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I co-founded an entrepreneurial venture, called RedSpark, with two others in 1999 during the first dotcom boom. And it failed spectacularly.
I raised $17 million and during those 2.5 years is where I made the biggest set of mistakes.
RedSpark was a B2B company. The idea we had for the manufacturing industry was we would have exchanges, in which people would list supply side, list their capabilities and the buyers would list what they were looking for. The company we’d build would match the two.
Let’s say someone is capable of doing these kinds of connecting rods made out of platinum and there might be people in Kentucky or California looking for that. Those days it was analog, people had to go to trade shows or look in the Yellow Pages. In 1999, you can turn all of this into a matching experience by putting it online. That was the premise. It sounds good on paper.
The mistake that I made was that I actually never checked whether customers needed that and how important it was for them. I never took the time, nor did my co-founders, to find out if enough customers had this problem, if it was important enough to sell.
We spent six months building this thing, showing this thing. Then we talk to manufacturers who say, “We don’t need to find suppliers, I’ve been doing business with the same people for 30 years. We look for suppliers once in awhile.”
The example that I described, the 1,000 platinum components, that happens every 2.5 years. It was worth $1,000 at most, because you’re giving a simpler way to do this than the other way they were doing it. It’s a 100 companies giving us $1,000 a year every two years. That’s not a business.
I was so convinced of the sheer brilliance of our thinking, we ended up following the “visionary customer” these guy we were talking to, thinking they’ll come around. We have to find that one customer who says, “Where have you been?” It turned out to be the other way around. They knew what they were doing,
By the time we figured it out, we were watching the cash in the bank account decline. The Darwinian thing about startups is when you run out of money and customers, you’re done.
Too many businesses are like Hollywood movies. They come up with a theme that sounds attractive.
It seems very straightforward now. We didn’t pick a valuable enough problem. We didn’t evaluate if enough customers had it. We never figured out how valuable it was. By the time we figured out the answer to that question and how many of them needed it, we had basically spent our money and had nothing to show for it.
Too many businesses are like Hollywood movies. They come up with a theme that sounds attractive, but the fundamentals of the business is hoping for certain assumptions. You really have to do your homework to make sure your assumptions turn out to be true.
I actually learned the hard way the physics of business: You have to find a problem valuable enough to someone and there should be enough of those someones that you can build a business around it. To build a profitable business, you have to solve that problem for less money than what customers are willing to pay you.
Follow Amar Hanspal on Twitter at @AmarHanspal.