Failures – exposed, reflected, considered

Two business failures == third business success?

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Dot.com bubble witnessed many young, bright and entrepreneurial spirits launch themselves into the tech gold rush only to see themselves chasing the fool’s gold. Too many entrepreneurs wound up in searching for jobs in not-so-inspiring companies and earning not-so-high a salaries. But few found courage to continue their entrepreneurial march and found new beginnings, although not necessarily with happy endings. Eric Ries of IMVU, named as one of the Best Young Entrepreneurs of Tech in 2007 by BusinessWeek, is a case in point.

Eric, like many other talented and bright young men in America, had a rather typical start at Yale: have an idea/dream, find a soulmate, work on the idea.

While pursuing a degree in computer science at Yale, Ries took cues from young techies in Silicon Valley who had no problem getting VC firms to back their software dreams. So he and a roommate started CatalystRecruiting.com, an online database of student résumés, and lined up their own slice of the VC pie. “In retrospect it was not such a good idea for investors to give money to kids who just barely knew what they were doing,” Ries says. “They were just throwing money at these companies. But when the bubble burst we had no chance.”

This first idea failed along with ideas and dreams of many others in the same dot.com lot. His next go? There.com.

Soon another lesson would begin. Ries describes There.com as a “traditional VC-model startup,” characterized by high fixed costs, a focused marketing strategy—and an underdeveloped sense of what consumers want. “They start a marketing buzz and a beautiful PR launch,” he says of the strategy too often pursued by startups, There.com included. Ries rattles off other hallmarks: blow through cash by bulking up on staff, hire a vice-president of marketing “and the burn rate keeps growing.” The trouble is, “they never tested if there would be immediate consumer adoption,” Ries says. Worse, the company couldn’t easily adapt to change, he says. “It was rigid and top-down.” Neither Ries nor Harvey lasted long.

The second time failed as well. None of the two did not seem to be a killer startup and couldn’t not wither turbulent and volatile tech market conditions. He did not digest well the errors he has made during the first two gos. One pattern he could however clearly see in both of his failures was the perceived gap between the tech strategy and business strategy, i.e. the tech-centered approach versus the customer-centered one.

For Ries, try No. 3 would be a charm. After losing their jobs at There.com, Ries and Harvey began working on their own startup, IMVU. This time, Ries says, the lessons stuck. “I knew I couldn’t just be a tech entrepreneur,” he says. “The tech strategy needs to be determined by the business strategy, not the other way around,” he says. So the company’s first meeting was all about determining culture and values. “Startups don’t fail from lack of technology,” he says. “They fail from lack of customers.”

His discipline, creativity and determination led him and his partner-in-crime Harvey into founding IMVU. This time, he knew well how to organize his startup; he had learnt it a bitter way, but he did. This time he knew well what there was to know about founding a startup, he had two failures under his belt, and he was determined to succeed.

Early on in his tenure as IMVU’s chief technology officer, Ries audited a class at Berkeley’s Haas School of Business. The instructor, Steve Blank, was so impressed with Ries’ attention to strategy and understanding of business R&D, that he called Shawn Carolan, a managing director at Menlo Ventures, and advised him to invest. Carolan describes Ries as the guy who would go out and read a business strategy book the moment someone mentioned it.

Fruits of his protracted efforts, failures and unfettered passion for what he believed started showing up, the first sign being almost a lucky strike.

Menlo became a backer, as did Allegis Capital (IMVU also had angel investors). “In the consumer market you have to have humility to admit you don’t know exactly what the consumer wants, so that you can be proactive and test features and make changes,” Carolan says. “Eric has an unusual amount of humility and he is unique as a tech person in his ability to be strategic in his business.”

IMVU showed all signs of success early on. Ries started practicing a lean approach for his own startup. Lean startups are resources-, money- and energy-frugal from the very beginning, and as a result are poised better for sustainable growth and long lifetime.

Part of that strategy was taking the product to the customer for testing as early as possible and keeping site development costs low. IMVU.com had a beta version up and running within six months. By contrast, there hadn’t been a test of There.com in its first five years. To prove that the product resonates with customers, there is a small fee associated with participation, and so far, the test phase has met or exceeded the corresponding financial targets.

Additionally, Ries has helped keep expenses in check by adopting a low-cost, low-risk software development process that maximizes ways to improve the site.

IMVU turned out to be an ultimate success and so did Ries, who is not only a full-time in his own startup but serves on boards of other leading tech boxes like pbWiki, Causes and KaChing.

Now the world is facing a recession, the worst one since the Great Depression. But entrepreneurial world is not necessarily crying doom and end to new ideas and initiatives. While some do, others are more moderate by providing an advice/how-to and still others are outright optimistic for launching a startup especially during this recession.

Make your choices.

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Written by Hayk

October 27, 2008 at 11:37 am

One Response

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  1. Steve

    October 28, 2008 at 5:27 pm


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