When Funding Goes Bad

A well funded business doesn’t have to focus on profits, or in some cases even revenue. I believe this is a risk, which can damage the potential of a business and prevent it from learning important lessons early on that could cost it huge amounts of money down the line.

Many startups are rightly encouraged to launch early and then iterate like crazy, constantly listening to their customer feedback, honing their product into something ready for sale. This makes sense for bootstrapped businesses, and often it’s the only way they can operate since they’ve no choice but to chase revenue in order to keep the business going.

You’d think that a well funded business would follow the same approach. Sure, they don’t need the revenue quite as early, but the value they’d get from the customer feedback could save them millions of dollars later on.

Case Study: Segway Inc.

Take the case of the Segway PT, the innovative ‘personal transporter’. This is a great example of how a well funded startup can get it wrong by not testing their product in the wild first. The company was founded in 1999 by an inventor named Dean Kamen. Born in New York, Dean’s history is an interesting one. He’s a great example of the modern day inventor and the more I read about him the more impressed I am with what he’s achieved. But all his great inventive abilities and personal success couldn’t help his new plucky startup get the basics right.

The first Segway was unveiled in December 2001 to much fanfare, and was announced as a revolution in personal transportation. The company had announced an annual sales target of 40,000 units in it’s first year and expected to clear 100,000 in the subsequent 13 months. But things did not go according to plan. In fact, things went so bad that between 2001-2007 there was less than 30,000 units sold in total – not exactly a revolution.

Nowadays Segway are extremely coy about their financials and many believe that they are still not profitable. To date, Segway have received €151M in funding so it’ll take a while for them to pay that back at the rate they’re growing now.

The problem with the Segway, as most people know, is that you look like an idiot when you’re on one. There is a zero coolness factor for having one and you can probably expect to be slagged by your friends if they see you using one. As a result, hardly anyone buys them.

This could have been easily avoided, but with their well funded manufacturing plant in New Hampshire, Segway steamed on ahead producing thousands of units without getting proper feedback from their customers first. It’s my view that if Segway was a bootstrapped company and not a well funded one, they would have been forced to start selling earlier, and getting feedback from their customers. They would have realised that yes, the Segway was not cool, and making a vehicle that people actually looked good while they used it was as important as all the other benefits.

But this didn’t happen. They had their heads buried in the sand, or in this case, in the lab. Their funding was the catalyst for their mistakes. Without it, they would have been forced to launch earlier, and they would have realised their design flaws well before they’d spent millions in production.

Segway are still operating today, but they’ve moved into different markets and mostly focus on corporate sales. They might get it right in the end, but not before the’ve wasted millions of dollars on poor decisions that could have been prevented by getting early feedback and iterating like crazy.

I witnessed the benefits of this approach first hand on thedebs.ie this month. We’re a bootstrapped startup that’s now well and truly trading. We’re learning new things from our customers everyday and we’re constantly changing our plans, our strategy, our revenue streams and our business models as a result.

A bootstrapped startup is a crazy roller coaster ride, but because we have no other choice then for it to be profitable from day one, we’re open to making those changes as soon as they need to happen. That’s an important lesson for me, and I’m sure for everyone else out there trying to do something new.

If you’ve got a great story about launching early and iterating quickly, why not drop a comment below? The more people that learn this lesson the better.

UPDATE: It seems that in 2009, Paul Graham of Y Combinator fame wrote a very similar post to this one.

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