Startups Archives - That's Not Market

Why Startups Fail – Crowdfunded Tech Startup Shuts Down With Open Letter to Backers

Despite successful crowdfunding campaign, tech startup KANOA shuts down after bad product review without sending out products.

KANOA, would-be producer of some sort of wireless earbuds, shut down. They announced their demise with an open letter to their backers.

They began with their founder’s initial capital spent on market research and design study by an engineering firm.

It appears that their crowdfunding may have been a pre-order campaign, but information is scarce at this point.

KANOA, crowdfunded tech startup, describes its demise

However, KANOA has said that they hired internally and engaged a contract manufacturer. They began to ship a few units, but they were absolutely savaged by one YouTube review, which seems to have been the knockout blow. Ironically, according to the reviewer, KANOA reached out to him as an influential personality to review the earbuds and garner publicity. iTwe4ks has about 486,000 subscribers, and some of his videos have exceeded 1,000,000 views. He did like the free t-shirt, if that is any consolation.

KANOA claimed in their farewell letter that they are in negotiations with investors for funding or an acquisition, but they do not have enough money to continue operations. Backers or pre-ordering customers are out of luck. They will not be fulfilling more orders.

Some farewell letters give a detailed post-mortem explaining what went wrong. They leave a memorial to what went wrong.

It is difficult to see what happened to KANOA, or at least what KANOA thinks went wrong, other than they ran out of money. Too many employees? Ineffective design and manufacturing? Lack of market?

No. They were too honest and transparent:

Unlike on typical crowdfunding platforms we allowed backers to ask for refunds at any time. This policy kept us honest, but also added vulnerability once we had made major financial commitments. Setbacks and some bad publicity, like reviews of non-shippable beta units, stirred our audience. Most significantly and to our unpleasant surprise, our investors recently backed out of our funding round. We do not blame them, but this was a pivotal setback since capital was essential for ramping up production.

Perhaps the actual story will be uncovered in the class action lawsuit. However, a lawsuit is unlikely if there is nothing to go after.

When Innovation Is More Than Technology: Software Company Allows Customers to Steal Their Software

Freakshow Industries implements innovative business model for its music tech software by letting customers “steal” the software.

As Freakshow says:

We fight crime by legalizing it. You can’t break an agreement you never made.

Creating products in the digital world can be difficult. Anyone can steal and reproduce your products at will. Copy protection is weak and generally only hurts your paying customers by making their experience inconvenient. I have a pile of license fobs as testament to this.

Some companies provide freeware and simply don’t charge. Others put out a tip jar. Freakshow Industries takes it a step further and provides a link for customers to steal their software.

It does not come without a cost. First, the thief must endure a Q&A with insults around why he or she chooses not to pay, with options including ‘Money is Tight,’ ‘Software Should Be Free,’ ‘I Am A Dick,’ and “I Changed My Mind and I Want to Pay.’ Each provides some additional commentary and ways for the thief to do a little on their part, such as pay less than full price or to provide a tip. However, the ‘I Am A Dick’ tab replies with “Well there is no fixing that. Download away asshole.”

Why would Freakshow do this? Resigned to their fate, perhaps? As they say:

Stolen product licenses are fully functional, they are just not eligible for any upgrade stuff. We do not otherwise taint these licenses in any way.

Also, if you steal a license then we’ll be using our own discretion around just how much we’re going to support you. Just be a good person and we’ll probably help you out. Yeah.

Don’t get us wrong. We would definitely rather you actually buy our software. But we realize that some people, for whatever reason, just won’t. So, if you’re going to be that person, then we would rather you steal directly from us than catch some shitty computer cancer from whoever else would be hosting our work.

Basically, stealing is inevitable and they don’t want to make life worse for their legitimate users. They also recognize the risk involved in acquiring pirated software on the streets, or at least through p2p networks. They probably also recognize that users of cracked software may actually come back and buy stuff if they decide they like it. Freakshow also provides easy access to links for buying their other merchandise, like t-shirts. Nonpaying customers may become paying customers, of some sort or another, eventually.

Whatever their reasoning, it is refreshing to see a company that cares about its users, paying and otherwise. It is refreshing to see a new take on this issue.

Obviously developers want to sell their products, but no amount of wishing is going to offset the reality that the cost to reproduce and distribute digital goods is zero. If you make your software unwieldy to validate and use, people will crack the copy protection or go elsewhere. Cultivating these users may actually turn them into paying customers, even if they wind up paying for other goods and services apart from the original software.

Freakshow Industries previews its Backmask plugin.

SEC Warns of SAFE Investment Instrument Popular in Equity Crowdfunding Campaigns

The SEC issued a bulletin warning investors about SAFE securities used in equity crowdfunding offerings.

Issuers in equity crowdfunding campaigns have offered various types of securities since it became legal to do so, such as various classes of stock, notes and instruments known as SAFE instruments. ‘SAFE’ stands for ‘Simple Agreement for Future Equity.’

SAFEs were originally designed to be an alternative to convertible notes for early-stage technology investments. The idea was that they would become simple, standardized vehicles for investing in very young companies without dealing with a lot the terms needed to make a convertible note or stock investment.

As the SEC points out, a SAFE is not like investing in common stock. It is an agreement that converts into issuer securities in the event of future triggering events, such as a future investment round, an IPO, a change of control or a liquidation.

Some people seem to think of them like convertible notes. However, convertible notes have maturity dates, among other terms. SAFEs do not and may never convert. SAFEs are more like derivative contracts with springing conversion based on listed events.

SAFEs have been increasing in use in the venture capital and angel investing worlds, and more recently other investors have gained some exposure and comfort with them. However, the SEC wants investors to know that:

SAFEs do not represent a current equity stake in the company in which you are investing.
SAFEs may only convert to equity if certain triggering events occur.
Depending on its terms, a SAFE may not be triggered.

To the people who have seen them before, none of this is a surprise. To a new investor, the SEC is concerned that these terms may be unexpected. As the SEC said:

SAFEs were developed in Silicon Valley as a way for venture capital investors to quickly invest in a hot startup without burdening the startup with the more labored negotiations an equity offering may entail. Oftentimes, for the venture capital investor, it was more important to get the investment opportunity, and possible future opportunities, with the startup than it was to protect the relatively small investment represented by the SAFE. In addition, the various mechanisms of the SAFE, from the triggering events to the conversion terms, were designed to best operate in the context of a fast growing startup likely to need and attract additional capital from sophisticated venture capital investors. This may or may not be the case with the crowdfunding investment opportunity you are exploring.

SAFEs can make a lot of sense to particular parties in particular deals, but investors such as crowdfunding investors should make sure to understand exactly what rights they have in what they are purchasing.

SEC issues warning about SAFE instruments in equity crowdfunding campaigns.

More Big Tech Companies Stay Private, Or Wait Longer To Go Public

The Wall Street Journal took note that many companies with high valuations prefer to stay private these days. Mostly, it is talking about the types of tech companies that went public much earlier in their life cycle in the late nineties.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

The article mostly deals with how investment bankers more used to IPOs are dealing with large companies that prefer to raise money privately.

For most people, the woes of investment bankers struggling to meet changing business conditions is not particularly interesting. However, what I find interesting is the assumption that these companies would necessarily want to go public. If you don’t have to, why would you subject yourself to periodic reporting, plaintiffs’ lawyers in the securities bar, Sarbanes-Oxley, etc…?

In addition, the universe of investors for private companies is expanding.

Banks trying to woo more private-placement clients said they provide a needed service. Companies are staying private longer partly because the number of investors interested in private deals has expanded significantly, they said.

Many of these companies are also less dependent on funding from the public markets.

“What’s changed is that companies are getting so quickly from startup to real traction,” said Dan Dees, global head of technology, media and telecommunications banking at Goldman. “You can’t just wait for the IPO pitch.”

And yet, this is what critics used to complain about for IPO companies: they were too immature for the public markets.

To me, it still comes down to an essential question for the issuer: Why do you want to go public. Because ‘go’ is only a part of it. ‘Being’ public is the long-term expense and obligation.

Why Startups Fail – Mint vs. Wesabe

In an old blog entry (that I just found), one of the founders of Wesabe thinks back to why his company lost to Mint.com and shut down. For those who don’t remember, Mint was high-flying personal finance site that was sold to Intuit in 2009 for about $170 million.

Wesabe and Mint went head-to-head. Mint won. Here's why.

Marc Hedlund writes an honest article about his take on why Wesabe eventually shut down. First, he knocks out four myths, including that Mint launched first, had a better name and design and went viral.

Then, Hedlund discusses what he saw were the drivers behind the success of one and the failure of another. At the end of the day, it comes down to familiar themes recognized by those of us who work with businesses, particularly startups.

“I think in this case, Mint totally won at the first (making users happy quickly), and we both totally failed at the second (actually helping people).”

Mint gave people what they wanted and made it easy. Wesabe wanted to help people change their financial behavior, which is a value judgment with which the consumer himself/herself may disagree.

Hedlund notes that some of the things founders obsess over are really not important:

“You’ll hear a lot about why company A won and company B lost in any market, and in my experience, a lot of the theories thrown about – even or especially by the participants – are utter crap. A domain name doesn’t win you a market; launching second or fifth or tenth doesn’t lose you a market. You can’t blame your competitors or your board or the lack of or excess of investment.”

He does get to the crux of the issue about how to succeed:

“Focus on what really matters: making users happy with your product as quickly as you can, and helping them as much as you can after that. If you do those better than anyone else out there you’ll win.”

That’s it. Give people what they want to meet their needs and solve their problems.

Hedlund still believes that there are problems to be solved. However, imposing your judgment on people’s behavior will not have the same success as meeting people’s needs and desires.

“So, yeah. Changing people’s behavior is really hard. No one in this market succeeded at doing so – there is no Google nor Amazon of personal finance. Can you succeed where we failed? Please do – the problems are absolutely huge and the help consumers have is absolutely abysmal. Learn from the above and go help people (after making them immediately happy, first).”

How Start-ups Can Increase Their Odds of Success

I had a discussion the other day about how start-ups can increase their odds of success. Since I do a lot of work with start-ups, in legal and consulting roles, I offered three tidbits of advice:

1. Business Idea. Do not pick an idea simply because you think it is cool or you will get rich. For example, the start-up graveyard is littered with music industry apps created by people who believed it was their entry into a “cool” industry.

Find a problem that you think you may share with many people and build a solution. This is what good businesses do. They induce customers to pay them to make the customers’ lives easier in some way. Yes, this includes the Facebooks and Twitters of the world who are good at aggregating and identifying users to make advertisers’ jobs easier in targeting an audience.

2. Pick the Right Team. It is important that founders surround themselves with people they trust to be committed to the venture and, most importantly, to produce quality results. The start-up world is populated with many “flakes,” but the founders need to be able to trust that their associates will do what they commit to do. I have seen this over and over. People show up with visions of options and IPOs and foosball tables, but when it comes to actually working and producing results, enthusiasm and attendance fade.

3. Know When to Step Aside. Very often, the skills necessary to start a business are different from the skills needed to grow a business. For example, founders often underestimate the importance of a skilled and talented sales person. This is a skill set just as computer programming is a skill set, and they does not necessarily overlap. In addition, managing an ongoing enterprise is much different than managing the birth of an enterprise. A skilled manager can often be the difference between a hobby with some potential and a successful, growing business.

Startup Tips: Knowing When To Add Salespeople

When you work in the startup world, you see it over and over again. A company has founders, a product and, maybe, some angel or friends and family investors. It is time to get that product out the door and some cash in your pocket.

Many founders believe that their wonderful and innovative idea combined with their passion will explode into sales. This is not always the case, particularly when your target market is other businesses.

Being an inventor, administrator, financier or (even) attorney is not the same thing as being a salesman. Selling is a talent and a skill. Not everyone is born with the ability to sell. Not everyone has taken the time to develop this particular skill. However, if your business depends on personal sales calls to buyers, whether they are end users or intermediaries, you may want to consider whether you should hire a dedicated salesperson.

Generally, when the product has been tested and is ready for entry into the market, it is a good time for the startup to have a committed salesperson on board. Preferably that person would know the industry and show up with a ready-made contact list, as ‘Rolodex’ is so-old economy. However, even a person who has sales experience and can understand the product will be preferable to an inventor or founder who may not have the right experience to turn an opportunity into revenue.

SEC Highlights Warnings About Unregistered Broker-Dealers in Private Oil And Gas Offerings

The SEC is taking notice of private oil and gas offerings and has increased its scrutiny of these deals. They have noted the recent increase in fraud cases for these deals at the federal and state levels. Thus, the SEC has released an Investor Alert for Private Oil and Gas Offerings. And the first thing they recommend to investors approached to invest?

“Is the person recommending the investment registered? Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA.”

The SEC cautions that being registered is not a seal of approval and that there may be conflicts of interest between the broker-dealer and the issuer.

In a general alert regarding the oil and gas industry, it is not surprising to find the SEC focused on the broker-dealer issue. Many advisors (including this writer) have been approached to sign off on an offering sales arrangement without a licensed broker-dealer with the explanation that:

“I do this all the time and it has never been a problem.”
“I am not acting as a broker-dealer, just a consultant who gets paid when the investment closes.”

Unfortunately for the would-be commission-eers, the SEC and state securities authorities do not share that analysis.

As the SEC said in the alert:

“If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.”

The SEC then illustrated benefits of using a licensed professional to assist in the investment decision:

Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.”

It should be instructive to practitioners that in the course of a general industry investor alert, the SEC chose to highlight the risks of dealing with unlicensed broker-dealers. They are still clearly focused on this issue. Although some bad actors promote these deals, hoping to stay under the radar is a bad strategy for the promoter, issuer and investor.