Failure is not cool: start-up founders reveal their hardest lessons

23 May 2016330 Shares

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Pictured from left: David Coallier (front) from Barricade, John Joyce (back) from Yvolution, Claire McHugh from Axonista, Joe Morely from Facebook, Deirdre Smith formerly of Zandar, Sean Blanchfield from PageFair and John Dennehy from Zartis. Photo credit: Conor McCabe Photography

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The majority of start-ups won’t succeed. And behind the glossy exits and funding rounds are mistakes, self-doubt, broken friendships and crippling anxiety, writes John Kennedy

I have written before about how the start-up journey is not a lifestyle choice.

There is, indeed, a myth in people’s minds that embarking on the start-up journey as an entrepreneur could one day make you the next Steve Jobs, Elon Musk or Mark Zuckerberg. Those are the exceptions, legends even, and, in reality they may be the only ones of their kind.

There is the danger that the idea of start-ups and working for yourself is another way to avoid the grind, to stop working for the man and get rich and live life on your own terms.

But when you see founders and CEOs swagger like peacocks on stages at various summits and at networking gatherings, it is really just a front. Everyone wants to put the best foot forward, they have their game faces on; but, behind the scenes, many are privately worrying about runway and making the next payroll.

Bank of Ireland’s Tracy Keogh in an excellent Medium post recently wrote movingly about the kind of struggles founders and their staff face, ranging from hitting the inevitable wall, stress, co-founders and staff not getting along, disgruntled investors, crippling anxiety about money and more. She hit the nail on the head when she said some founders actually fear seeing each other at events where everyone seems so happy and preppy. The truth is less kind.

This sentiment was also touched on by Barricade’s David Coallier in a blog post where he wrote about how depression, stress and mental health are no longer taboo subjects in the tech start-up world, how he lost friends to depression, and he pleaded with first-time entrepreneurs to balance their work and their personal lives.

I, too, have seen what can happen to people when the wheels of a start-up go off the rails. I know that the big valuations given to companies and the apparent wealth of founders following a merger or acquisition are mostly PR bluster, smoke and mirrors. It’s not always happily ever after and often that long-sought exit or a big chunk of venture capital funding brings its own share of problems.

What makes an entrepreneur?

Joe_Morley_Facebook

Joe Morley, director of partnerships EMEA for Facebook and Instagram. Photo credit: Conor McCabe Photography

So, why do entrepreneurs do it? I found myself pondering this very question when I attended a Founders Series event at Facebook in Dublin last week. Facebook, which employs more than 1,000 people in Dublin, is stepping up its efforts to make friends with the start-ups of Dublin and involve them in appropriate programmes. Two successful Irish digital marketing technology companies, StitcherAds and Bionic, are examples of this.

Joe Morley, director of Partnerships EMEA for Facebook and Instagram, emphasised the value of peer learning in the start-up world and reminded me that Facebook still thinks of itself as a start-up company. Its workforce of 13,500 people is diminutive relative to the size of its user base of 1.5bn people across the planet. “As an organisation, we keep ourselves deliberately small. It keeps us fast-moving and lean.”

On stage, Morley introduced the audience to six Irish founders and asked them to answer three questions: who they were, where they came from and what was their worst failure. The founders were John Joyce of Yvolution, Claire McHugh of Axonista, John Dennehy from Zartis, Sean Blanchfield from PageFair, Deirdre Smith from Zandar and David Coallier from Barricade.

For the ensuing hour, the founders spoke movingly and candidly about their worst failures. Not one of them flinched as they remembered with humility the lost opportunities, hitting the wall, sometimes crippling anxiety and occasional comedies of error. It also answered my question, about why founders do it. The truth is somewhere between not wanting to let people down and a compulsive ambition to strive and build something remarkable.

First up was John Dennehy from Cork, the CEO of Zartis and HireHive.io, a recruitment software services company. His most spectacular failure was what began as a spectacular exit when his first company, also called Zartis, was acquired in 1999 by a US company called Breakaway Solutions for $18m.

Zartis, at the time a full-service web agency, was started by five co-founders in Dublin and very quickly grew to 40 people before it caught the attention of Breakaway. “I didn’t even know what M&A was, what share structures were, cap tables, escrow cash. I didn’t know how to value the company. We agreed on a sum 10 times revenue in cash and shares.”

‘We were literally watching the value of our shares plummet by the day and restrictive stock agreements meant we couldn’t sell our shares for a year’
– JOHN DENNEHY, ZARTIS

When the contracts were signed, that’s when the trouble began, as they quickly realised they sold the company for $18m in US dollars, not Irish punts as they had thought, a 30pc difference. Also, one of the co-founders wanted to leave and would have been entitled to 10pc of the $18m. But the bigger trouble was around the corner when the dot-com collapse hit in March 2000. Some $1m cash sitting in an escrow account at Breakaway that hadn’t been transferred to the Zartis founders was spent as Breakaway fought to survive the tech apocalypse.

“We were literally watching the value of our shares plummet by the day and restrictive stock agreements meant we couldn’t sell our shares for a year.”

Dennehy said he learned his lessons the hard way. “We should have gotten more advisers and better advisers. During the heat of the moment, we agreed to leave $1m that should have been on our balance sheet in an escrow account. After 12 months, the tech world had fallen apart and the $1m they owed us disappeared.”

Facebook_Founder_Series

Pictured: John Joyce of Yvolution, Claire McHugh of Axonista, John Dennehy from Zartis, Joe Morely from Facebook, Sean Blanchfield from PageFair, Deirdre Smith from Zandar and David Coallier from Barricade. Photo: Conor McCabe Photography

Next up was Claire McHugh from Axonista, a successful tech company that is making cutting-edge interactive software for TV broadcasters.

In a touching segment, McHugh spoke about the kind of anxieties and struggles that grip founders, no matter how successful the company is, and how important it is to talk to people and not to internalise fears and doubts.

‘It was a lovely summer and even with all the sunshine, it made things feel worse. I was worried we had run out of runway and it was incredibly stressful’
– CLAIRE MCHUGH, AXONISTA

Early in Axonista’s journey, everything had been going well. The company had good early clients, was in negotiations for its first major funding round and it was on the verge of closing a major enterprise deal. On the surface, all was well, but with all three things happening at the same time, the company had nearly run out of financial runway and McHugh was consumed with worry about making payroll. “It was a lovely summer and even with all the sunshine it made things feel worse. I was worried we had run out of runway and it was incredibly stressful.

“In those situations, you need to be the best version of yourself that you can be. I did the opposite. I stopped enjoying life, I stopped exercising, eating well, meeting with friends and I dreaded the inevitable question about how are things going. I felt ashamed. I was paralysed by fear.”

It was only when her father turned up one day unannounced and went for a walk with McHugh that she told him the full story. “It was a sunny, beautiful day and we sat on some steps. It took me a long time to talk about it, about my fears for payroll and that all the parts were nearly in place but weren’t.

“He is a former CEO himself and replied: ‘you have a cashflow problem. Do you have an overdraft? Why not’?

“And that was it. That was the solution and I just hadn’t considered the possibility. I felt so much relief. When you are paralysed by fear your judgement becomes clouded. The big lesson is to find people you can talk to. People who have been around the block. Sometimes, the solution is the simplest, most obvious answer, and the pressure was off.”

John Joyce is the successful founder of Yvolution, a Dublin company that makes kids toys for the internet of things and is best known for its Y Fliker scooters, and which today makes $80m a year in revenues.

‘You have to watch the cliff. If you get it wrong the business dies and you can burn through €50,000 of high-potential start-up funding in just weeks’
– JOHN JOYCE, YVOLUTION

Joyce had a “big fat job” at a Big Five accounting firm when he suddenly got the entrepreneurial itch and embarked on the start-up trail. He raised €100,000 to start the company, €50,000 from Enterprise Ireland and got another €100,000 on Dragon’s Den. “We raised around €300,000 in the first year-and-a-half but burned through it very quickly.”

Joyce needed to raise investment and there were offers on the table, but he underestimated how long it would take to secure the investment. The company quickly ran out of runway and over the usual Friday night pizza and beer he had to let go 10 staff who he had hired and mentored.

“I was hoping the money would land in time but it came eight weeks later than when I needed it. Luckily, we got restarted and I hired back the team. Never underestimate how long it takes. You have to watch the cliff. If you get it wrong the business dies and you can burn through €50,000 of high-potential start-up (HPSU) funding in just weeks.

“My mistakes were underestimating the amount of time you need to spend on fundraising, and I also didn’t have five or six co-founders, you need someone to help you carry the weight.”

‘After Demonware, we felt we had the magic touch’
– SEAN BLANCHFIELD, PAGEFAIR

Sean Blanchfield is the CEO of PageFair, which is focused on helping publishers find ways around the ad-blocking trend. In 2006, along with Dylan Collins, he sold Demonware to Activision for around $17m.

“After Demonware, we felt we had the magic touch,” Blanchfield recalled.

But subsequent start-ups that Blanchfield embarked upon, including the online gaming company Jolt, did not turn out to be the same surefire successes as Demonware had been.

“My particular failure after Jolt was trying to take a computer gaming approach to Lean Six Sigma training – it was the slowest and most expensive failure.”

While companies expressed interest, including three with more than 100,000 employees, they simply weren’t buying it and 12 months later the founders walked away.

“The good news is that it led us to where we are now. It was 2011 and we simply said ‘we are smarter than this’ and we started our own accelerator and put in every idea we had – 50 in one year – and the one that survived was PageFair.”

‘Always read the fine print in legal documents. Advisers are really important’
– DEIRDRE SMITH, ZANDAR

For Deirdre Smith, formerly of Zandar, the key lesson was reading the fine print in legal documents and not over-engineering products. The company made display technology for security operations and in its haste to secure a huge US partner ended up in a situation where products were over-promised and under-delivered for customers.

The situation had spiralled out of control.

“Thankfully, our board told us to stop what we were doing and that unless we took drastic action we’d go out of business. Within four weeks we cancelled non-core projects, downsized and restructured our operations. We turned it around and success followed. Always read the fine print in legal documents. Advisers are really important.”

‘The saddest moment of my life was when I was talking to my 18-month-old daughter and she said “Hi FaceTime”’
– DAVID COALLIER, BARRICADE

David Coallier’s problems began after he and Eamon Leonard sold Orchestra to EngineYard.

“I was director of engineering for a team in San Francisco and Portland. Always travelling, putting work first. The saddest moment of my life was when I was talking to my 18-month-old daughter and she said ‘Hi FaceTime’.

“That was it for me. I immediately took three weeks off and I decided to change position and joined the security team as a data scientist. The biggest failure for me was personal. I found I was neglecting friends and family, but my daughter knowing me only as ‘FaceTime’, that was the big thing.”

After EngineYard, Coallier started Barricade, a security software company. Coallier’s next mistake was around timing and negotiation.

At the start, Barricade raised €1.2m in seed capital in just two weeks. An unheard-of achievement.

However, a year later, the company needed to raise its next tranche of investment but market conditions had changed. “We did not foresee the investment environment changing and it took longer and longer to raise that funding. We had a lead investor in New York coming in with $2.5m but that fell through at the last minute.”

Ultimately, Coallier prevailed, but it was a tough lesson. “It was a lack of managing my own expectations around how long a round would take to raise.”

From Dennehy and McHugh to Coallier, Smith, Blanchfield and Joyce, the rigours of start-up life are plainly not for the faint-hearted. It is not glamorous. The hype makes it look and sound easy. But it is hard.

They are the survivors and the strivers, successful despite the trials. But even still you never really hear of the real failures; those faces that you won’t see again at the various meets or the summits.

For all the survivors and the success stories, the cost is often personal and the truth is everyone makes mistakes along the way.

But the lessons to be learned from those mistakes can be invaluable.

And experience is certainly worth more than any amount you will ever see on a term sheet.

Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com