We met a startup company recently who wanted to sell their company having burnt their initial seed funding . They had been working on a great idea for the last 18 months, had got funding but  was now broke.

Here is their sad story

X, a team of youngsters left their jobs to become entrepreneurs. Their idea was to create an exchange platform for sourcing professionals. The idea was to connect professionals with knowledge of sourcing various kinds of material from international sources with companies seeking such services. The idea, though not original, had merits as there was a vacuum in the specific space that was being targeted. Registration, pay by use, advertising etc., were the revenue streams envisaged. A business plan was created and the company managed to get initial angel funding of around $300K/- .

All this money was spent in developing an excellent portal with all functionalities. Free sign ups were offered and fairly large number of signups happened. There was some quick revenue generation (about $ 10K in about 6 months) – but by end of the first year the paid customers started declining and almost came to zero. ( later on they realised that most of the initial revenue was from well meaning friends and relatives) .

The company was desperate-   they felt they had a good product. They needed money to go to market. But, they had run out of cash. No one was willing to fund- and finally the promoters, with egg on their face went back to their paying jobs they had left to chase the entrepreneurial dream.

A sad story indeed – but what had gone wrong?

This was a classic case of entrepreneurs so much in love with their idea that they could not believe why anyone would not jump at it. They spent all their money in creating the product- but not any of it in testing their idea with real customers.

Ideas have to be tested – at every stage. With each stage of testing, feedback from market has to be used to refine the idea. It is wise to  test prototypes – for robustness, ease of use, customer acceptance, and price acceptance ( in fact for all possible failure modes) before plunging into product development .

Let’s learn from brick and mortar companies

New age startups must learn lessons from the past. The concepts of alpha , beta stage testing has been used by brick and mortar companies for decades. Why should new age companies be any different just because they often deal with virtual products?

Product engineering companies use another concept called design FMEA (Failure Mode Effect Analysis) to test products at design stage for safety in use. This technique uses brainstorming to envision possible ways (modes) in which the product could fail and assesses the effect of such failure, and the probability of such failures in terms of severity. This is used to design safe products.

New age companies should follow a similar exercise during product development. The focus is not so much on “safety” of use – but robustness of the business idea itself. The questions to be examined are: What are the ways in which this business idea could fail? How can we redesign the product, its manufacturing, its marketing, its pricing, etc., to address all these possible failure modes? This adaptation of FMEA to new business ventures will go a long way in averting failures.

“Look before you leap”. “Forewarned  is forearmed.”- these old granny sayings still have relevance.