Tag: Build

How I spent €200.000 on a failed startup by raising money, hiring people, and building a product no one wanted.

We received the call we’d been waiting for. An angel investor was ready to make us an offer. After some back and forth, despite it being a “biggish” amount of money, we said no. The main reason for this is because we were still figuring out what we do and knew that it would be way too easy to completely waste the money.

What led us to such an unusual conclusion? Four and a half years ago my team and I had a sobering experience raising and unreasonably spending €200,000 that led to both insights and a reality check.

Don’t raise money before product/market fit

I thought money would accelerate our path towards finding our business model, but it only created a distraction, and ultimately led us to waste money on things we didn’t need to even think about.

4.5 years ago my startup (Panda Training, which back then was a matchmaking platform for trainers offering training and companies that needed training) raised €200.000 from various funding sources. We ended up going from Helsinki to New York that summer after an initial “killer” run at local sales in the spring with a product that “was supposed to be ready by the time we arrived to NYC.”

It was bad timing to raise money because we didn’t know what we were doing. We didn’t have a product and we didn’t have any revenue. Fast forward to today, however, and we have a product with close to €20.000 in monthly revenue. But regardless of this, we still ended up saying no to an investment. The primary reason for this is because it is still too early and we aren’t quite there yet.

Don’t hire before product/market fit

After raising €200.000 we ended up hiring people and bloating our headcount to 14 people at its peak.

We got community managers, marketing managers, sales managers, and all kinds of developers. We spent time designing the job description, marketing those, selecting people, onboarding them. It is a very straightforward task to do when you are a stable company. But when you don’t know what you are doing, have any revenue, and changing the direction every week, it is the recipe for disaster. Employees are not founders. They need direction and they can’t adjust every week. Even for founders it’s super hard and takes me as the CEO several discussions with the team.

People can help you scale what you are doing well and what works. But if you don’t know what you are doing, it will take you more time aligning a team. of 14 people than it would have taken to do the job alone. Not to mention that it’s super expensive

So what is Product/Market Fit?

One term that is arguably the most important for any startup is product/market fit. Here is what one of the top investors in the world Marc Andreessen says about it:

In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy. You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

Why is product/market fit important? Because it is what makes a successful startup. You thought it’s the investment you got? How many people you’ve hired? Revenue? Profit? I would argue it is none of those things.

A startup is a company looking for a business model. Product/market fit is when you found your business model. Having product/market fit means you have a very high chance of surviving the next 10 years as a company, provided you keep your sh*t together. Raising €1M and going bust in 2 years is not a success.

Don’t conflate interest and demand

Why do startups make such basic mistakes? Why do they raise money and hire people when they don’t need to? I believe it is about our psychology. Inherently, to build a business, one needs to be an optimist. I picked this idea from the ex-CEO of Intel and the book “High Output Management”:

“CEOs always act on leading indicators of good news, but only act on lagging indicators of bad news.” This is because “In order to build something great, you have to be an optimist, because by definition you’re trying to do something that most consider impossible. Optimists most certainly would not listen to leading indicators of bad news.”

Being optimists we as entrepreneurs often conflate interest and demand.

Interest is when someone is saying “Amazing idea, we should test it when we have some slack in our organization and the right opportunity arises.”

Demand, on the other hand, is when they say (in a higher voice), “We really need this! Now! Where can I sign?”

The reason I went to conquer New York at the age of 21 is that I conflated politeness and interest with demand. We thought they were going to buy our service. We were wrong. Our potential clients just liked kids and their innovative idea, and in some cases invested in testing it with them.

Sell before building

Many conflate politeness with demand and rush to build their product. We were not an exception. We poured thousands into the salaries of developers in Serbia and only to realize 6 months later that no one needed our product.

Looking back on it though, we didn’t need to build an amazing backend to realize that no one wanted to use what we are trying to build. Even a quick mockup would have done the job. And yes, we definitely didn’t need an iOS developer who would be adopting our web solution to mobile before it was even validated.

You don’t need a fancy office. And I would go as far as to say that you should sell just with a Powerpoint. Once they pay, only then you can start building. And ideally, it should be a hefty sum. The price of a coffee level commitment is not a good indicator for investing €100K into development.

Investors will come to you

One other thing I’ve noticed is that investors will come to you if you have a good business. Randomly, somehow they will find you. Not everyone, but you will start getting strange offers. We didn’t get any offers with Panda Training at first. Nor did we get any after we first pivoted. But then now after the second pivot with close to €20.000 in monthly revenue, it has started to happen.

For another company that I am a part of, GrowthClub, angels came knocking very early on. We hesitated. Nonetheless, with GrowthClub we took very little pre-seed money as a buffer and because we wanted to get on board a couple of angel investors as advisors. The difference in comparison to a typical case is that we didn’t spend 6 months full-time looking for investors, the equity we gave up was quite small, and we are watching our profit and loss very closely.

Is your business engine working?

So, when should you build?

After you’ve sold.

When should you raise money and hire people?

When you’ve built your business engine. When you know your target audience, your marketing channels, your value proposition, your profit margins, and can confidently say that if we put €1M into this engine, we will get €2M out.

And as a final remark, these days Panda Training is prospering after 2 pivots and a lot of bootstrapping. Today, with clients like SAP, Universal Pictures, Stora Enso we are making coaching 10 times cheaper and using it as a tool for strategy rollout and implementation, culture and people development. Our service is a human-chatbot hybrid that also collects critical data and insights. All in all — we were thrilled about investors showing interest in us. But declining the investment was the right decision.

Thanks for sticking with me till the end! These days I am a GrowthClub member who became a hands-on advisor there. GrowthClub is a community of founders with an average of $ 5K+ MRR where founders exchange growth hacks and build genuine connections in 1-on-1 video calls.

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Don’t raise money. Don’t hire. Don’t build. Sell. was originally published in Entrepreneur's Handbook on Medium, where people are continuing the conversation by highlighting and responding to this story.

Entrepreneur's Handbook – Medium