How I Killed A 120000 Deal And Quit My Startup
And what you can learn from it
Last year in August, the future of my startup was looking glamourous. I’d returned from a trip to Thailand hosted and funded by an incubator. We attended the Techsauce Summit 2019 and got tons of new prospects.
Even better, on coming back to India, we had a Berlin-based investor ready to invest in our company.
We were a B2B SaaS startup aiming to change the way how retailers sell their products offline by using machine learning for unique insights on pricing.
Ultimately, we wanted to bring dynamic pricing to brick-and-mortar stores. That, in my experience, was enough to turn heads at a networking event. (I won’t go into much detail, but you can read about our whole journey here.)
But the praise for the concept didn’t translate into sales. The retail market wasn’t mature enough for our technology and thus, we were looking towards foreign markets. Since we were targeting fashion and apparel retailers, we were definitely interested in Europe.
The investor in Berlin was offering us €120K for 5% of the company. Since he was a director at a renowned European accelerator that I won’t name, we also got tons of free resources.
He had pooled money from investors to fund five startups in total which had a promising future in Europe.
The deal would’ve valued us at €2.4 million.
But we killed it.
Our current investor wasn’t satisfied with the cap table (the equity split between investors and founders).
While I and my co-founder were willing to give up some equity, the new investors were worried that by the time we raise our Series A round, our (the founders’) equity wouldn’t be enough to motivate us.
Simply put, they feared that our equity would dilute and we wouldn’t be motivated to run the business.
The existing investor then wanted us to buy them out at a ridiculous price that we couldn’t afford.
Our failure to solve the deadlock took the deal off the table.
Wait the story isn’t over yet. We wouldn’t be calling ourselves entrepreneurs if we gave up.
Though we did try to pull some shady strings after the deal was off, it never really worked. The bottom line was, we were stuck in India with a couple of clients that couldn’t pay our bills.
So we changed our product altogether. At this point, we couldn’t risk trusting our existing investors and left the company.
We then incorporated a new one to make something from scratch. This time, we had our eye on restaurants.
The restaurant industry in India was adopting technology better than fashion retailers. So we made all sorts of products for them like:
An application to enable customers to see the menu by scanning a QR code and order directly without calling the waiter
Dashboards for restaurant owners to view insights
Helping restaurant procurement managers to order their supplies digitally (Yes, it still happens on paper)
Having done all this, we called our Berlin-based investor for feedback.
He told us that it’s a bad idea and that we would fail. He further told us to take time off and think about what we wanted to do.
We didn’t listen to him. And now we couldn’t go back to him for money.
But even worse, it turns out he was right when he said we’d fail. 4 months later, with almost no sales, we closed the shop.
Here are some mistakes we made that you should try to avoid.
Going After a Very Large Market
One of the first mistakes we made was we started pitching to any restaurant that would listen to us.
It was part desperation and part lack of planning.
Not every restaurant was suited to our product. You wouldn’t find small cafes making huge investments in technology for example.
Whatever your market is, you need to make an effort to find the early adopters. These are the people who are willing to try it out. Once they do, they’ll act as references for other users who are afraid to try new or untested products.
In hindsight, we should’ve gone to the wealthy and luxurious restaurants. The reason is simple — they have money to spend.
This lesson is so simple that it hides in plain sight. You can spend days convincing a person that a product is good for him. But even if he’s convinced, what good does it do if he doesn’t have money to spend?
The restaurants we spoke to instead, were defaulting on payments to their suppliers. They didn’t have enough cash flow to survive for two months, let alone spend on technological upgrades.
When you set out to sell your product/services, identify the smallest segment you can sell to and ensure they have money to spend.
Not Understanding Market Dynamics
The presence of competition is never really a problem. But I’m not talking about other companies trying to eat into our business.
We had a different kind of problem. Restaurants were already using our competitors’ ERP software for various purposes. For our system to work, we had two choices:
Make our own ERP
Integrate with their ERPs
The first one is time-consuming. And even if we made our own ERP, the restaurant isn’t going to change the software they’ve been using for a decade.
The second one seems fine until you realize that there are hundreds of ERPs on the market. Each ERP integration would take tons of time, negotiation, and additional costs.
We neither had the time nor the money to do it.
If we were cautious of the industry players in the first place, we wouldn’t have stepped into the market.
The Biggest Mistake We Made
Peter Theil’s Zero to One (source)
This chart is given by Peter Thiel in his book, Zero to One. Let’s understand what each of these means:
Complex sales: When an average sale is seven figures or more, it takes months, if not years to close. An example of a complex sale is Elon Musk convincing NASA to sign billion-dollar contracts to replace the decommissioned space shuttle with SpaceX’s vessel. At this point, it’s worth it for the CEO to invest his time in such deals.
Personal Sales: This is where the average deal sizes range from $10K-$100K. The CEO doesn’t do every sale. Instead, there’s a sales process that everyone follows.
Deadzone: For a product around $1000 dollars, there’s no distribution channel to reach customers. Suppose you make a software for convenience stores to manage inventory. You can’t employ salespeople since the price is too low and there’s no specific medium to reach these store owners. TV ads for example are too broad. Until you reach them, you can’t sell the product. It’s a big distribution bottleneck.
Marketing and Advertising: For instance, P&G does not pay people to send laundry detergent door-to-door. It uses TV ads, newspapers, etc to reach their consumers.
Viral Marketing: A product is viral if its core functionality encourages users to invite their friends to become users too. Examples are Facebook and Paypal.
We were in the dead zone. Our product was exactly around $1000 (I couldn’t believe it when I read Zero to One).
Being in the dead zone, we kept losing money until we could no longer take it. No one was willing to pay huge sums for the product which could justify the time it takes to sell to restaurants.
Entrepreneurs Are Like Like Cockroaches
As any founder will tell you, the entrepreneurial life is like that of a cockroach — crawl through a lot of shit and try not to die.
That is why, even after all this, we asked ourselves, what’s next?
I returned to writing and my co-founder now helps me manage the online business. We take on copywriting projects and are working through other aspects of our business.
We were able to write a book and build an email list which is hopefully the start of another adventure.
I don’t know what will happen in the future. But what I do know is I’ll keep making mistakes and I’ll keep writing about them, hoping that you don’t make the same ones.
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