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This is actually sort of old news, but I had to let the dust settle before I could talk publicly about this. About late April this year, we decided to pull the plug on the start-up. It was a really hard decision, but there are times where it makes more sense to throw in the towel rather than pursue a journey leading to a blackhole.

Although it ended in failure.. I consider it to be an incredible journey. A slight recap.

• November 2006: I quit my job at Ray-o-Vac. At the time, I had one partner
• January 2007: A preliminary alpha version of the product comes out. My partner decides to go his own way.
• Early Feburary 2007: I do some consulting work for a web 2.0 start-up in Newport Beach, and pitch my business idea to them. They accept the idea and I carve out an agreement where I own 30% of their company and they absorb all intellectual property rights of my prototype product
• March 2007: The guy who originally hired me to help him resigns.. ooh.. that must suck.
• Late April 2007: Start-up plug is pulled

So why pull the start-up? Here are the two main reasons.

lack of liquidity
Liquidity is the aspect of transforming your business to cash. When you work with tangible properties like a physical product, the liquidity aspect is clearer. But software is not a tangible physical product, so much thought has to be put into it.

At the end of the day, we realized we could not create a sustainable business model for the company because we were relying way too much on an m&a (merger and acquisition) situation.

Not an m&a candidate
Our product (a social networking maps site) really wasn’t a good m&a candidate because we were late to market probably about a year. Google MyMaps coming out and Yelps marketing expansion to So Cal really did us in.

One may ask.. ‘do I regret doing this?’ And the answer is a definite no. The journey was fraught with mistakes, failures, and some successes. But in this journey, there was no way I would have learned this much about business and people if I hadn’t taken the risk. So what did I learn from all this…

Be careful of mixing friends and business

Oh man.. I never ever thought this would happen to me. But it did. My partner decided to go his separate way, and we had a verbal agreement to terminate his stake in the business. Later on down the line, I merged with another start-up company in Newport Beach, and we were reallocating stock ownership in the new company since I came on board.

I tell my friend about this, and then he ‘strongly asks’ for share in the new company even after the verbal agreement. The problem here is my friend was mixing friendship and business while I was not. The problem got bad enough where it really put the entire friendship on the line and if things didn’t go according to my terms, the friendship probably would have been thrown away.

Luckily for me.. the situation was resolved and things were forgiven. As much as we hate to admit it, money brings out the true character in people, for better or for worse. Morale of the story.. document all agreements. Even termination agreements with friends.

Validate your business models/propositions early

A big mistake we made was not to validate our business model early. We assumed everything would pan out, and instead focused on the technical software aspect of the business. And oh boy.. we got burned on this.

At the end of the day, all of our business model validations were falling flat. All of them pretty much were wrong or unachievable.

Morale of the story.. when creating a prototype of your product, don’t validate just the technical feasibility of doing it, but also validate a microcosm of the business model.

That way, you can make an intelligent decision whether to pull out early or not.

Validate Metrics
I remember when talking a lot about the start-up early on, I threw out this ridiculous numbers of potential growth and our expected valuation. All these metrics were wrong because we didn’t validate the business model and propositions.

Metrics can make the difference between success or failure in any organization. For example.. think about the war in Iraq. Information that they had weapons of mass destruction totally influenced our policy direction in that region. Can you imagine what the world would be like today if we had invalidated those findings back then?

Answer the question.. what is the ‘value’ in your company?
Our product at the end of the day consisted of using third party api services of other companies such as Google and Amazon. So in a sense our product was mainly software glue connected third parties.

When you develop a product that consists of other products, you have to be careful that you are creating something of value. For instance, if I create an algorithm that can determine when recessions could potentially occur, that has some great value. The value is in the mathematical analysis of complex events. And with that type of value, you can fetch a high price for it.

Unfortunately for our product, we simply merged a bunch of things together, and it wasn’t necessarily the case where the aggregation of the parts created something of greater value.

Asking yourself what is the ‘value’ of your company is really important in the software world because you can get caught up in the technical intricacies of how to develop something, but forget where the value is coming from.

On further analysis on our product, there really was no real reason for anyone to buy us because we simply just integrating a bunch of other stuff into our software. In a sense, it was easily reproducible.

Morale of the story: even if you are working on a software start-up, standard business rules and forces still apply. You need to consider barriers of entry, competition, suppliers, buyers, etc. Tech start-ups are not exempt from these rules

Exit Strategy

It is a hard discussion, but when partnering up with anyone, you need to talk about the possible outcomes of the start-up. For us, we really didn’t talk about an exit strategy early, because I think we were afraid to. Because if we talked about it, the analysis would probably lead towards the start-up failing.

It is an important talk to have.. you need to consider if you want to be simply cash positive, sell out by an m&a, or otherwise.

At the end of the day, I have to say I am quite humbled. Back then I was naïve with visions of grandeur. And really that’s not completely a bad thing, but I did not do my homework in several areas which would have pointed out to the start-up having big problems.

I’ll end this post with a story I read in some business book (it goes something like this..)

The vice-president of a company decided to make a million dollar bet in investing in this one product. After the launch of the product, it failed miserably. The vice-president came into the CEOs office with his resignation letter expecting to be canned.

The CEO responded with, “Why would I fire you now? You just took a million dollar training lesson.”

The CEO continued with, “It’s ok to make mistakes once. Make the same mistake twice, and I’ll fire you.”

As much as people sometimes preach and tell us the wise ways of the world and business.. you sometimes can’t learn unless you make the mistakes. As long as you don’t make them twice

Fin

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