Only about half of new businesses survive for five years.
From 1994 to 2015, an average of 53.4 percent of businesses survived to their fifth year of operation, according to data from the U.S. Bureau of Labor Statistics.
In a February analysis of 101 startup postmortems by private company intelligence platform CB Insights, the top five reasons startups failed were: no market need, running out of cash, not the right team, getting outcompeted and pricing/cost issues.
Launching a startup is an inherently risky venture. For those whose fledgling companies ultimately fail, what have they learned from the process? And would they do it again?
We asked a few brave southeastern Wisconsin entrepreneurs to share their sunk startup stories to gain their valuable insights.
3D Creations
Jesse DePinto and Matt Juranitch formed 3D Creations LLC in 2012, as the 3D printing trend began to take hold.
The University of Wisconsin-Milwaukee students sold 3D printers and 3D printed materials to small businesses, artists and makers, DePinto said. They rented a retail space for the new business in the Shops of Grand Avenue in downtown Milwaukee for $150 a month.
About a year later, 3D Creations was being dissolved.
“We thought it was a good idea to sell 3D printers out of the Grand Avenue mall two years before anybody even knew what 3D printing was,” DePinto said. “We thought the market was going to come a lot faster than it did. So we were ahead of the curve – too far ahead of the curve – didn’t time it right and chased the wrong clientele.”
The biggest cause of failure for 3D Creations was a founder dispute, DePinto said.
“It was a breakup between two founders to go different ways,” he said. “We’re still great friends and keep in touch and send business leads to each other, but we just wanted two different things.”
After 3D Creations closed its doors, DePinto and new co-founder Matt Halenka created a similar company, Voxel Metric Inc., to provide custom 3D scanning to the same customers. Launched in May 2013, by November 2014 Voxel Metric was shutting down.
“By that point we were out of school, the debt was piling up and we were just kind of stringing along and saw that we were about a month away from running out of money,” DePinto said.
After the demise of Voxel Metric, DePinto worked at more established companies for a while, at Emteq in New Berlin and the company that acquired it, B/E Aerospace Inc., and then at Waukesha-based Telkonet Inc. On the side, he and Halenka formed another startup, Tosa Labs, to provide a fleet management system for forklifts and other industrial equipment using the Internet of Things that has now evolved into an engineering consulting business.
Last year, he co-founded a Milwaukee-based corporate housing management startup called Frontdesk LLC with Kyle Weatherly, who was a client of Voxel Metric when he was president of Solaris Inc.
Frontdesk is raising a $750,000 seed-plus funding round, and DePinto said it’s the best chance of success he’s had in a startup.
“(When Weatherly approached me about Frontdesk) I had a child and a mortgage and I wasn’t sure I was ever going to start a company again,” DePinto said. “So I made the commitment to myself to build a company that I could leave to pursue without having my family suffer by a huge drop in salary.”
DePinto said he keeps taking the leap to start new companies because it’s a challenge on his bucket list he’d like to successfully complete, and he’s too far down the road to stop his entrepreneurial pursuits. He’s learned a lot on that journey. His top tips:
- Focus on revenue instead of investors.
“With Voxel Metric, the biggest lesson learned was to chase money instead of investment. I think a lot of startups fall into the trap of trying to get funded, which doesn’t really mean anything. It’s a scorecard in the startup world. It’s a decent indicator, but it’s not the only indicator of success.
“We bootstrapped it and found out with Frontdesk that if you build a great business with customers, the investment’s going to come easy.” - Collaborate with others.
“Generally speaking, not everybody’s trying to steal your idea and you’re 99 percent of the time better off just opening up in the spirit of collaboration with others.” - Gain some real-world experience first.
“It’s great to have large visions, but you have to bring it down to reality. If you can’t focus on where the money’s going to come in in a month from now, then you’ll be out of business before your two-year vision can unfold.” - Build your network.
“That’s the great part about startups and especially the Milwaukee culture. People generally want to see startups succeed, so you’ve got a silent team backing you if you ever need a favor.” - Be persistent.
“If the investors see a one out of 10 chance that every startup’s going to be a home run, then there’s nothing stopping anybody from just trying 10 times, other than lack of persistence. You have to be willing to pull the plug and pivot, but the question is if you get knocked down, are you going to get back on your feet and try the next idea?”
iDAvatars
Norrie Daroga established Mequon health care software startup Intelligent Digital Avatars Inc. in 2013.
The intelligent digital avatars the company built using the IBM Watson framework for use by health care companies could display compassion, empathy and a sense of humor; they were more advanced than the Alexas and Siris on the market today, Daroga said.
iDAvatars was growing at a 50 percent annual clip. It acquired Colorado virtual assistant developer CodeBaby Corp. in 2016, raised more than $2 million in operating capital through a series of funding rounds, and in May 2017 moved from a 700-square-foot office to a 3,000-square-foot space.
But by December, iDAvatars was winding down operations.
One big factor in the closure was the loss of two huge customers when iDAvatars’ sponsors left their companies: Blue Cross Blue Shield of Maryland and the U.S. Department of Veterans Affairs, each of which was bringing in about $1 million of the company’s annual revenue.
Another problem was Daroga didn’t have the right business partner. Mark Meadows started iDAvatars with him, but they parted ways a year later.
“There’s a bunch of services that help you document your idea, protect your idea, whatever, but who’s telling you whether it is a good idea?” Daroga asked. “Having a business partner who is complementary to you in personality and risk is important. Each of us basically tried to do everything ourselves and it doesn’t work.”
Daroga also wishes he had listened to his wife, Ellen, and allowed her outside perspective to temper the highs and lows of entrepreneurship, he said.
“She’s much more risk-averse, so there was probably moments where I would have taken different approaches or different actions if I had a plan B, C, D, instead of thinking plan A’s going to work,” Daroga said.
This isn’t Daroga’s first foray into entrepreneurship – he started and sold a travel agency database company called Travel Business Systems in the late ’80’s. And he also had plenty of professional experience, with stints as a manufacturing engineer at General Electric, a partner at Quarles & Brady LLP, chief administrative officer at Metavante and chief executive officer of Tailored Care Enterprises LLC before he formed iDAvatars. But, he learned a lot from the experience of failure.
His top tips:
- Have two to three different plans.
“Entrepreneurship is viewed as risk-taking, but successful entrepreneurship is really risk mitigation. I now understand, ‘If this client fails to come through, what else do I have and when am I going to have it?’” - Grow carefully.
iDAvatars had 30 employees when it folded, but Daroga said it probably should have had 10. The merger with CodeBaby presented opportunities, but also major challenges Daroga failed to see.
“You have to understand why they weren’t successful and solve those problems before you merge, not make them your problems. It just was not a very good deal.” - Time is a non-renewable resource.
“Particularly when you’re trying to build something, if you can’t identify and focus on the people who are going to want to buy your product, you’re dead. You just don’t have time.” - Work hard.
“Perseverance is certainly the key because you have to break through to the successful part of that journey.” - Learn from your failures.
“Sometimes you have to shut things down and reboot them to get to be successful. It’s like climbing a mountain and finding out that you’re not going to get to the summit the way you’re going and you have to go back down and find another way up.”
Daroga said while he would do it differently, he’d definitely take the leap into entrepreneurship again.
“It’s about charting a course for your own destiny and, more importantly, having a passion for what you’re doing where you’re not an employee, you’re an owner. Until you understand that you’re responsible for feeding other people’s families and everything depends on a company’s success, you don’t get it.”
Servique
Before he founded technology talent acquisition firm Skills Pipeline and early-stage network Startup Milwaukee, Matt Cordio had a startup that didn’t work out as well.
Servique was a marketplace aimed at connecting homeowners with contractors or service professionals, similar to subscription business review platform Angie’s List.
“I was a student at Marquette (University), which I thought at the time was a great time to start a company,” said Cordio, who majored in entrepreneurship. “But now, I’m actually a believer that the best entrepreneurs have real-world career experience. They’re not college students.”
There aren’t many programs in southeastern Wisconsin tailored to the needs of mid-career professionals who want to accelerate startup growth, he said.
While college is a great time to start a business from a risk perspective, Cordio and his co-founder (whom he declined to name) ultimately didn’t have enough experience to run a business, he said.
“As a student, I had housing paid for and taken care of, but I also had a lot of other things going on that took my attention away from running a company or starting a company,” Cordio said. “I also didn’t really have a lot of practical experience.”
Ultimately, Servique’s yearlong run ended in 2012.
His tips:
- Solve a problem you understand.
Cordio and his co-founder weren’t homeowners or service providers, so they didn’t have firsthand experience to guide them.
“We didn’t have customers because we didn’t understand the problem we were solving.” - Talk to your customers.
“It’s very important to talk to your customers as soon as possible,” and do extensive research. - Focus on profits.
A common mistake Cordio sees in his work with startups is founders getting obsessed with the product, at the expense of the company.
“I think I was somewhat enamored by startup culture and lifestyle and maybe at times not as focused on starting and running a profitable company.” - Pick the right co-founder.
Through a now-defunct startup program called 94Labs, Servique received $18,000 to test its concept.
“What that small amount of money allowed us to do was to test things quickly and … one of those things we were testing is, ‘Does the co-founder relationship work?’ and it didn’t. Your co-founder is probably not necessarily your best friend.” - Apply what you learned.
“Everything we do in Startup Milwaukee, at Milwaukee Startup Week, at Wisconsin Startup Week, is guided by the principle of founders first.”
Since Servique, Cordio has also launched co-working space 96Square, which shuttered in 2015, founded college entrepreneurial skills accelerator program The Commons, which he left in 2016, and founded or co-founded his current endeavors: Wisconsin Startup Week, Startup Milwaukee and Skills Pipeline.
“As an entrepreneur, you have to be pretty self-aware of who you are, where your strengths are, where your weaknesses are and figure out how you amplify your strengths and minimize your weaknesses,” he said.
Cordio said he plans to keep starting new businesses and helping other startups in Milwaukee connect. The best lesson for an entrepreneur is hands-on, he said.
“I don’t think you can actually teach entrepreneurship,” Cordio said. “I think you can teach entrepreneurial mindset and skills and applying them to different things, but I don’t think you can actually teach someone to start a company.”
Yappem
Dave Sachse and Justin Webb founded Sheboygan startup Yappem LLC in 2012, launching the platform to a wider audience at the national technology conference South by Southwest in 2013.
Yappem was an app that rewarded customers for reviewing products and companies online. Those who left a review received in-app currency that could be exchanged for gift cards, Sachse said. It was free to the consumer, and Yappem’s revenue came from large companies like McDonald’s and Random House.
“Brands, especially large brands, were losing control of the impact of their message when they would share it online,” he said. “The whole point of it is we were trying to help brands activate their audiences to share their opinions about the brand while ultimately rewarding people for the content they created online that actually drove business results.”
Yappem grew to about 15,000 active monthly users, but ultimately folded in 2015.
Now, at his consulting firm Midwest Perks, Sachse helps startups develop their sales. And he also is a venture capital investor, helping run his family office, Sachse Family Fund LLC, which makes about $1 million of investments per year. He’s seen entrepreneurship from several angles.
“I don’t think a lot of people understand how entrepreneurship can be a lot of highs and lows and a lot of peaks and valleys,” he said. “You have to stay somewhat even-keeled. Some of those entrepreneurs that are very even-keeled and take a methodical approach are some of the ones you really get excited about.”
His tips:
- Go after more than one big fish.
“Ultimately, our sales cycles were too long. We were selling to larger brands. One of our first customers was McDonald’s. In hindsight, I wish we’d had five to 10 smaller customers.” - Be nimble.
“The development speed was not fast enough for the arena we were playing in. We were a mobile social application and we were doing updates every couple months … and you can’t compete doing that.” - Cultivate your culture.
“I never understood the importance of culture, and building a culture at a startup is really important. I was always like, ‘Hey, on to the next thing’ mentally, and I think that wore down the startup team. I didn’t celebrate the small victories enough and truly enjoy the ride of it.” - Sell it right.
When pitching potential clients, Sachse was heavily selling the features of the app, which were difficult to quickly implement, instead of focusing on the product as the solution to a company’s need.
“That’s a quick way to over-promise and under-deliver when the technology gets in their hands.” - Have a plan for the money.
As an investor, Sachse is less excited about investing in a company if there isn’t a specific, detailed plan about how the funds will be spent.
While he would become an entrepreneur again, Sachse isn’t currently focused on it.
“I see a bigger calling for myself right now with my experience,” he said. “That bigger calling was the bad taste that was left in my mouth by being discounted (by investors) because I was from the Midwest. I just see a bigger calling for myself to try to help entrepreneurs create their businesses where they want to create them, whether that’s in Wisconsin or the Midwest or elsewhere.”
And he’s glad he had the experience, even though Yappem didn’t survive.
“Learning a tough lesson isn’t bad unless you repeat it,” Sachse said. “It’s OK to make a mistake, but learn from it. That only makes you stronger.”
Startuplandia
Embracing failure can teach some important lessons about entrepreneurship, but it’s not often discussed.
Milwaukee entrepreneur Kelly Fitzsimmons wants to change that. She’s working on a book about failed startup founders’ experiences – including her own – called “Lost in Startuplandia.”
“The book came out of my frustration with the current literature on startups, and there seems to be a running trope around how to be successful,” she said. “Success is not simple. Success is incredibly complex and it has everything to do with the individual.
“There’s infinite roads to success, but there’s some surefire ways to fail.”
She uses examples like the widespread public criticism of Julie Wainwright of Pets.com, which closed within months of its initial public offering, to demonstrate instances of spectacular failure and strategies for professional recovery.
“I had the great fortune of being very private about my failure, so most people didn’t know what I was going through and the anger that was being directed at me was very personal and private,” Fitzsimmons said.
Fitzsimmons, who wound up with $5 million in debt from one of her startups, dotcom crash victim PRISM (Proactive Remote Information Security Monitoring), said it was a challenge to keep her situation a secret from even her employees and friends.
“(Entrepreneurs) are already a highly charged group when it comes to mental health, but you start to layer on very public shaming and failure that is incredibly difficult to recover from, and it’s really a recipe for disaster,” she said.
After she got out from under the debt, Fitzsimmons continued to start companies. She’s applying the lessons she’s learned at her current venture, Milwaukee-based Custom Reality Services Ltd.
“I’m always talking about cash on hand and how much do we have and making sure that we’re doing all the right things in managing the mundane, boring stuff,” she said. ν
