The 6 lessons on entrepreneurship I learned losing 22.092,22 euros on my first startup
Puoi leggere questo articolo in italiano sul mio blog matteoc.com
Intro: I’m not dumb. I’m just like you.
I lost some money. Precisely 22.092,22 euros on my first startup. I’m not here to celebrate failure. I’m not here to brag about how spectacularly I screwed up. And I’m not here to tell you anything you haven’t heard before. But I want to share my story, the exact sequence of events that led to the demise of my first online project and me losing 22k euros over a period of 6 years.
My name is Matteo. I run a consulting business these days. And — by the way — the business is going great. I started in 2011 and in the last 2 years I’ve doubled my business every year. I have great returning customers with steady retainers. Everything is going fine. But while I was developing my new business, I had the 2009 startup nagging me the whole time. It was only in May of 2016 that I was able to finally shut down 100% of this first project.
It all started in January 2009. I still had a day job (that I would quit in a couple of years) and I felt the call of the startup world. My call, specifically, was to innovate the cinema business.
I’ve always been a technology geek and I have delved in the movie business for several years. A technology expert and an entertainment expert is in the best position to innovate the cinema space, right?
Oh, I was so wrong!
But before we get any further, let me summarise my idea really quickly. I knew movies, I knew social media and I knew data: so I tried to connect these three components together by creating a search engine capable of instantly mashing up a ton of information from hundreds of different sources into a convenient dashboard. I called it Filmizer, and according to the Wayback Machine it looked something like this.
What could possibly go wrong?
As it turns out, a lot could and did. Let’s start from the most expensive mistake:
1. Rely on somebody else’s API. Cost: €10.555,84
I started my first solo business with a blind trust in the Google API. If you don’t know what an API is, think of it as an easy way to access somebody’s data and intelligence with their permission.
Most of the search activity that was needed to make my entire site work depended on the ability to use this great service.
I had played around with it and it worked fine at the beginning. So I set out to create all my technology around it. What I was doing — in practice — was setting up a massive point of failure that didn’t depend on me or anything I could do.
In 2010, a few months into beta testing, Google banned my application because it didn’t comply with the murky Terms & Conditions that regulated the use of their API.
As I exhausted my funds for development, I had a machine that depended on a system that I couldn’t use. I just wasted €9.600 in development and I didn’t have money left to rework the system.
I learned a painful and important lesson: companies are built around stuff they own. Companies are built around technologies that they control. Companies should own — or have a clear partnership — around all their core activities.
You can’t rely on some gatekeeper that could shut you down at any time. You don’t (save very rare exceptions) build a business on top of somebody else’s API, especially if it’s a single API and you don’t have a definite relationship with the owners of the API.
I wish I had known before, but I don’t feel bad thinking about this mistake. I know better now because of it, but it doesn’t make me mad anymore. I’ve come to terms with it. Instead I am still very angry about this second mistake.
2. Establish a LLC I never actually needed. Cost €8.388,90
When I was in Rome in 2009, dreaming up my first startup, I had a clear vision: my company wouldn’t be entangled in the complex Italian tax framework, I was going to found a US company.
So I set out and asked my tax advisor at the time to give me his advice on establishing a company. Delaware was the obvious choice. My guy had done this before for other clients and suggested I use some partner of his.
They ended up having me pay €4.594,16 to form the company. That’s around €4.000 more than it actually should cost. I ended up paying them €5,600 to handle the formation and first year of the fees of the company. I then realised that they were simply buying a service for €300 and selling it to me for €1000. A 333% markup for doing nothing at all!
I also had the bad idea of opening a bank account. I wanted to do it remotely, but that was impossible. So on my following visit to the US, I spent some time at Chase and opened the business account for my company. I ended up with €637 in banking fees that I could have entirely saved: in fact, I never actually needed the account.
On top of that I had to pay local CPA’s to handle the tax status of the company, the Delaware franchise tax, the registered agent for the LLC, etc. All of this adds up to another €2.788,24 that I didn’t need to spend at all.
Fact is: you don’t need to create a company until you’re making money. And making money means: making more than you spend. As long as you’re burning cash but have no revenue, there is no need to incorporate, there is no need to create a separate bank account, no need to have accountants, notaries or lawyers.
So my expensive lesson comes to you for free: save your money. Create your company when you’re making tons of money, but not a minute before.
My mistake was over optimising: I created a structure that was tax efficient for a revenue that I never generated. Which leads me nicely to the next mistake, also about over optimising.
3. Creating a redundant infrastructure when there was no traffic. Cost €3.147,48
When you start a new project you want it to be perfect. And to make it perfect you have many tools. For starters it should actually work, somebody must feel the need for it and use it.
With 0 users and 0 revenue, I set out to do to a couple of plain crazy steps in the direction of “perfect”.
First, I registered my company name across multiple countries (.it,.es.,.co.uk). That’s useless, but still in the range of sanity. But then I went totally nuts and registered all the misspellings of my brand name that I could put my hands on. I got flimzer and flimizer and so on. I even renewed some of these domains for a second year. I ended up spending a stupid amount of €1054,48 on domains alone. That’s a staggering amount considering that, to operate, I needed just one and my domain budget for 5 years should have been around €100–150.
I have since let all of my domains expire but I am still stuck with the filmizer.com domain. Probably after this article gets out I will finally dispense of it…
Sorry, but I got carried away and I am almost forgetting about the second part of my fuckup: instead of staying with the “el-cheapo” hosting that any scrappy startup would have chosen, I decided I needed a cloud based high availability hosting. See: I was already optimising for traffic. But remember: I never had traffic (for reasons I will explain in a little bit).
So here I am spending €2.093 in hosting over a couple of years where I could have spent just €200.
The reason why I over optimised my tech to such a great degree is that I am passionate about technology. This passion for tech didn’t stop me from making the next technological mistake.
4. Outsourcing technology. Cost: unknown.
I was speaking to my good friend James the other day about his new startup MeasureMatch. He’s on path to develop his first MVP through a London outsourcing agency that has a technology center in India.
I told him not to do it. But he didn’t seem to budge. Actually he’s on track for a first release in a few weeks and I wish him the best success. I didn’t succeed in outsourcing my technology and I will not do it again.
I went out on the market and found a good development shop, a local one, and sent out my specs. They were foolish enough to accept my specs and send over a quote. So we started working.
Accepting that tech is not internal to your company means first and foremost that you’re on somebody else’s schedule. So my project was at times a priority for the developers, at other times personal matters came into play. The development was halted when the developer assigned to my account had a burnout and left for the countryside. His partner resumed operations after a long hiatus.
Not only did I outsource the technology, but I also had some data entry work that needed to be done and I couldn’t resist a $4 an hour offer from India that promised perfect results.
Suffice it to say that nothing good comes out from such a meager fee and that both experience in outsourcing ended up with me not wanting to have anything to do with the outsourcers.
It’s not that I was unlucky with the vendors I chose: I should have not developed anything at all. Why? I was lacking a technical cofounder. If you don’t have somebody who is willing to code in your team, you should not start to develop any tech. (I know that there are a ton of exceptions, but that’s my experience, right?).
I could have done a part of the coding work myself. I can still do a bit of PHP. It would have sufficed to create a rough proof of concept, but — remember — I wanted my site to be perfect.
Overdeveloping is a mistake. But there’s a bigger one looming just behind it and it’s important that you know all about it.
5. Not allowing my product to find the right market. Cost €22,092,22
I can’t assign an exact cost to this mistake. So I will say that it cost me the whole 22k of the project. Yes, that’s the big one. The mistake of mistakes.
I set out to create a product to enhance the knowledge of movie-goers, film fanatics and cinema buffs without properly understanding what, if any, demand there was for it.
It’s the job of the entrepreneur to create the new. But to do so the entrepreneur needs time, needs resources and resilience. The first incarnation of my idea was an open, free website.
Today I can see that the real potential of my idea is in creating a dashboard for movie creators and distributors, well hidden from public view by way of a fat monthly payment.
In entrepreneurship the difference between expectations and reality is called “product market fit”. If you’re a natural, your “idea” will instantly become a “business”. Most of us need to make a few mistakes before we finally “fit” within a market with the right product.
Instead I went all in with my first hunch. And when I realised that I had a problem, it was already too late. The site was published, in Beta obviously, and acquiring users was near to impossible. No one was using the site. Even worse than that: even the few people that found it, would never visit a second time.
Everybody knows that you need to test. Test your assumptions, test the hypothesis, test the concept and even test the different ways to execute.
Nowadays its customary to run a fake marketing campaign for non existent products in order to gauge demand. If there’s a payment involved you come to the step of asking for credit card information and then say: sorry, we’ll get back to you.
All of this happens way before you set out to create any actual product.
That’s easier said than done. When you have a novel idea, you usually have little to no tools to market it. It’s terribly hard to devise that initial test campaign. So a lot of entrepreneurs fail to execute on the testing phase.
Those that actually test their idea, often incur a second problem: bias. They read the data as they wish. Data is only as good as your interpretation. And since entrepreneurs are optimists, you can imagine that they often read the positive even in negative data.
Today I understand that my idea had the underpinnings of business to business research tool for a niche market. I know it very well now, with the infinite wisdom of looking back at an idea that is 7 years old. At the time I had to make this mistake…
6. Final mistake: not using risk capital.
So this is how I lost €22,092,22. But wait: is that a big or a small amount? Numbers, even when they represent money, are always relative. 22k may seem big or small. To better understand a figure you need to anchor it to another. A good anchor figure would be the sum of my savings. At the time they amounted to 22k. So you can say that I burned 100% of my savings. After Filmizer I was living paycheck to paycheck. Does this help? I am not sure.
Not all money is born the same. There’s money that pays rent, buys groceries and covers essential bills. There’s money that you save for a vacation or a special hobby. Then there’s risk capital (also called venture capital).
Money that ensures your lifestyle can’t be used for funding startups. But neither savings coming from a salary should be used to that purpose. Only money that you can surely dispense of should be used to fund a startup. It can be your savings, but you should shave off the top 10 or 20% of your savings. Label it as risk capital (or venture capital) and keep the remaining 80% or 90%.
Since my 22k was 100% of my savings, it was definitely not risk capital and I should not have invested it in a high risk project.
But I want to make one last step forward. Entrepreneurs should not use their own money. The role of the entrepreneur is to put in the work, not the money. Many entrepreneurs are so skilled at crating products that they’re able to create them from scratch, without outside investment (it’s what we call bootstrapping).
In case their idea requires capital, they should find money in the seed capital, angel capital or venture capital markets. They exist just to put risky money to good use. They are full of people that have extra money to invest, why not use them?
Conclusions: there’s no value if there’s no learning.
Filmizer LLC is in the past now. I am happy to share my experience with you because I have now made back many times 22K. But to arrive where I am now, I’ve had to fail a couple more times.
You’ll fail too. Multiple times. And that’s great. Learn a ton. Remain open and eager to start again. How much failure is too much? Well, if you make the same mistake twice then you know that something is wrong, and maybe the entrepreneurial adventure is not for you.
And please don’t make any of these 6 mistakes. I already made them so you wouldn’t have to.
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Originally published at www.lafabbricadellarealta.com on December 6, 2016.