One Startup Story. What Fails in The IT Business May Come

FailConf – a conference, dedicated to the brightest failures in business, was held in Barnaul for the very first time. Of course, with the prefix “IT”. We were lucky to visit the conference as co-organizers within the Innovation Support Association and listen live to the nonfictional stories of defeats, failures and unfortunate mistakes in the big business world. As a result, we have decided to combine the stories from the conference and from the usual practice in the big one. We are happy to introduce your four fail-stories. Two of them have a sad end, and two – a happy one.

A startup itself is risky and much less in IT. Here the series “Silicon Valley” isn’t lying: dangers are lurking around every bend. For sure.

Conflicts and misunderstandings with investors, discords in the processes and inside the team, sudden bugs in the program, technology hijackings, difficulties with promotion – these and many other factors contribute the business breakdown. It is confirmed by the bad statistics: only 1% of startups are successful. Thousands of failed social networking projects and one Facebook, hundreds of similar ideas that have not survived and one Uber.

However, it is not that common to talk about our mistakes. And if you are brave enough to do it, you should mention your fails in passing and with eyes down, because you don’t want to become an object of derision and to be pelt with rotten tomatoes. But there is no sense in it. It is much better to learn from other people’s mistakes than your own. This says the conventional wisdom and the Internet Initiatives Development Fund (IIDF), having organized together with us the FailConf in Barnaul.

FailConf – what is it?

The idea of the FailConf is to demonstrate that everyone can make mistakes. Everyone has failures and difficulties at the beginning, but the question is a person makes conclusions out of them and whether he wants to move on, taking bitter experience into account.

The conference about mistakes and fails is a new phenomenon in our country. Instead of cases of an unprecedented success and the demonstration of incredible achievements – the harsh uncensored truth. People in Russia still have a cautious attitude to it, but this practice is common all over the world. Public discussion of errors has proved to be effective in the West. Similar Fail-conferences are regularly held in the Silicon Valley: representatives of the largest IT companies share their unsuccessful experience with beginners.

The Internet Initiatives Development Fund is a pioneer in Russia, organising the conferences like that. For about three years, it has been conducted FailConf across the country, from Kaliningrad to Vladivostok, trying to prove: talking your mistakes for everyone to hear and confessing your failures in business is not a shame, but a useful practice.

Finally, the Fund reached Barnaul with this non-standard format. About 70 people came to the conference – entrepreneurs, IT specialists, marketers, journalists and others.

Stories

Well, now to the dessert – the stories themselves. Exciting, sometimes funny, sometimes sad to tears. Some give the jitters, and some make you feel real pain. Four stories.

Each story is connected with the loss of large sums, an unsuccessful experience of cooperation with partners and investors, or even with the entire business closure.

Two ended with complete and irrevocable failure.

Two with a happy end.

Disclaimer: all stories have really happened; all coincidences are not accidental and are intentional.

Monetization model fail

Person: Michail Avdeev (Ekaterinburg), the founder of E-transport, the resident of Acceleration IIDF.

Project: E-transport is a service allowing to track the movement of public transport and calculating the arrival time for buses, trolleys and trams for a specific stop to the minute.

Field: В2C.

Working principle: The integrated GLONASS detector helps to determine the location of the person and of the transport. It finds where the user is, and through a server with geographic memory transfers data to the phone. When the mobile device receives the data, it shows the approaching transport and the time to arrival at the stop.

Developed for iOS, Android. Also the web-version was planned by order of Ekaterinburg administration, but it is unfinished.

Events chronology:

1. The group of students opens a small mobile application development studio and thinks about a project for a portfolio. This project is E-transport. When the application had 15,000 users, they decided to scale.
2. As the monetization model, the startups chose the advertising one.
3. In 2014, they were enrolled in Acceleration IIDF, which has invested 45 thousand dollars in the project.
4. Worked out the plan:
   In 6 months: connect 15 cities, monetize at 10, reaching an annual revenue of 20 million rubles.
   In a year: 40 cities with monetization in all of them and annual revenue of 80 million rubles.
   In 3 years: 100 cities, a full-scale transport monitoring system and annual revenue of 250 million rubles.

   

5. In Acceleration they have earned the first 10 thousand rubles and reached 60 thousand application installations. By the end of the year, they wanted to earn 4 million rubles (spoiler: this didn’t happen).
6. Suddenly the strong competitor has appeared, Yandex. Transport. Yandex has launched a beta version of its application in Kazan, embarassing the developers from Ekaterinburg, which made them take several wrong steps.
7. Then they decided not to waste their talents on trifles and chose as the main purpose the capital of Russia – Moscow. As a result, they spent 15 thousand rubles on advertising Vkontakte and conquered the city earlier than Yandex. In 6 hours after the trick in Moscow, the application gathered 10 thousand users, by the end of the day – about 20 thousand, and at the end of the week – 60 thousand users.

   

8. A triumphant march through the country starts. In total, E-transport was launched in 33 Russian cities.

   

9. New plan is to make profit from advertisers in the application. However, advertising networks and agencies were not ready to work with E-transport: 300 thousand users were not enough for them. At least one million was required.
10. An attempt to forge cooperation with Beeline, mobile operator, but the same situation again, the project lacked the necessary users number.

    

11. After all, having implemented the advertising network, they didn’t achieve success: the maximum profit per month was 100 thousand rubles, with CPI of 0.5 Rub. In addition, Yandex, who also has started to work in Moscow, breathed down the developers’ neck.
12. An attempt to work with small cafes, restaurants, pharmacies and other services near the stops, having implemented social and gaming functions into the application.
13. By autumn 2015, the servers broke down, and no one wanted to recover them.
14. The decline of interest, the inability to overcome the profit ceiling.
15. Fail.

Fail summary: Poor financial model and lack of consistency in actions.

The application was marketed as free and survived thanks to voluntary donations of users and investments, without taking official payments from them. The startups relied on the users, hoping that they would advertise the application themselves, but that didn’t happen. As for big agencies, they were not satisfied with arguments and indicators offered.

In addition, one more important factor has not been taken into account. Rivals on the market. Besides the already powerful Yandex, there were many analogous projects: only Ekaterinburg had three such applications at that period time, and St. Petersburg – more than a dozen.

Now: The project was canceled, the company was closed. Michail is now engaged in other projects and feels great.

Plans for the future: Create other projects.

Michail Avdeev, the founder of E-transport:

The most startups problem isn’t in their products themselves but in their marketing and financial models. Often the product isn’t needed for anyone. What stopped us from going to Beeline to find out how many users we need to have to connect to the advertising network? Nothing. However, we were absolutely confident in our actions, and we didn’t even think that something could go wrong. We didn’t understand who our client was, why he might want to apply to us. When the company was closed, we made the conclusions, why it has happened. And this is the most important thing that happened in my business experience. In two years, the project has taught us a lot. When we decided to go beyond the portfolio thing and to start a business, I should have asked myself – how will we earn, why we will make money on it and whether our client thinks the same.

Result: Both positive and negative.

Niche fail

Person: Evgeny Ageenko (Barnaul), the founder of Gde.ru.

Project: Gde.ru (https://gde.ru) is a board of free ads where anyone can place his offering.

The site works in all regions of Russia. There are also versions for Ukraine, Uzbekistan, Kazakhstan, Belarus and India. In the domain zones of these countries the project called Salexy. Another board in English works at salexy.com (http://salexy.com) in more than 100 countries.

Field: В2C.

Working principle: The principle of Gde.ru is elementary: a person comes to the site, selects the category needed, and places his ad for free.

The list of categories on the site is nearly complete: “Goods”, “Services”, “Jobs”, “Entertainment” – everything Internet users are looking for.

Events chronology:

1. In 2003, together with the partner, the entrepreneur has created a project called ePilot.ru – a search system for erotics. The system was designed for the Russian audience. As a model for earning, the partners chose contextual advertising.
2. A year later some results were achieved. The number of advertisers and active partners reached three thousand. However, the service did not bring much money. Sites with such contents are in demand without additional actions. Therefore, the owners of such resources have no need to pay extra money for advertising.

   

3. In 2005, the project evolved into the search system Gde.ru with expanded subjects.
4. The number of categories has grown as well as money and advertisers. But new challenges arose before the startup.
   There were too many competitors in this field. If search systems for erotic sites didn’t exist at all, the portals offering a search for different categories of goods and services were a legion.
   It was necessary to attract traffic for each category to it profitable for advertisers. To increase the activity of advertisers, they decided to reduce the minimum CPC by half. But this did a fat lot of good: the partners, naturally, did not want to get less and left.
5. In 2007, additional services were added to the site: photo galleries, e-mail, blogs, chats, social network, dating and so on. Overall 12 new features for the year. Each service required further development, integration and promotion, they were written on different engines and did not live well on one server. That’s why they didn’t bring income, only having taken away the huge resources.
6. In the same year 2007, the company attracted its first and only investments – 20 thousand dollars. Evgeny has decided to spend them on advertising of free services, and that has attracted a lot of new users. The fee-based services were closed because they brought only loss.
7. All this time the company worked with zero balance. Money was enough only for the salaries of employees (there were five or six people) and to maintain the infrastructure. There was no profit. Totally nothing.
8. In 2008, he has decided to “re-qualify” again and create a bulletin board, based on the site.
9. The bulletin board turned out to be a good solution, but there there were also reasons to stumble. For example, payments for ads and to support non-viable services.
10. As a result – long five years without profit.
11. Fail.

Fail summary: There was a whole bunch of all kinds of mistakes, which prevented the company from moving forward. Financial model errors, competitors, multiple throwings and distractions – all of these has become the obstacles on the way to success.

But the main problem is the choice of the niche and themes and its positioning. At the beginning, they were too narrow, then – too wide. Instead of concentrating on one thing and “aiming” more accurately, the creators of Gde.ru expanded, having hoped that the wider the network – the greater the catch. But you can’t please everyone. The Internet operates according to its own laws and getting free traffic is more a dream than a given.

Now: Gde.ru is a successful project with a large audience. In 2014, it has started to get profit, and since then the business is a real hot streak. In 2016, the company’s profit was 100 thousand dollars. The main traffic to the site comes from the search systems and attracted by promotion there.

The overall attendance of bulletin boards in Russia and the CIS countries is 1.5 million users per month, and sites in other countries – 300,000 thousand per month.

Plans for the future: In three years Evgeny Ageenko plans to win 10% of the market for private listings in Russia and to achieve 300 million rubles of annual revenue. This requires 20 million rubles of investments, which will be used to build an artificial intelligence system.

Evgeny Ageenko (Barnaul), the founder of Gde.ru:

Over the years, we have had several unsuccessful attempts. We made the same mistake again and again. Instead of “aiming” more accurately and concentrating on one market, we have just expanded, even more, hoping that fish will come to a wide net. At the same time, we didn’t take into account the fact that there is no free traffic on the Internet. Moreover, we have constantly worked to improve the usability of the site, considering that it would attract new people. But users do not care about your name, nor design, nor comfort. First of all, it matters to them whether they can earn or solve their problems with the help of your service.

Result: Positive.

Business processes fail

Person: Vyacheslav Arkharov (Moscow), expert on B2B business development in the IT, in Acceleration IIDF and Kaspersky.Start, Business Development Manager at the system integrator KSS Group, ex-senior business strategy manager at Microsoft.

*Vyacheslav did not participate in the project in person but was an active observer.

strong>Project: System integrator SCALAXI group – the company developing portal solutions and complex components for business processes automation.

Field: В2В.

Working principle: At first, they used this scheme: together with the client, they worked out solutions, the functions list was invented in process. Without tangible resources and necessary documents, this didn’t work. Therefore, the company collapsed.

Events chronology:

1. At the beginning, the company made portals for Gazprom’s affiliates, major auto dealers and several banks. The portals were custom, the margin – low, but the business grew.
2. The company revenue has reached 40 million rubles a year. The number of leads and orders increased. But all the processes were very specific. Specific in Russian style. No working system and discipline – only lazy “maybe”. “Maybe” is, practically, a business for free, without registration and without many other important things, like:
   – Clear specifications.
   – Any agreements.
   – Payments in advance.
   All this got worse due to the lack of coordination between departments. The same situation was on the side of many customers, but no one wanted to explore their processes, it was too long and dreary.
3. After implementation, the solutions began to work completely differently in comparison with their supposed version – due to objective reality. Even if the specification, after all, were made, it was extremely vague and didn’t show the full picture.
4. The customers began to refuse payments.

   

5. Losses. The projects, which were supposed to be a goldmine, led the company to the financial bottom.

   

6. The company became bankrupt, with debts and two lawsuits.
7. Fail.

Fail summary: Business in the Russian style isn’t an option in modern realities. The era of raspberry-red blazers passed into oblivion, it’s time to act in another way. The company burned down because:

• Didn’t identify the client’s hidden needs and pains (customer development), but worked by guess, shooting in the dark. That is why there were many extra, sudden and unexpected costs, having hit the company’s pocket significantly.
• Didn’t receive payments from customers. Since the contract was a non-binding handshake, not the official serious document, the client found many reasons not to pay – and actually didn’t pay, while the company suffered from losses.
• Didn’t create a minimum viable product (MVP), but each time came up with a new idea for a new problem, changing everything on half-way to the project’s end.

Now: The company does not operate. The team is broken, no customers. Errors have not been corrected and taken into account.

Plans for the future: Unknown.

Vyacheslav Arkharov (Moscow), expert on B2B business development in the IT, in Acceleration IIDF and Kaspersky.Start, Business Development Manager at the system integrator KSS Group:

The big world of B2B is very severe. At first sight, it may seem to be simple, but it isn’t. Also, it is very attractive, because there is a lot of big money here. But even the simple tasks have many small details that you can notice only after the careful analysis. Even if the client agrees with you, it’s not a fact that he really understands how the system will really look. He has his own picture in his head, and even when you discuss the same thing, you think differently. The example: let’s imagine a house. Someone thought about a wooden house in the village, someone about a skyscraper, and someone about a small flat in Moscow suburbs. The same works for the automation systems. So without writing a good specification, just hoping for the illusions, you end up with no money.

Result: Negative.

Mentality fail

Person: Denis Gazukin (Barnaul), serial entrepreneur, MITRA and Freematiq CEO, founder of the Innovation Support Association.

Project: Payment terminals. What’s more important is where – in India, which Denis with the partner wanted to conquer more than ten years ago.

Field: В2C.

Working principle: Now payment terminals won’t surprise you, but in 2007, when an entrepreneur started this story, they were at the peak. The principle of operation is familiar to everyone: using the touch screen you choose a service to pay, put money into the terminal, and all done.

Events chronology:

1. In 2007, Denis with the partner launched a network of payment terminals in Delhi.
2. At this time, the entrepreneur already owned a group of companies, having developed payment terminals. Everything was OK: the company revenue was about 50 million dollars a month, the staff number around 200-300 people. The partners conducted all affairs.
3. Before the trip to India, Denis has performed a marketing research and found no arguments against the project. It was not customer development; the office in Delhi, having made the research, provided purely marketing data: about the legal and tax components and about the structure of the market. The received indicators promised “the sky in diamonds” and left no doubts.
4. After the arrival to the country of Kamasutra and the sacred cows, the partners entered the Delhi metro and installed about 120 terminals throughout the city. Having invested tremendous funds.
5. But the bright expectations were false; despite the fact that millions of people passed terminals every day, only a few used them.
6. At the same time, there was another payment system in India. Mobile operators issued specialized cards, which helped people to top up. The SIM cards were advertised everywhere and this system was quite enough for the Indians. However, this fact didn’t stop the partners. As a result, the network balance was negative. Always. Due to such low traffic, it was impossible to make money, even with a rather high commission of the terminals.
7. 300 payments per day – the maximum number that was achieved.
8. The business epic story in India has lasted for 5 years. Losses, losses and losses once again.
9. Loss of business.
10. Fail.

Fail summary: The absence of any customer development was a fail reason. In their research, the partners didn’t take into account the mentality of the nation, the difference of cultures. That’s why they lost. The Indian’s mind is somewhat different. They just don’t want to pay for services through terminals and that’s it. Such machines are soulless pieces of iron for them. At the same time people in India are very social, they need to communicate with each other. It’s worth to pay attention to such things. How do people in India pay for mobile communications? Do they really need payment terminals? These important questions were answered too late.

Now: Denis has about 15 companies in different spheres. But 80% of the time are dediated to the companies called MITRA and Freematiq. He has started Freematiq in Barnaul immediately after the return from India. MITRA focuses on the usability of websites: interfaces, behavioral factors, design. Freematiq develops financial web applications and complex Internet business. Both companies have an impressive staff with more than one hundred people and leadership positions in the region. Recently, Denis Gazukin helped another company to appear: MIRANIT. It specializes in complex Internet marketing and promotion (SEO, SMM, targeted and contextual advertising). Together these companies form a new unique IT cluster, which hasn’t existed in Siberia up to this day.

Plans for the future: The plans of Denis Gazukin are truly Napoleonic, especially regarding the development of the IT industry in Barnaul and in the Altai Territory. This is the expansion of technology stack, and further promotion of his own products, and the educational base development, and the work with a startup community, and even an attempt to create an Altai analog of the Silicon Valley in the region.

Denis Gazukin (Barnaul), serial entrepreneur, MITRA and Freematiq CEO, founder of the Innovation Support Association.

In fact, my story is a caution about the customer development. Work with the client! Customer development is a way to understand your market and an attempt to foresee the reaction of a potential consumer to your product. When we launched payment terminals in India, we considered ourselves as someone who thrives the Indians and brings technology to them. But in reality, everything was quite good with them without us, there was nothing to bring. The result of five years work was actually a customer development, we understood how the client thought. So don’t skip this stage, it’s too expensive.

Result: Positive.

Common mistakes

Certain common patterns inherent in all unsuccessful startups unite all these stories, despite the fact that they are different.

Such typical errors were also mentioned by FailConf experts.

In no case:

• DON’T marry your ideas
  As many people do: just right after it comes up, they claim idea as “ingenious” and try to break bad with it. But don’t hurry to order wedding march, at the beginning a couple of dates will be enough for you.

  

  Always remember: your idea is unconfirmed and not proven. There is a strong probability that it isn’t so cool and necessary for everyone.
  So be prepared that anytime you will have either to transform the original idea or to abandon it completely. Do not waste your and other people’s money for nothing.

• DON’T skip the customer development
  Down with the hypothesis not supported by facts!
  If the statement isn’t proven, it is a fantasy, which isn’t fit as a basis for your project.
  That’s why you should include in your arsenal tools for testing hypotheses such as different kinds of interview, surveys, analytics and so on and so forth.
• DON’T work in the Russian style
  Contracts, acts and other papers, detailed specifications, payments in advance are needed by default.
  Otherwise, no money and that’s all. Proved in practice.
• DON’T introduce a final product version immediately
  Make MVP, a minimum viable product. Test it with the client, observe his reaction and find out what is good and what is not.
  If everything is OK, then you can get the product into final shape.
  In addition, in such way, you will ensure you will not take unnecessary actions and look for the constant new ideas for the upcoming problems.

  

• DON’T try to seem smarter than you really are
  Perhaps it is the golden rule for business. Don’t say or offer something that you hear for the first time or have no idea how to do. Clients really believe you and think that you understand their problems.
  Don’t lie about your skills, there is nothing kept secret that won’t come to light, and the payment will be very cruel for it. You will just lose your reputation and everything will be for nothing.

The list is endless, but these errors occur most often. Do you have anything to add?

Michail Avdeev, the founder of E-transport:

Why visiting FailConf is more useful than success cases conferences? The success story is often single, unique, and can never happen again in comparison with the stories of mistakes. You should always take into account other people’s mistakes when you are doing your own business. It is necessary to consider other people’s mistakes and go further.

Dmitry Starostenkov, Enterra, Inc. CEO, founder of the Innovation Support Association:

Mistakes and failures are an indispensable part of the path in any business. If you don’t get hard knocks, you don’t understand, how does it work and won’t grow up. Any entrepreneur goes through them, and I have faced difficulties in my practice many times. However, the main thing here is to feel that something is going wrong on time and to take all the necessary actions to change the situation. And, of course, don’t give up. You can’t survive in the business world if you aren’t persistent and hard-working.

In the history of Enterra, of course, there have also been misses and unpleasant situations. For example, we have working on a large order for one Barnaul organization. The budget provided seemed sufficient. But when we began to dig into the details, it turned out that the developed system would be much bigger than we supposed. At the last stages, there were attempts to persuade the customer to increase budget, but they refused. As a result, we returned some money to the customer and transferred him what we already did. To continue further works meant to increase losses. The system was ready by 80%. The main problem, in this case, was that the client couldn’t accurately formulate the specification. We felt that this could last for years. It must have happened in such way. This has become a lesson for us – now we carefully calculate the budgets.

This entry was posted on Tuesday, April 24th, 2018 at 11:04 am and is filed under management, Startups.