Insider Series
First of four stories on dysfunctional startups I survived. This one is free but the other three will be published to paid subscribers only in the days and weeks ahead. Reader support is what allows me to carve out significant chunks of time to write these articles. So, your support is much appreciated. I cannot thank you enough.
I’ve worked at half a dozen B2B venture funded startups. All of these companies raised at least $30MM in VC and went through three or more rounds of funding. I was a key member of the management team at five of these startups so I’ll only review those experiences.
At three of these startups, I also co-led the fundraising for the startups alongside the CEO. Of the five startups, two were gigantic successes (one was a big IPO and a second was a record setting exit or acquisition at the time). The third startup became profitable but I would not call it a giant success. And, of course, two of the startups were utter failures. Horrific failures.
What is interesting (or scary) is that all five (5) startups were hugely dysfunctional during its journey to success or failure. I’ll share some of the nasty and ugly things that happened in this article.
I’m going to skip the startup that had a massively successful exit because that may give out too much identifying information. The short story is that we took that company from under $1MM revenue to a hockey stick growth in just under 3 years and got acquired for nearly half a billion dollars.
We all made a chunk of money and many of us went on to start new companies. Some of us got burned out and left the tech industry altogether. In this article, I will tell the story of the one that went IPO despite the crazy founder doing everything possible to screw himself.
Startup No. 1: The Crazy Founder
This company raised seed, Series A, and Series B from the top tier VC firms and powerful angel investors. It hit the market too early and burned through most of its cash. The main failure for this startup was that it built out the sales organization way too quickly.
The sales VP was a guy with a track record of success. The problem is that — like most polished sales VPs — he needs to join a startup long after the repeatable sales process is established. Almost all of these sales guys who claim they “took a startup from $10MM to $150MM in 3-4 years” never tell you that everything was set up for them. They just come in and hire a lot of account managers, sales engineers, and inside sales reps.
Toss everyone a $2MM quota to pull down and sit back. This is a gross oversimplification but it is not at all an exaggeration. The real skill of these sales VPs is that they know how to identify these startups when they are interviewing for the job. They know exactly what evidence to look for. They do not do VCs a favor and jump into the “next new thing” on claims alone.
In this case, the star sales VP got duped. The initial 20 or so customers purchased the startup’s products as a favor to their VCs - who happened to be the startup’s own VCs. This kind of cross pollination happens all the time. These are not real customers. Sure, they are paying customers but they have not gone through the buying cycle. There is no proof of customer demand, market intelligence, or sales learning.
Eventually, the startup ended up laying off more than half its employees. I joined at this point and my charter from the Board (aka VCs) and the founder CEO was to craft a new strategy, GTM plan, and redo the funding deck.
We re-positioned the startup and its products. We re-branded it not for design coolness but to appeal to a different buying (cost) center. And, we made some significant engineering changes to transform the point product into a system that exchanges data across a shared cloud platform.
Throughout this process, we gave the sales VP a new (interim) job to assess technology partnerships so he would not distract us. We did not fire him because the founder felt bad that he “sort of duped” the guy. And, once our new strategy showed signs of life, we both agreed this particular sales VP would be the ideal person to scale the effort.
Crazy Shit One: The Love Letters
In the middle of our fundraising efforts, the sales VP (now supposedly studying the partner landscape) would feel left out. The founder CEO felt bad about it. The two would Cc me and write what I can only describe as man-to-man love letters to one another. It was very bizarre.
The letter were very long and emotional. It would say things such as, “Henry, you give me power and energy. I woke up this morning wondering how I can help you and Rachel. But, I know that the two of you are sacrificing everything to create the next Microsoft and Apple of the ____ world.” Really creepy shit.
Just when I thought Henry would respond with a kind but terse note, I would see the reciprocation from Henry! “Sanjay, the feeling is mutual and I, too, woke up this morning knowing full well that my purpose in life is to sacrifice and create the next Apple of the ____ world. Hang in there. We need you to create the ecosystem to take us to another galaxy.”
What the f*ck is going on here? The weirdest part is that they looked angry at each other when at the office. Deep down inside, they each blamed the other for the mess we were all caught up in.
Crazy Shit Two: No Product Managers
Henry did not believe in product managers. He actually had hired two product managers. But, he ended up firing one (probably for disagreeing with him) and transitioned the second PM to a “special projects” role. I still do not know what “special projects” we had at the time. Perhaps it was to replenish the free sodas.
A big part of the new strategy was to build our own data center while using the already deployed boxes on-premise at customers’ sites as sensor gateways. This would allows us to build a real-time store of very high value data.
Clearly, anyone could see that we needed a PM, maybe multiple PMs. Henry did not believe in PMs so he worked double and triple time to do the work of a PM. This left me scrambling at all times to keep up. I still have holes in my stomach due to the ulcers from this period of my life.
But, what should have killed most startups only made us recover. Henry was absolutely brilliant. This is a lesson for startups. Almost everyone thinks they are brilliant. Almost everyone is wrong. They are slightly above average in relative terms because there are a lot of super intelligent, workaholic maniacs leading tech startups.
Henry was the one percent genius founder. He can spend four or five hours with me on excruciatingly detailed financial models, customer presentation slides, and deal expansion contracts then instantly dive into code with his engineering team for the next 10 hours. The guy did not drink alcohol, smoke, or take drugs. But, he had more energy and stamina than any young founder. Henry was in his 50s when he started his company.
Crazy Shit Three: Founder Loved Having Women Around
When we laid off more than half the company, Henry kept four very attractive young women around. These women were hired long before me. I knew what their job titles were but had no idea what they actually did.
In random order, the women were: office manager, personnel manager, CEO’s executive assistant, and escalation specialist. WTH is an escalation specialist?
I recall asking Henry why he did not layoff these women as their roles (whatever they were) would not be needed much less critical in the lead up to Series C. He got very mad and told me never to bring it up. He said there were things he — as founder — had the latitude and right to decide and that this kind of who is hired and fired is off limits.
Eventually, I learned that Henry was sleeping with at least one of the women. The rumors circulated widely among the remaining employees. But, many years later, Henry confided in me and told me he had an affair with at least one of the women … of course, it was with the “escalation” specialist. He never said anything about the others.
Crazy Shit Four: The Foreign Telecom Investor
We had no less than 20 investor meetings lined up. Our existing investors had already verbally committed to Series C in principle but they were fighting over pricing the round. The VCs and Henry argued endlessly about pricing.
The VCs wanted to do a slightly down round and had all the facts on their side. Henry thought they were crazy or evil. He thought they were trying to take his company away. He would come by my office and close the door.
“What do you think the price should be? I feel like our valuation is exponentially higher with our new direction,” he would ask. “Look, Henry, that may be true and I believe it. But, from their perspective, it is reasonable for them to want to see new milestones.”
F*ck. Henry glared at me so maliciously that I was sure he would fire me the next day. Instead, he came up to me to emphasize how important it would be for me to schedule at least 20 or 30 meetings with outside investors.
I will never forget one of these meetings with a potential investor. The man was the head of a major telecom’s corporate fund. He flies into Silicon Valley for a conference but agrees to meet us at a rented hotel meeting room up in the Peninsula.
Henry went nuts. At the first sign of skepticism from this foreign investor, Henry took out a hammer (yes, he had brought a small hammer) and started destroying his laptop. He said that computers were all empty terminals now. They are useless.
Anyway, the foreign investor and I both laughed out hard. But, I’m sure we were both terrified inside. The investor passed.
Crazy Enough To Keep Funding
In the end, we succeeded in raising Series C at a higher valuation than the last round! It was a “reality distortion field” moment for me as I saw how VCs operate. Outside investors came in because they wanted to ride the coattails of the existing VCs. One new VC told me later that he put money in for future deals with one of the existing VCs in particular.
The existing VCs all participated because they knew this new strategy would require at least $60-70MM more in a later round. So, they were fine paying up knowing that these new late stage firms had the gunpowder to get us there.
I vested a large portion of my stock options so I went on to another startup. If we had done a down round, I probably would have stayed longer. But, who knows how things would have shaken out if that had been the case.
Anyway, the startup went on to be a gigantic success. It went IPO and Henry wound up making $billions. He now buys up commercial and residential property left and right around the world.
I read about this company everywhere several years ago. ALL of the articles are roughly 95 percent wrong about the story. I am sure that Henry worked his magic and told his far fetched tales. And, the new executives who joined after all the blood spilling work was done only see the heavy flywheel spin but do not understand it.
Or, if they do understand the 100-ton flywheel, no one would ever admit that they had nothing to do with creating it. So, readers are left hearing the same bullsh*t story. The story of how a very brilliant founder got backed by very smart VCs. The genius founder builds an amazing product and recruits a world class team.
They conquer doubts and overcome enormous obstacles. They are victorious and make everyone rich beyond their wildest imagination. The rich part is true. The rest of it is not always accurate. Most times, crazy people destructively rush ahead only to blow up everything. But, sometimes, if you stick with them the market catches up to their sprint.
As for product/market fit? The market actually catches up to the product. The fit is not some exercise in precision nor iterative convergence. The market simply catches up to the product that is 10x better than the existing crap but no one has the incentives to want to understand it much less bet their careers on it.
Mistiming Kills Most Startups
It is my belief that the majority of VC funded startups fail because they are too early to market. And, most VCs are not as patient or visionary as they would like us all to believe. They give up easily when they do not see results.
VCs are extremely conservative and results-oriented. If Henry did not have a very visionary and old (i.e., major success was behind him) VC on his Board, he would have joined the list of 1000s of startups that failed.
Remember the story of Henry the next time you see someone list the endless reasons why startups fail, founders struggle, etc. Mistiming causes most of the downstream troubles, dysfunction, and failures. And, by definition, startups are EARLY to market.
The key is either (a) not to be too early or (b) get investors who decide to invest not on 1-2 rounds but on a full assessment of 4-5 rounds. You cannot control “A” too much as it is nearly impossible to know until you make the leap but “B” can definitely be vetted by testing them with certain questions.
Have a great weekend and do consider providing me with your support by subscribing! I have a discount through the end of September (20% off).
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