In 2017 we had our first zero at Blossom Street Ventures. I’ll withhold the name of the company, but I do want to share key learnings from that experience. Below is an autopsy of a dead company.
Build a product for one market. Our portfolio company built phenomenal technology but didn’t actually productize for a specific use case. The technology had many use cases and applications, but we failed to apply it to one single product and focus that product on one single market. As a result, we weren’t recognized in any field, we weren’t thought leaders, and the sales team never focused on one niche were it could become an expert selling a solution. We were dumb generalists selling a technology with no domain expertise or industry focus. Build a real product, focus on one market and use case, and don’t move to a new market until you’ve successfully established your company in that original market.
Watch your sales cycle and customer set up. Although we signed contracts with big names like Facebook and Yahoo, it was always a custom project which took up team resources and had a very long sales cycle. As a result, our customers were not profitable enough given the money we spent closing and servicing them. Revisiting the point above, had we built a product around the technology, we could have said to a prospect “here is the product, if it’s a fit for you, sign this nifty SaaS contract.” If the product wasn’t a fit, no problem, we could have moved on and focused on our real prospects we could sell to profitably.
Cash is king. We did not grow fast enough given the cash burn. Period. If you’re going to burn cash, make sure you’re growing fast enough such that you can easily justify raising a new round at a new valuation when you’ve only got 8 months of cash left. If the revenue to burn ratio is too high and growth rate too low, if you’re lucky you’ll end up with a down round. If you’re unlucky, you’ll die.
Know your limitations. One of the issues with this company is we had a CEO who thought he was good at sales. On top of that he loved selling, so he made himself the head of sales. As a result we never had good sales leadership and never had the benefit of a real sales professional building out a team of AE’s, watching the sales cycle, monitoring metrics like ACV and upsells, etc. It’s important to know your limitations, identify them, and then hire talent to take duties off your plate which you’re not well suited for. In regards to sales specifically, selling is incredibly hard, it’s a skillset many people can’t develop, and I have tremendous respect for sales personnel who do it well and hit quota consistently. At the early stages of any business, the founder will do most of the selling, but professionalize this function as soon as you can afford it by bringing on real sales talent.
Know when it’s time to exit. Ironically enough, we had three opportunities to exit this business. In one case, we would have actually made money and the other two cases, we would have recouped about 80 cents on the dollar. In hindsight these would have been fantastic outcomes rather than zeroing out, but at the time these outcomes were viewed as very disappointing and no one wanted to get behind them. Each time we should have seen the exit through: investors would get some money back, the VC could focus on other companies in their portfolio, and the founders get to start fresh as ‘serial founders’. Knowing when it’s time to walk away is valuable.
Don’t drink too much of the Kool-Aid. Believing in your product and potential is wonderful, but don’t let it blind you. Be aware and honest about where the market is going, where you’re positioned in that market, market acceptance and adoption of your product, customer perception, and perhaps most importantly your cash position relative to burn. Rather than spending your time thinking about the where you will be in 5 years, think about the risks and issues that face your business today and what you’re doing to address them. Once you’ve got a handle on today’s problems and are realistic about them, you can move on to thinking about the future.
Stay heads down. Your time is well spent visiting with major customers, major prospects, working with your employees on their problems, putting out content that makes you a thought leader in your space, and attending the biggest conference in your industry once a year. Your time is poorly spent talking to VC outside of your fundraising cycles, going to startup events, mentoring other startups, spending too much time with current investors, putting together massive decks for board meetings, etc. Basically spend more time building the business and less time on everything else.
I could go on and may add to this post in the future, but above are the major flaws that ultimately resulted in the death of a venture backed company that could have had a better outcome.
Visit us at blossomstreetventures.com and email me directly at firstname.lastname@example.org. All founders and funds welcome! We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.