Start-ups fail because they have no users

I didn’t have the luxury of attending much of Echelon earlier this week; Joi was in town for only 2 days, which meant our schedule was packed full. Apart from the “New early-stage venture funding and incubator models” panel that Joi was on, and a quick round of the start-ups on display on level 5 of Matrix@Biopolis, I missed everything else.

Thanks to e27’s write-ups, I was able to play catch-up well after the event had ended. Vinod’s case study titled “Only One Reason Why Start-ups Fail, No Money” gives some solid advice to aspiring entrepreneurs on adopting a laser-like focus on simplifying product features, and customer engagement early on to refine the product. However, I detected several undertones that gave me sufficient pause to pen this post to offer an alternative perspective.

Disclaimer: Vinod is a good friend of mine, and definitely has a ton more experience as an entrepreneur than me. My comments are based entirely off Joash Wee’s write-up of Vinod’s talk and comments to the post, and may fail to take into account any nuances and subtle details brought up by Vinod that were not reflected in Joash’s article. My comments are also probably relevant only for scrappy web start-ups who need smaller amounts of capital to launch their services.

Shoot for the Moon

One can’t help but admit that Singapore and Asia Pacific has next-to-zero track record in producing outliers in the global tech start-up landscape. Credible and experienced investors are in short supply, especially so in the early seed/series-A stage. The start-up ecosystem across the region resembles a desert, with the rare oasis or two. The odds that we’ll produce a spectacular outlier are (currently) low, which is also why we have yet to see serious private venture money being pumped into the region.

Hotmail, Facebook and Twitter are (the) exceptions. Most of us are not going to create these once-a-year, spectacular outliers. Whilst it’s nice to aspire, it’s better to plan for realistic success.

comment by Andy Croll to e27’s article “[Case Study] Vinod – Only One Reason Why Companies Fail, No Money

Andy was speaking as an entrepreneur, by advising his peers to keep themselves firmly grounded instead of getting caught up with delusions of grandeur. And rightfully so; I cannot imagine any investor would consider megalomania as a virtue in the entrepreneurs they fund.

However, “planning for realistic success” and “shooting for the moon” are business objectives mindsets that reside on opposite ends of the spectrum; it is inconceivable for entrepreneurs to optimize for both. The investor psychology is such that the only investments that matter are those that plan on “shooting for the moon”, for it will be those spectacular-outliers-in-the-making that will bring home the bacon for their funds. Having more entrepreneurs learn to build credible plans for world domination (and sell them well to investors) is the only way we can attract serious private venture money to this region and increase our odds of a spectacular outlier. Post-financing execution is important, but ultimately pointless if our start-ups are not able to attract investments to begin with.

I’m probably going to get into trouble for saying this, but if you’re a tech entrepreneur and you aren’t dreaming big, unless you’re in this to change the world and/or monetary reward doesn’t matter, your risk-to-reward curve is probably not going to make sense in the long run. If it’s fame and/or money that you’re after, you’re likely to be better off looking for other less risky options. Entrepreneurship definitely isn’t a career path for the faint-hearted.

The User is King

I also detected an undertone suggesting that for start-ups, monetization (i.e. deciding on a viable business model) is at least as important, if not more so, than focusing on users. Building for acquisition was also purported to be a bad idea, and that VC money was only really needed for cashflow-negative start-ups building towards an exit based on exponential user/usage growth.

What I was trying to get at was that building for acquisition is not a good idea. If you don’t get acquired you’re screwed. Youtube was perhaps one of the few web companies that I think really needed VC money. They blew 30 million in 6 months coz of bandwidth costs. If Youtube didn’t get acquired, I guarantee you they will not be around today.

So unless you’re doing it as a side project/hobby (like koprol) or you have another stable business that constantly generates good profits, I wouldn’t bet on a startup that is working towards an exit without a business model.

clarification by Vinod Nair, to e27’s article “[Case Study] Vinod – Only One Reason Why Companies Fail, No Money

Building for acquisition is typically a fallback; a tactical decision made by investors and entrepreneurs after the two- or three-way horse race is lost. There are also instances where building for acquisition makes sense, i.e. in a spin-out situation from a large company that later gets re-acquired for its product/user synergies, or with “copycat” start-ups operating in large homogenous markets where the global incumbent is not competing in.

Youtube was none of the above. Google obviously saw value in the purchase to fork out US$1.65b in stock, and today continues to work on realizing its value in the ever-changing tech landscape. I’m sure other buyers would have stepped in to scoop up Youtube, even if Google had passed. The important part of the story is that the investors and entrepreneurs made money, and some of that wealth and experience has cycled back into the tech start-up ecosystem in the Valley. We need that sort of virtuous cycle here in Asia Pacific; one nice exit or a string of smallish to medium-sized exits is probably all we need to have our own “Golden Age” in start-up land.

I get worried each time I am pitched by entrepreneurs who talk up monetization and business models and spend insufficient time on their product/service. Nothing can be more important to early-stage start-ups than your users. The team should be entirely focused around establishing and refining its user and product metrics, and collecting and analyzing user data. Do plenty of A/B testing and rapidly iterate to fix any flattening adoption. As the rest of the team toils over the product, the CEO should ensure that there is sufficient cashflow to tide the team over the next hump or two, until sufficient user data are collected and product hypotheses tested. The CEO should also be preparing for the pitch for that next financing round – it’s never too early to get started.

Summary

Worrying about product pricing before the team figures out a repeatable model for user attraction and retention puts the cart well before the horse. Early stage start-ups that worry about profitability and actually succeed in doing so early on in their life are either on to something great, or have stunted their potential by charging their users too early. Otherwise, they end up as ‘nice little businesses’ that are profitable for its owners, but wouldn’t appeal to investors.

Without the right user and product metrics, start-ups will not have enough compelling data to prove that their hypotheses are or have the potential to be correct. Institutional investors won’t buy into the story, and eventually those start-ups run out of cash and join the deadpool.

Running out of money in itself won’t lead to failure if investors see potential in the hypotheses and inject funds to give the team more runway. Instead, it is a by-product of not having enough user traction.

About James Chan

James Chan is an entrepreneur, investor, geek, photographer and husband/father based out of Singapore. Apart from frequent travels to Vietnam, Myanmar and Indonesia for work, James can also be found online via his trusty 15" Retina MacBook Pro or iPhone 6+.