Solid Advice for Startups – and a Startup Post Mortem

I found this article the other day which gives good advice to people thinking about making a startup company. I know from experience that these are key points worth taking seriously.

I started a small company with two friends/associates in February 2007. We had all seen The Secret (a positive thinking DVD) the year before but realised that you couldn’t buy it easily in the UK at all. So we set up a website to sell it and imported a load from the US. I researched adwords and made a great site that converted visitors to purchasing at 40%!

Anyway, we sold tons of DVDs to customers and shops (and even other wholesalers) in the UK and Europe in a very short period of time. We quickly discovered that selling in bulk is way easier than selling tons of individual units. So we discussed how scale up the business such as outsourcing the shipping because it was becoming laborious and time consuming and we all had other main businesses to take care of at the same time. We successfully outsourced the shipping to a 3rd party (who also sold DVDs via Amazon for us) but they took quite a lot of management and we weren’t getting the level of accuracy that we’d have liked.

All of a sudden we started to find it *really* hard to get the DVDs from the US and eventually we discovered that this was because an “official” UK wholesaler was going to be selling The Secret soon and the makers of the secret had forbidden any of the US wholesalers from selling to anyone in the UK! Clearly they didn’t want to share in the “wealth creation”! This actually made us all feel pretty gutted (they were actually pretty rude about the whole thing) but we tried to find alternative ways to carry on selling The Secret (we had tons of orders but no stock) but we kept hitting dead ends.

So in the end we decided to sell products on an affiliate basis instead of direct because it was a lot easier that way and we made a special website to do that from. By this point I had actually put in a lot more work than my colleagues and we discussed this and they agreed to catch up their portion of the work whilst I took a break and focussed on programming my current game. However, they never did step up to the plate and do anything and thus the business ground to a halt.

Eventually I got them to sign the business over to me in case I wanted to do anything with it, but by then I was doing so well with my game programming that I didn’t have the time or inclination to renew the business. So I closed it down last year to reduce admin. It feels sad to close down a business, but at least we made a profit whilst we were trading and we were a roaring success for a while. But because it was not the primary business for all of us, it eventually fizzled out. Sure we could blame the radical shift in the business model that was forced upon us by the makers of The Secret, but I’m sure that we could have made the new site work well if we had put some decent effort into it.

The failing was with us, there’s no point in denying that. However, we all learnt many things. We all found out what parts of a business we didn’t like doing and where our strengths lay, and now we are better equipped for starting another business should we ever need do (I’m bound to start another business one day, it’s in my nature!)

Analysis

So here’s what I believe we got right and wrong from the 13 sentences in the article I linked to above:

1. Pick good cofounders: The original idea was from one of the cofounders and they were both certainly well versed in the subject matter of The Secret and had good ideas, but they weren’t that interested (and were too busy) in the nitty gritty of running a business. Nor was I interested in the nitty gritty, but someone had to do the work and thus I ended up doing it. Ideally I’d have started a business with cofounders that were prepared to put in an equal effort into areas requiring equal skill unless we agreed otherwise at the start. If you agree to split profits 3 ways but then you do >50% of the work, it’s a sure-fire recipe for feeling demotivated, trust me.

2. Launch fast: Yeah did a pretty good job of this once the idea was put forward. But we could have done it even faster with more focus if we didn’t have other main businesses. Also if we’d had the idea 6 months earlier we could have made a killing and stockpiled tons of DVDs before the business model changed. Ah, hindsight.

3. Let your idea evolve: Originally we were selling to individuals but once wholesale orders started coming through we realised this was a much easier way to make bigger profits more quickly and so we tried to attract more of those orders. Later on the business model changed completely to having no stock and making affiliate sales, but that never got off the ground (as I’ve mentioned in the top half of this article).

4. Understand your users: I believe that all of us understood what our customers wanted well and our website reflected that, hence the very successful conversion rate.

5. Better to make a few users love you than a lot ambivalent: We offered good prices, fast delivery and had a no quibbles refund policy. Also we made sure that wholesalers were treated well. Lots of people recommended the site to their friends which showed that the customers were happy.

6. Offer surprisingly good customer service: I’ve kinda covered this in point 5. It’s essential of course.

7. You make what you measure: I measured the adwords performance and site conversion rate very carefully and tweaked them to push up the efficiency and it worked. I also kept the accounts up-to-date because looking at the money coming in made us all feel excited and motivated.

8. Spend little: We ran the business from our homes so there were no major overheads. The only real expenses, apart from a few domains and setting up a company, were buying the actual DVDs and then shipping them to customers. Mainly we used my credit cards because this allowed us to spend thousands of pounds that we didn’t need to pay off for about 50 days.

9. Get ramen profitable: We weren’t in business long enough for this to happen. We were making a profit, but also there were other competitors and slowly the margins got eroded as price wars began.

10. Avoid distractions: Having other main businesses was a major distraction and no doubt a major fail point of the business.

11. Don’t get demoralized: We did get pretty demoralised when we discovered that we could no longer buy stock. Then we worked out an alternative business model and got a great site made for it. But by then I guess the momentum had worn off and we didn’t make it happen.

12. Don’t give up: We didn’t give up initially, but I took a break thinking that the other guys would keep their word and carry it on so I could come back to it fresh. But they never did. So maybe they gave up first and then I did? They may not view their inattention as giving up, but certainly the business was static by that point. Of course eventually I closed the business and that is giving up, but that was so I could focus my strengths in a more profitable area (making casual games), and that’s working out very well indeed.

13. Deals fall through: This didn’t really apply to us unless we count the fact that our US wholesale source of DVDs totally dried up.

Some Advice

It’s worth mentioning that starting a business with friends will strain your relationship at points especially if you feel that someone is not pulling their weight. However, you’ll also learn a lot more about your friends and how they cope with certain situations (good or bad). We did have lots of fun too though such as getting creative with marketing ideas and visualising success etc. We are all still good friends – maybe better friends because of it. This is largely because we aimed to discuss things maturely and positively (always looking for solutions) without getting angry and in that I believe we succeeded.

I now know that it’s important to identify the skills that will be needed to run the company and to make sure that they are evenly split across the founders. For example I ended up doing all of the accounts, a large part of the initial web development and optimisation, the Adwords stuff, lots of the customer service etc. The other guys did lots of stuff too, but it did feel somewhat weighted towards me in terms of skills and time. For example one of the founders didn’t really know anything about accounts or how to make a webpage (they do know now though :-) ). Clearly it’s important that you all have a general understanding of the core aspects of running a business and that you each have some special unique skills that you can bring to the table. Later on you should be able to outsource a lot of the day to day work anyway, but someone has to do it right at the beginning (unless you start with outsourcing in mind from day one I guess).

Also we waited too long before starting a proper company and getting a company bank account set up (actually the bank took ages too). This meant that we all had to juggle a lot of our personal money round at the beginning and it was very time consuming, complicated, and a bit stressful. Knowing that your personal credit card is maxed out with stock that you have to sell ASAP can induce anxiety – in fact I made sure that the other guys bought some stock themselves so that they understood the sense of urgency I felt when it was my own money on the line. We only waited a month or so before setting up a proper company, but it was still too long. Mainly the problem was not having a single bank account (which Paypal was pointed at). Perhaps one of us should have just quickly set up a brand new personal account that we all paid an agreed upon amount of startup capital into – except that none of us actually had any decent capital spare and I had the biggest limits on my credit cards.

Hopefully if my ex-business partners ever read this they will feel that it’s a fair and accurate account of our business. I’ll admit that as the business grew more hectic and I was doing more and more I probably put them under pressure in a way which may have led them to do less work, so it was counter-productive. It’s worth bearing that sort of thing in mind for sure.

And there we have it, a summary of what went right and wrong with my little foray into a specialist DVD wholesale business (gosh that sounds like dodgy movies, wink wink, nudge nudge, instead of positive thinking films). Anyway, I hope that you found it useful.

4 Responses to “Solid Advice for Startups – and a Startup Post Mortem”

  1. Iain Key Says:

    Nice article Jake, running a business has easily got to be one of the most stressful things to do in life.

    I actually think your point 12 should really be “knowing when to let go” or when it’s ok to give up. You put a lot into your own business and sometimes, like in your situation, it just time to let go because things just aren’t working for one reason or another.

    If you look at their biography’s most of the people who “make it big”, such as those on Dragons Den, have started and failed in business many many times before they make it.
    It’s well worth remembering that as well as, on the other hand, don’t give up at the first hurdle because there are always challenges.

    Just my 2p (or in today’s climate approx £500 ;-) )
    Iain

  2. Brian Says:

    This video offers some more great advice to people who want to do a startup: http://www.omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08/00:00.000

    :)

  3. Rob R Says:

    Very good article! I have started many companies over the last 30 yrs and I need to emphasize one very important point! Try to have control and ownership over the product! Although you make a point that you had some issues with co founders, ultimately, the business failed because you no longer had product. Without that you had no business left, everything else just caved in because of that one point.

  4. Grey Alien Games Says:

    Thanks for your comments everyone.

    Yes Iain, failing fast is definitely worth bearing in mind, but in this case I feel that we gave up too soon and could have made it work and it may well have been making me a decent passive income by now…However, if we had put effort in for a good while and it was generating peanuts then I may have shut it down to focus on bigger money makers.

    Rob R: Absolutely, someone else controlled the product and had a stranglehold on the supply chain. That’s why we tried to change to multiple products (on an affiliate basis) to have our eggs in many baskets but we never made that take off properly. I certainly prefer selling my own games that I have control over and I also think that an ebook is a great thing to sell as there is no physical media.