list:

  1. Do your own coding (at least to start with)
  2. Don’t only spend your own money
  3. Twitter chatter isn’t enough, good press and advertising lasts longer
  4. It’s the business model, not the business plan, that matters most
  5. Don’t get distracted.

I’ll cover the five over this and the next four posts. Here’s number one.

1. Do your own coding (at least to start with).

I can’t, and I really believe that’s the main reason my last start-up sank.

Expecting programmers to build something in code that you’ve drafted in Word, Excel, or as a notepad scribble – not good.

Not understanding programming languages well enough to be able to tell a) whether that’s a great programmer or great bullshitter sitting in front of you, or b) whether they’re standing at a coding crossroad and might be about to chose the road to obsolescence  –  also not good.

Not understanding the job of coding well enough to know how long you can realistically expect a programmer to take to do that “tweak” you thought of last night as you were falling asleep. Not good.

I’m not the only one who thinks being able to code matters for web-tech entrepreneurs. Here’s Fred Wilson,  of Union Square Ventures, saying the same thing earlier this year:

“Be technical, get technical, or find people you can be business partners with who are. Even if you are not going to do these things by yourself, it’s helpful to learn. It’s better to learn it to talk to technical people, and to evaluate if somebody technical is good or not.”

Stephan Schmidt, of blog codemonkeyism and his own failed start-up, puts “write code” as his number one advice to CTOs of start-ups. While serial entrepreneur David Cummings, blogs that every CEO should learn to code because it will make them “a better leader”. For reasons that include:

‘”You understand the technical architecture and trade-offs of different product decisions. You can call B.S. if a technical person pushes back on something being too difficult/time consuming.”

Being able to code, even a little, means being able to sketch your idea in a way that programmers will be able to follow and run with. It means being able to cobble together a working demo of your idea and be talking to possible investors, while every one else is still writing the brief and interviewing developers.

It means being the pack leader of your technical terriers.

Cesar MilanPlus coding twists the brain, in a useful way. Twitter co-founder Jack Dorsey (talking to Lisa Chow) gave a programmer’s perspective on why they had to come up with the name Twitter before they even started to code the concept:

‘CHOW: At the point that you decided on the name, how much of the idea of the company had been already discussed and decided?
DORSEY: I really wanted a name before we started work on the code because if you don’t name the code the same thing, then it becomes extremely confusing and then you have go in and rename all these variables and all these functions, and it’s just a mess. So I wanted the name before we even started work.’

And in case you wondered, Evan can code too. And obviously Mark, and Larry and Sergey and Bill and Dennis and … (although the other Mark can’t so I do need to interview him).

So what do you do if you’ve got the ideas but not the code skills? I’d suggest looking these options: