A Tale of Two Start-Ups from the Brink of Failure to Success
April 5, 2011
Here is a true tale of two start-ups. It seemed the best of product concepts, it turned into the worst of product concepts. The birth of a new start-up. It started with the spring of promise , quickly became the winter of despair and was renewed as the spring of hope once more. It is both entertaining, instructive, enlightening on how a fairly typical Silicon Valley tech start-up can go from launch to stardom.
Plan A
Two guys started a software start-up in their homes. They were self-funded. They hired a seasoned and a recent college graduate as their first employees. They developed a small software package, which was pre-sold to a couple of customers. There weren’t big sales, but enough to cover their expenses. It looked as though they had initial market traction, and they were excited.
Plan B
Then an unexpected disaster struck. There was a big shift in the market, the anticipated new demand vaporized overnight. They decided to attempt to convert their software company into a hardware component company in the same market segment. They contacted investors. Most weren’t interested, but one was willing to hear their proposal. The venture capitalist’s response was “It won’t work”; the market was too small for this type of low volume hardware to interest investors. BUT the venture capitalist had an idea. He thought there would be a market explosion in the next few years, but not for components, but for a new state-of-the-system. Would this small merry start-up be willing to build a system instead?
The start-up was thrilled to find the investor even if it wasn’t for their idea, but a different one in the same industry. BUT there was a catch. The investor would only be willing to fund them if they could find and convince two senior people to join them – one had to be someone with extensive experience with developing the hardware for such systems and the other had to be someone with experience in the developing the complex system software. So they searched, contacted everyone they knew, and success. They found two willing cohorts. One co-founder was so excited that he got a vanity license plate to proclaim his success!
The investor was as thrilled as they were. While they were searching for these new co-founders, the investor had located a co-lead investor with deep pockets who had made his fortune in the very same industry. This new investor brought both money and industry contacts. Both investors knew a system project of this magnitude would require at least $100 million before the start-up ever recorded a cent of revenue.
One of the original co-founder was appointed CEO and the other became head of the component development group. Likewise, the two new founders began building the system and software development groups. In the meantime, the investors looked to fill out the senior management team. They needed to add a seasoned marketing, sales, and more senior managers to the team. The search began.
The Apple Cart Is Turned Upside Down
Everything seemed like it was going well. The organization was expanding and the big development effort was underway. However, the investors wanted some personnel changes. It was less than a year after the start when the investors decided the co-founder and CEO had to be replaced. In their minds, this was a very big project and the capital required was significant. They wanted someone who had managed and grown a large organization in that position and the original co-founder was simply not qualified. The investors asked him to step down and leave the company, which he did. They had also found a more seasoned manager to head the component group and the other co-founder was asked to step down into a lower position. He wouldn’t take a lessor role, tempers flared, and he chose to leave as well. With the amount of money at stack, the investors wanted better odds of success. Don’t fret too much over the co-founders, the received a huge stock options to take their leave.
The newly employed marketing and sales team started to contact potential customers about their new system and gauge the market reception. The new system was start-of-the art, bleeding edge technology, the next generation and targeted at tier 1 companies, the corporate icons of the industry. Many of their former contacts wouldn’t even return calls. These big companies didn’t like the start-up or the product. Why? Buying such an expensive system from a newbie was too risky and they wanted to reduce their risk. They wanted a proven supplier with financial strength and a track record. A company in business for years, with an on-time delivery schedule, and a stellar customer service organization. The sales person concluded the sales cycle would be long and they would meet much customer resistance. Oops, plan B was a big miscalculation. Now what?
Plan C
They looked at the tier 2 and tier 3 companies, and researched what products they bought. They discovered these companies bought refurbished equipment; the hand-me-downs from the tier 1 players. They wanted to buy new equipment, but couldn’t afford it. The refurbished equipment was more than a decade old and not fully depreciated. A lot of technology changes had occurred between when that equipment had been designed and when it got to the lower tier companies. Why not use the advances in technology to design a low cost version of yesterday’s technology? It was a technical tweek from the start-of-the-art design. So off they went with the new plan.
Plan C Makes Ripples
BUT not everyone wanted the new plan, not everyone agreed with the conclusion reached by the sales and marketing team. There was dissention everywhere. The investors disagreed: one supported the change and the other did not. Each of the investors gathered support from fractions of the senior team members. A rift was created and the shouting started, neither side would yield. Some of the newly hired members of the senior management team resigned. Disgusted and disillusioned, one whole side submitted their resignation in mass one day. The investors were staring at the possibility of their investment becoming worthless fast. The investors cried, “No! Don’t quit. We’ll find a resolution to this issue”. All the employees sat around gossiping and rumor mongering for days. They were left to wonder whether they would still have a job tomorrow.
Plan D
Finally, an agreement was reached. Split the small start-up in two – thirty employees to build the start-of-the-art, better-than-sliced-bread system and the rest to build the low cost, low tech system. BUT after the split was announced, the legalities and negotiations dragged on for months. Fortunately, both investors had deep pockets (and possibly egos) and so the company remained operational and funded. During this uncertain time, no work got done. Employees came to work and sat around talking. They had no motivation. Progress was at a standstill.
In the end, both companies produced a huge return for the investors. They breathed a sigh of relief; they had pulled two rabbits out of the hat. BUT the products did not fair equally as well in the marketplace. The low cost system sold like hot cakes. So many tier 2/3 companies bought it that the tier 1 companies could no longer snub this fledging start-up. The state-of-the-art system didn’t sell. The tier 1 companies weren’t interested.
The real interesting part is that this is not all that usual in start-ups.
9 Lessons Learned
1. The first product concept rarely ever works and sometimes not even the second works.
2. Sometimes the market shifts unexpectedly. You can’t always anticipate the change, but you have to respond to it.
3. The latest and greatest technology doesn’t always produce a winning start-up.
4. When big time investors fund a start-up, the founders are often whisked out of the way.
5. Investors and shareholders can be difficult to manage. You don’t get to take their money and go do what you want.
6. A big change to the plan produces a period of non-productivity.
7. Every start-up wants to do business with the big companies. That doesn’t mean a corporate icon wants to do business with a start-up.
8. A big company can’t ignore a small start-up that has stirred up a plague of locusts.
9. Those unimaginable eventst, those not on the list of risk management possibilities, are always the most difficult. If the risk can be imagined then it is manageable. It is those unforeseen ones that sleep is lost over.
Filed under: Funny Stories and Humor
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