Wednesday, November 7, 2007

Entrepreneurial Case Study: A true failure story.

… and it happens everyday - different people and different businesses.

A year and change ago, I was asked to make an investment in a venture – a couple of smart technologist with previous management experience creating a VOIP related company. I knew the entrepreneurs and was absolutely convinced that they are smart and dedicated. The business model, however, did not make sense to me and I did not invest.

The company raised around $500K. A few months later, they are looking for money and are considering a change in the business model… and later, a new angel investor with another $500K or so has influenced the team to focus on an originally tangent mobile technology to create a novel consumer application.

The new business model and technology was intriguing and reached for my check book! But before signing, met with the two founders and the recent addition to the team, a brilliant new CEO with big telecom and carrier experience.

So, I met the team and my check book was quickly back in my pocket. The founders were showing early stages of the “founder disease” – we are in love with what we are building, we know exactly how it should work, if we only need money to scale the product and market it, the company is worth millions and WE will build it into a new giant. In short, I found the team non-coachable and looking only for a check book and not a partner. I also found the new hotshot CEO Was suffering from the “big company syndrome” -- very limited early stage experience; I did it at XYZ so I can do it here, we had a $100 mil budget, over 300 developers and delivered the product in only 3 years - oopps there is no mega dollar budget, only a few developers, a very limited and rapidly depleting bank account – no room for error.

Later news … the team had made some progress and a pilot demo was built, VCs were approached and a term sheet was received at a great valuation (dilution of about 30%).

The team did not accept the term sheet. One of the clauses (standard in almost 100% of VC term sheets) was the ability for the board (not the VC alone) to augment the management team, if needed -- the team was offended!

A few months later the team is disassembled, the hot shot CEO is after the next big dream, my simple investigation indicates that the mobile product is falling far short what was promised, the founders are doing some consulting to make the ends meet and are looking for someone to buy the Intellectual property. What a shame! Very smart people, so many hours of hard work, over a million dollar down the drain, a great business concept (the second version), and a true failure story.

The question is who’s fault is it? The founders are of the opinion that they had a great team and a great idea and that the VC’s destroyed their dream company and that the angel seed investors failed them by not giving them more money.

I guess my opinion is rather clear… what do you think?


Adam Steen said...

Great Post and I agree with your opinion!

In Iowa, I see business owners chasing $ and still argue with valuation/other partners if they are even lucky enough to have a business model capable of receiving an equity investment. When we watch capital go into a business we definitely see the benefit of bringing in partners rather than just $.

Anonymous said...

Hi there

Awesome post, just want to say thanks for the share