Around this time every year we look back to the prior year for tips on how to improve our business. I find it is easier to learn from mistakes than from successes, and even though we had a great year in 2011 there were a few companies that didn’t work out. These losses had some valuable lessons for young companies.
So what went wrong in 2011?
1. Conflict at the Top
The companies that didn’t work out all had multiple co-founders, as well as first time CEOs. Multiple people at the helm sounded good at first, but there were inevitable disagreements between founders about product and sales strategy. Unfortunately no one in the company had prior experience dealing with this situation. Eventually the board dug in and found that issues had been festering for a while.
2. Customized Software
One of the companies delivered exactly what the customer wanted, even if it meant a laundry list of unique features. Ultimately this created a Gordian Knot of software code that swamped product development, caused significant service issues, and made it hard for the company to recruit engineers.
3. Open Source vs Licensed Software
One company built their infrastructure on Oracle. This was fine at first, but over time competitors cut price and the Oracle fees prevented the company from following suit.
4. Sales Cycle
One company had early adopters and ‘friendly’ customers at the time we invested. They referenced great, but mainstream clients took over a year to close.
One company tried to sell their product before it was ready for prime time. The early adopters were disappointed and churned before the version 2.0 release.
What could we have done differently?
1. Recruit an Executive Chairman
It can be helpful for first-time CEOs to have mentorship from an Executive Chairman who has been through a cycle before. This is often preferable to replacing management and it enables the company to recruit a more senior advisor than they would otherwise be able to get as a full-time employee.
2. Distinguish between “what the customer wants” and “what the customer is willing to buy”
During due diligence we should have done mystery shopping across the competitive set to get an objective analysis of what features were absolutely necessary. After we invested we could have recruited an experienced product manager to help drive this conversation.
3. Open Source, Open Source, Open Source
No one can predict how software pricing will decline over time, so I strongly recommend building on open source unless there are extenuating circumstances.
4. Pivot to SMB Earlier
Sales cycle is the number one challenge for B2B businesses. In this instance the company should have migrated to SMB, and potentially launched a freemium offering, to accelerate demand.
5. Launch Slowly
Beta products require beta customers. If we waited until we had a hardened product before going main stream we could have prevented disappointed customers and poor reference sales.
As an investor there are other alternatives. For instance, when things really go wrong it can be in everyone’s best interest to start over. Employees get a clean break and a portion of the funding can be salvaged. This rarely happens because management assumes that the investors want to keep going and investors assume that management wants to keep going. Sometimes an honest conversation can save everyone time and money.