Web start-ups almost always fail. So why are these guys launching one?

The story of America's greatest idea.
April 21 2010 7:05 AM

Risky Business

Web start-ups almost always fail. So why are these guys launching one?

(Continued from Page 2)

The contest culminates with each company making an eight-minute pitch to attendees. That was Anderson's job, as head of marketing. He's had a lot of practice. He spends most of his day driving up and down Highway 101 to meetings, symposia, and networking cocktail parties. (He is like the bride at the wedding, always delighted to answer a question she's been asked a hundred times before: How do you get customers? Who are your service providers? What's your five-year plan? When are you going to start a family?)

Anderson had to explain Redbeacon in a way that would excite a very sophisticated audience. So he talked about cupcakes. He decided to order 500 for the crowd designed with the company logo. He called up the Redbeacon Web site, placed the order, and uploaded a digital image of the logo for the bakers to use as a pattern. He picked a baker out of the three who bid. As the final flourish, he put a call out to the cell phones of all Redbeacon users near the auditorium asking if any wanted to hire themselves out to deliver cupcakes. For $100 they found someone and the cupcakes were delivered to the crowd.

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Obviously this entire process didn't actually take place in six minutes. (Anderson and his colleagues had picked the baker days before, and she spent the weekend baking.) But the presentation of how the site would work once operational dazzled the crowd. Redbeacon won and took home one of those huge checks like the ones Ed McMahon used to deliver.

As expected, the venture capitalists followed soon after. And here is where the story gets complicated. Books and blogs devoted to start-ups are filled with psychological counseling and advice about how to get in the door with VC's. Most companies dream of getting a VC meeting, and many never get one. In the month after winning, Redbeacon had 19 meetings with venture capital firms.

Investment from a VC would have launched Redbeacon. It could have moved into bigger offices—no more playing musical chairs to accommodate the sales team and freelance engineers. Anderson, Binur, and Lee could have paid themselves salaries and maybe taken a day of vacation. They could have advertised on city buses and hired an army of salespeople to sign up local plumbers, cleaners, and photographers. They could replace their saggy Craigslist couch.

But accepting venture capitalist money had its own risks. Silicon Valley veterans describe VC cash as "rocket fuel" or "a bomb." Anderson has his own metaphor: "It's like driving a car before the steering column is built and stepping all the way down on the gas. You go out of control and are destroyed."

Once the venture capitalists put in money, they expect the company to grow. They want to see the money spent on engineers, marketing, and expansion into other cities, all of which would presumably grow revenues. But what if the company isn't ready yet? What if you get huge and then you discover a fundamental flaw in your approach? You're too big to fix it in time. Your size and reach only means you've achieved the ability to broadcast your incompetence to a vast number of people.

Anderson, Binur, and Lee debated for three weeks about whether they should take any money. They interviewed other entrepreneurs and got mixed advice. Don't take the money so early, said many, you'll have to give up too much equity in the company in exchange. Launch small and then work out the bugs before you take on that big fuel.

Others argued they'd never have more buzz than after the TechCrunch50 win. The more buzz, the bigger the paycheck. The progress they could make during a soft launch would seem pathetic by comparison.

They decided not to pursue discussions that would lead to immediate money. This was their caution and their hubris. They weren't ready to handle the rocket fuel. Plus, they thought by launching on their own they could gather enough data about consumer behavior to make venture capital firms even more excited about what the company could do when it built to a larger scale. "We needed to prove to ourselves first that we could hit these goals," says Binur. "We need to prove that our models aren't theoretical. If we do that, we can go into VCs in a completely different position than after TechCrunch50. Then we had no data. We were just guessing."

A month after their TechCrunch victory, they launched in San Francisco and immediately started trying to understand how their customers behaved. Redbeacon's offices may be drab, but the software they've developed to analyze their data seems fit for one of those companies in all-glass buildings where everyone gets a Wii at the end-of-the year party.

Lee's software was designed to identify problems as soon as possible. "In order to be nimble and fast you need to have data on a daily basis if not sooner. A start-up's success or failure depends on how many iterations you can do within a fixed window."

What this means in plain English is that they need to identify problems quickly and adapt software to solve them. (At Google this concept was encapsulated in the phrase "launch early and launch often.") This is necessary to get the company on its feet, but it's also an important part of the pitch to future investors. New challenges don't stop coming once you've worked out the initial bugs. Investors want to see how quickly a company can identify and kill risks that might pop up in the future to threaten the money they might invest.

Manic data mining is also a necessity when you're operating on such a lean budget. With limited time, money, and attention, the Redbeacon co-founders can't spend resources guarding against every problem they might anticipate. Most of the problems they thought they'd face before launch didn't pop up. Those that did, they hadn't anticipated. Their constant risk assessment strategy means that as they look at every challenge they face they have to decide to spend their time only on those risks that threaten the enterprise. They don't worry about solving every edge case. "We don't build something until we feel the pain," says Lee.

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