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You hear this quite a bit in the start-up world: The thing about technology companies, or any company for that matter, is you have to “fail to succeed”. Many venture capitalists won’t invest in an entrepreneur who hasn’t failed at least once. Some start-ups rise from the ashes to develop into successful businesses.
This is not always the case. Some fail, others thrive, some just evolve. Jon Jacobson, founder of high-profile Cape Town start-up Global Vision, rose to the top of his game, creating a company worth well over R45-million and employing around 90 people at its peak. Just a decade later it all nose-dived. Here is Jacobson’s account of his company’s rapid rise and dramatic fall:
I returned from New York after five years of working for a topflight merchant bank. I sold my apartment on the upper west side of Manhattan, went to South Africa and started Global Vision from the backroom of my rented house in 1999. By 2008 we were near our peak and boasted a net profit before tax of R10-million. Two years later we were going out of business. This is an account of our mistakes.
Learning from Mistakes
When we started the business we managed our expenses very tightly, but grew the business steadily. We were always hiring behind the curve, winning business and then finding the people to execute. It was a good principle to follow and helped us navigate our way through the first two years of business, during which 90% of start-ups fail.
By 2006, we were in the process of rolling our first-generation marketing platform into 35 markets as part of our joint venture with a global consumer goods multi-national. At this stage, we were one of only three global partners they had. We were on track for great things and our turnover was following nicely, continuing a pattern of growth which had seen us increase revenue by 50% year on year from foundation.
In 2007, we did our first investment deal. We sold 35% of the business for R10-million. The primary driver for the deal was to provide funding for the build of our next generation platform. At the time, and at the height of our success, we made strategic decisions that were to play major roles in the downfall of the business:
Lessons I learned the hard way:
1. Own your mistakes
We invested R1-million in a new IT start-up. The motivation for investing in the startup was two-fold — partly to bring software architectural best practice to Global Vision and partly because we thought it would dovetail nicely with our new software. The logic was sound, but we compromised our position by not owning a clear majority stake in the business and thereby not being able to call the shots on what very quickly became a bad investment. It took us two years and much pain before circumstances forced the separation.
What did I learn though, was to own your mistakes. Fix them quickly and move on. Don’t be scared to change your mind. Within the first two months of the investment a number of issues surfaced. This made it apparent that the leadership at the other company had a very different mindset and value system to ours. As entrepreneurs and businessmen, we’re often too worried about appearing inconsistent. Famous economist John Maynard Keynes once said, “When the facts change, I change my mind. What do you do?”
2. Stick to your knitting (or stick to what you know best)
We were running out of space for the third time and purchased a floor of space in a new building development, which would accommodate our growth for years to come. By October 2008, the massive property costs for carrying the building headlease meant that our expenses had gone through the roof. We needed to get more cash in to keep the business going and drive our vision for our next generation software. In 2009, we made another investment deal, but to no avail. By January 2011 Global Vision was no more.
The property deal we got involved in was fundamentally flawed from day one. All the risk for the deal was on our company’s shoulders. We had everything to lose, our partners had everything to gain. In the process we broke one of the cardinal rules for IT startups
We created a second major fixed cost over and above our headcount costs. Because Global Vision carried the headlease we were now exposed to the vagaries of the property rental market. The property remained let at only 40% of tenancy for nearly two years. What was once a very profitable company was barely breaking even.
In essence, by breaking away from what we knew best, we had created an unmanageable expense, which eventually led to massive debt issues.
3. Make the Right Technology Decisions Early
One of the key decisions we had to make on the new software project was selecting a Rich Internet Application (RIA) Framework for the presentation layer of the application. We selected Silverlight (Microsoft’s RIA framework). In retrospect, however, the decision was made without enough due diligence applied to the thinking. A bit of applied research would have shown that Silverlight just wasn’t for us. That decision probably extended the development cycle by a year.
Take time to find out what tech is best for you. Doing so at the beginning of a project will save you time, and money, later on.
4. VCs are driven by profit, you should be too
Towards the end of the Global Vision story, we were a month or two away from being profitable again but our VC partner wasn’t interested. They had stripped the IP out of the company months before (IP stripping is a mechanism used by VC’s to protect their investment. If the company they have invested in is at risk a VC will strip the IP out of the ‘at risk’ company and house it in a new entity. The ‘at risk’ company is liquidated and the new company trades in its name).
This isn’t some kind of evil conspiracy. It’s just what makes business sense to the VC company. That we were even looking to VCs that late in the game shows that we had taken a wrong turn and changed mindset from a profit-driven business to a funded business. Remember, the aim should always be for your business to be capable of standing on its own feet.
5. Make sure everyone stays on vision
In the final years, too often we compromised both trust and integrity and allowed people at a senior level to drive their own agendas which had nothing to do with the best interests of the company. If everyone had been able to go back and embrace the original vision for the company, we might have been able to regroup and survive. No matter how old the company is, everyone involved should have the same kind of passion they did on day one.
The end of GV
In January 2011, I put Global Vision to sleep. It was a tough decision to make. In the last six months when no more investment was available for the business, the hyenas started gathering. The writing was on the wall, but I wasn’t prepared to see the business fail. I extended my bond and put more cash into the business to buy us a bit of runway until the deals on the table panned out. During good times, deals come in fast and furious. In bad times, they become a moving target.
We got a lot of things right in the first nine years of the business and beat the odds on a number of occasions in order to become very successful. Luck is obviously an intangible but making the right calls is the best way to control our own fate. You can only make so many mistakes before they come back to haunt you. Finally and most importantly, stay humble. Like Bob Marley said “Every day the bucket goes to the well, one day the bottom will drop out.”
Image: Alex E. Proimos