Take control of your startup’s destiny, or someone else will

Giff Constable startups

Mark Suster recently wrote one of his most important posts for entrepreneurs (and he has written many good ones): Why You Need to Ring the Freaking Cash Register.

All startups are vulnerable, but if you are over-reliant on external capital, you are especially fragile when the winds change. I thought I would illustrate it with a personal story.

In 2004/5 I became obsessed with the notion that the time for a Metaverse, a 3D virtual layer to the Internet, was finally upon us. I came an inch from starting my own company, but ended up joining a new startup called The Electric Sheep Company. ESC was incredibly promising. The handful of people who had joined before me were all exceptional, and the founder was visionary, charismatic, and had sold his previous company to Comcast.

We tried planting ourselves in front of a wave. Since the wave was barely formed, we decided on a two-phase strategy. We would gain cash and experience through consulting work, and then roll out a series of products for this new 3D layer on the Internet.

In particular, Second Life was on fire, growing at a massive rate each month. Our goal was to become the Netscape (browser), eBay (ecommerce), and Google (search) of that new Internet platform.

Our first year of 2006 was an uphill battle. We all took big salary cuts and hustled for tiny $15K projects. The founder raised about a million dollar seed round, and we slugged away.

Fast-forward a year, and we were killing it. We were the number one company in the world for designing and executing “virtual worlds” projects. We were all over the press, including a huge article on the front page, above the fold, of the NYTimes business section. We had clients like MTV, P&G, Sony BMG, MLB, NBC, Best Buy, etc. We won an Emmy for our work on The L Word’s virtual experience. I gave a keynote speech to 3,000 people at the National Retail Federation’s annual show, right after The Blue Man Group and a guy from a little company called Coca Cola.

ESC-smokinaces

The virtual worlds wave felt bigger, and it was time to claim it. The founder raised $7 million from his original angels and CBS joined as a strategic investor. Our strategy was to use the distribution from our big media-company clients to drive traffic into our suite of software products. I switched over from building up the Second Life consulting practice to leading our product team and we got to work. I knew that the revenue ramp-up on the software side was going to take time, but we were confident that we could continue to keep a leadership position riding the wave and fund the company.

But the wave started feeling shaky. Second Life’s platform had limitations, and it was hitting a bigger chasm than expected between the enthusiasm of early adopters and the acceptance of mainstream users.

Nothing we couldn’t solve, we thought. The Second Life software was hard to use, so we built a better designed client. People didn’t know what to do when they got into SL, so we created content and games. We did a huge trans-media project with CSI NY, with a mystery plot that crossed television and into the virtual world.

In late 2007, About 9 months after our $7M round, we knew we had a serious problem.

We had obsessed about the wrong wave. It wasn’t going to be the Metaverse. Instead, it was the Facebook platform.

Then the financial crisis hit. We had grown to 85 people, a big portion of that in the money-making services side of the business. Between Second Life losing its shine and the financial crisis, the consulting work slowed way down.

We had to lay people off and pivot at the same time, but raising money from a strategic investor too early came back to bite the business. Instead of pivoting to something ambitious, the board decided to pivot to the relative safety of consulting, even though that was low-return work. Unfortunately, it was also a mirage because the good consulting work had dried up.

In the span of just a few months, we had gone from flying high to a desperate struggle for survival. And unfortunately, it turned into a death spiral. The tragedy, to me at least, is that at the start of crisis, we actually still had enough money in the bank for a seed-sized team. We had an unbelievably talented group of people and some good ideas. If only the board had the guts to take another swing at bat. I parted ways with hard-won experience, lessons from my mistakes, some great friends, and a lot of frustration about what could have been.

But so it goes.

I tell the story to illustrate how fast things can change. One minute, we were top of the world, and figured raising more money would be relatively easy. The next, we were in the pit of despair and the venture capital markets were completely shut.

As an entrepreneur, there are few feelings worse than being at the mercy of financial investors.

VC money is often extremely important to a business, but unless you are playing that low-odds gamble of mass adoption (tumblr, instagram) hustle for your financial independence as fast as you can. Ring that cash register.