How Not to Kill Your Startup and How Can a Startup with $ 75 Million Investment Die
And 10 Lessons about failure from the co-founder of Twitch
“The humiliation of closing a project after losing too much is not possible if you decide on an exit strategy from the beginning,” says Daniel Kahneman in “Thinking, Fast and Slow.”
Any idea needs an Expiry Date and a Pre-Mortem Analysis, as you will discover further.
Justin Kan founded Twitch, a startup that became a streaming giant until Amazon bought it. He later founded a legal tech startup called Atrium that received a $ 75 million investment. In 2020 the startup closed. On Twitter, Justin Kan posted several tips and teachings on “how to close a $ 75 million investment startup”.
Justin Kan founded Atrium after selling Twitch. This was a startup that wanted to provide legal services for startups and replace traditional law firms. Atrium was a hybrid of legal software and a law firm. Atrium had software through which the founders of startups could have access to contracts of all kinds, to manage some of these aspects themselves, but it also had lawyers who could offer consultancy. Atrium also operated on a subscription basis, providing a more vertical model in the legal aid market. In essence, Atrium was a kind of hybrid between a classic law firm and a 2.0 one.
Although they received $ 75.5 million in investment from well-known Silicon Valley investors, in March 2020, Atrium was shut down because it failed to discover the business model through which it could do things better than a traditional law.
The company was founded in 2017 and received investments from Andreessen Horowitz, General Catalyst, or Y Combinator. Before closing, the startup fired its lawyers and paralegals from the company and tried to develop only software for legal services.
Justin Kan recently participated in a Ask Me Anything session on Reddit (you can find here) to talk more about his entrepreneurial experiences. He also listed on his Twitter account several tips for entrepreneurs based on his experience.
Here are the tips from an entrepreneur who closed a business that had received an investment of 75 million dollars, the biggest lessons learned:
- Start with the mission and pay attention to culture, as it is set early and very hard to change. It is complicated and challenging to build the mission of the startup after its founding. You need to start with a clear reason to exist and hire people who believe in that mission.
- You can’t skip the Research and Development phase of a company. If you try to jump over this, you will miss the part where you are forced to create something differentiating. Hard to solve this with money, after.
- CEOs can’t delegate getting in the trenches in the beginning. The ability to frame the strategy but also to communicate it is rare and requires experience.
- The more people you hire, the harder it will be to get feedback and turn the ship around. “The emperor has no clothes effect” is true.
- Don’t build service companies. It’s more work to manage people, and the reward is not there at the end of the day.
- It would be best if you started remote. San Francisco is a finished story for startups. The cost of rent gives you an operational torment. Considering that smart people choose jobs they want to be flexible, remote work is a better option right now. And Justin mentioned this before Covid, but now it’s even more true.
- Work only on things for which you have intrinsic motivation. If not, you will lose motivation on the road when the situation is worse or when your goals change.
- Create real market situations and try to avoid fake markets. If a person doesn’t really need your product, then it’s a fake market. If you add more money without having a product-market fit, it rarely works.
- They needed to change the business model faster and they haven’t made enough changes to the business model quickly enough.
- Ask yourself “to whom you are building for” very specifically and iterate for them and build in an environment where the iteration time of your product is fast.
How can you avoid all of the above as an entrepreneur?
Any idea needs an expiry date.
In the world of equity investors, there is an order called “stop-loss”: it tells the system to liquidate a portfolio of shares if the losses reach a certain predefined level. In other words, stop the loss.
Why not the same for new projects? What attracts us to a project, an idea, a job, is the mirage of a terribly interesting, big, desirable opportunity. The possibility of a bright future becomes, thanks to the business plan, almost a certainty. In the chase for the “upside,” we completely forget that, as everything has a face and a reverse, there is a potential for a “downside.”
You need the discipline to say, “this is the date by which I will draw conclusions.” Either I move on, or I close. What we often lose is the deadline, the closing, the exit. An “If…. Then….”: If I lose more than $ 50,000, then I change direction; if they do not reach point X in six months, I close; if I don’t get Y by X, I’ll stop. It is essential to define the conditions in advance.
Why you need Pre-Mortem Analysis
It’s the opposite of post-mortem, an analysis that explains why something died, what didn’t work, what happened. A premortem examines what might go wrong in the future. Psychologist Gary Klein first used the term in 2007 in a Harvard Business Review article to explain how an advance analysis of weak links in a project could save him from death. But the story is even older: Stoic philosophers practiced “premeditatio malorum” (anticipation of evil) to be prepared for negative scenarios.
Experienced entrepreneurs have the “worst-case scenario.” It’s the first thing you do. You never think about how much you can earn. If you start with that, you’re lost. If it doesn’t come out, how awful is it? The opportunity can, in theory, be exciting. But if the worst-case scenario is that the bank will take your house and you stay on the street, are you willing to move on?
It is said that entrepreneurs are beings with above-average optimism and that if you knew everything that would not work, you would not start that business. That’s how it is. But let’s not confuse optimism with unconsciousness. And let’s not forget that the risks are not only financial: the hardest attempt is to keep your confidence and rebuild your relationships, reputation and aplomb after a major failure. The bottom line is that these things are the main resources of any entrepreneur, in fact.
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