Rise and fall of a startup

Impressive titles, degrees and prior success as an entrepreneur are not enough to guarantee future success.

Alan M. Davis, a professor in the College of Business at the University of Colorado at Colorado Springs, has held academic positions across the nation and in Spain, Indonesia, Australia and South Africa. He’s also founded several successful multi-million dollar startups.

But to help other would-be entrepreneurs, he was willing to share his experiences at a Colorado Springs Technology Incubator seminar — about the company that failed.

After a struggle and numerous cash infusions, Omni-Vista, a decision-support software company, was put to repose — and its assets were auctioned off to the highest bidders — during June 2002.

“The average shareholder got 15 cents on the dollar — which is not a very good return,” Davis said, as the audience laughed.

The company had engineers, a board of advisers and developers with all the experience and brain-power one could hope for. The product was innovative — a bi-directional spreadsheet with bi-directional graphs, which helped companies select the right combination of requirements, time-to-market, revenue, profit, market size, price, research and development costs, and breakeven points — and former clients still use it to this day.

But, as Davis said, the company’s plan had a few “fatal flaws” when it was launched during October 1997.

First, despite the talent of all the individuals involved — not one had any marketing experience.

“We knew from the beginning that marketing and sales was a big hole in our team,” he said.

But the first vice president of marketing wasn’t hired until six months after startup, instead of at the requisite beginning.

“I’d been preaching that to my students for years — I knew that!” Davis said, with self-deprecating humor.

The VP, who used a one-size-fits-all sales approach, “didn’t understand our product. And there’s seldom a silver bullet for marketing and sales,” Davis said.

By the time the company found the fourth VP of marketing — who was “a rare find” and actually increased revenue and decreased expenses, well, “he got us to profitable — but it was too late.”

And the economy “crashed” during 2000 and 2001, which didn’t help the situation, as demand for both product and service dropped.

The second fatal flaw was that the principals chose the product, software, because they knew the technology — not necessarily a good reason to develop something.

“This was a classic example of a solution in search of a pain,” Davis said.

And the product was a bit ahead of its time — most clients weren’t ready for the technology, and Omni-Vista SP was priced at $3,000.

“We were so entranced with our own neat product that we forgot to stay engaged with it,” Davis said. “The product helped 130 clients solve real problems — but it didn’t get enough traction in the market to be (viable).”

So they developed a similar, less-complex product, OnYourMark Pro, which they priced at $500. They sold the volume they’d planned to, but still fell short of revenue goals because the price was “way too low.”

Without increasing sales or revenue, “the salespeople consumed nearly $1 million,” he said. And in the “brave new world” of technology, the company had a brand new product — but it was the wrong product (the first one was too complicated), the wrong price point (the second version was priced too low) and the wrong market.

“Even though everyone who actually used it loved it,” Davis said, “it took way too long to make a sale for $3,000.”

But the company did do some things right, such as maintaining strong external boards, keeping employees and investors informed, eliminating symbols of hierarchy, and having principals invest in each financing round.

“Any time we were in trouble (in between rounds of financing), our employees knew far in advance,” Davis said.

He and the other principal took a 75 percent pay cut, and employees took voluntary pay cuts.

“I was the janitor of the company, from beginning to end, and always had the same size office as all the employees,” Davis said. “Whenever we needed help, the employees jumped in.”

Davis “still preaches” that entrepreneurs use the one-third rule for equity in a company: one-third each for founders, investors and employees. This approach “incentivizes employees to work hard and stay with you. And founders should have an amount of skin in the game proportionate to your net worth — the same percentage you’re asking for from your investors.”

After “converting” a $50,000 company into a $600 million company over 10 years, and another from $1 million to $6.5 million in nine months, Davis still had lessons to learn with Omni-Vista. By taking heed, entrepreneurs can learn which mistakes to avoid.

In the wisdom of hindsight, Davis recommends that entrepreneurs “use strategy to drive the product — not vice-versa; get marketing involved on day one; remember that a customer is a person, not a company; sell simple products before complex ones; don’t get lured into fancy office space; when accepting investments, get more than you (think you) need; and develop a fall-back plan.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.