Wrong money. The story of a startup - part III

After a long lull, we continue our series of articles devoted to the creation of a startup. In this, the third part, we will tell you how we received our project’s financing in a month and how and why we lost it after 4 months.

It will be a story about easy money at first glance and about how important is understanding and trust between the developer and the investor.

For those who have not read the previous parts: I part about ideas and part II about the pilot

As you remember from the second part - we built and rebuilt the project pilot for 4 months and at the end of this period we had a service that could already be shown and started moving forward.
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December 2008 New Year's gift. In autumn 2008, the executive director left us. He went to a higher paying and promising position. This in some way affected the overall condition of the company, but as they say, life goes on. In December 2008, he visited us and offered to finance the project from his employers. Moreover, to finance not only our current project, but also several subsequent ideas. The head of this company was the same executive director.

At that time, it seemed to us a real gift at the height of the economic crisis and we agreed without hesitation. For this case, a company was organized that paid all the costs of developing the project. It seems that this happens only in a fairy tale.

January, 2009. Quick jerk. Encouraged by the fact that not only we believe in this project, but also investors, we have significantly advanced in the development of the project: we licked it, concluded all contracts, rented equipment and much more. At the end of January we were ready for the big launch, which was scheduled for early February.

It seems everything is cool, the money is coming, the service is getting better, but the alarm bells are starting to make themselves felt. The more into the forest, the more persistently the questions are asked about, and when will we start earning, and the big agreement (Joint Venture Agreement) is not signed (the investor is always traveling.) We naively write off all this on the still insufficient understanding of the business investor and explain how everything happens. It seems everyone is calm.

February, 2009. Barcamp Baltics 2009 . To present the project to the general public, we chose BarCamp Baltics 2009, which took place in Riga. Our service was the general sponsor of this event. After the presentation and long and interesting conversations, we were even more convinced that our service is in demand.

During this event and some time after it, we received a huge amount of comments, suggestions, and advice, which in many respects determined the future development of the service. Against this background, we again heard alarming bells from the investor. The alarm was that it was already the third month that had gone, we were sponsors of the event, I don’t have any money. Here we began to think about the need to go out for another direct conversation with the investor, without an intermediary in the person of the director.

March 2009 The end of illusions. In March, we realized that the “fabulous” option was not prokanal :) The investor refused to talk, the main papers were never signed, the financing was simply stopped. The director described the situation with inarticulate mooing.

All this month we were in a suspended state and did not know what to do with all this ... but it turned out to be only flowers.

April, 2009. Substrate. In April, we decided to continue the project, adopt all contracts with suppliers and move on. Then there were three great events ...

1. The first - the latest version of the service with the entire customer base and with all the backups disabled. It turns out that the company represented by the director and investors has not paid a single account for the hosting and the server. 2 000 euros hung on the neck in one day, which had to get out of his own pocket.
2. The second is that in recent months no one bothered to pay taxes, which also hung on the company in the amount of 3,000 euros.
3. The third, and the most fun, is that the money that came to the company was given as a loan for which there was a return period and many other wonderful conditions that were specified in contracts between investors and the notorious director. Of course, we were not aware of these matters :) After taking over all the cases, we got a debt to investors in the amount of 35,000 euros.

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Total on the results of work with the investor: minus 40,000 euros, which we should have left. So we lived these four months. It seems like we got the money and literally right there they were left :)

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And now the conclusions ...

From this, I tell you, a very unpleasant experience, we learned very clear and clear principles for working with business angels and investors.

• Joint Venture Agreement (JVA) - this is your bible for the entire period of work with the investor. Without this paper, do not even move a finger. It will be complex, voluminous and very confusing, but do not be lazy to study it in detail.
• Never work with an investor who does not understand for whom and what exactly you are doing. It will be the greatest mistake.
• “I’m a developer, let other people do business” will lead you to a very similar situation. Very fast. Therefore, you need to understand with whom and which contracts are concluded. Who, to whom and what should.
• The output should be clear and transparent. The way out is how you will diverge with the investor in different situations. The investor will lose interest, the project will not burn out or you will get tired of it, all this should be clear from the very beginning!
• Require a report! You are required to report on what you have done, you can demand a report on the money, where it is received from, when, how, where it is spent, etc. It is very important.
• Respond to “alarm calls” immediately and quickly! If you feel that something is wrong - immediately to meet with the investor, if he does not want, then stop the project until everything is clear.

We strongly advise you to adhere to these rules, they will allow you to avoid major failures in cooperation. All the same applies to those situations where you just start a business with a friend (friend is money, you are development). This is absolutely the same situation and you can step on the same rake.

Further in our cycle:
Part IV - Do not hang your nose. About our experience in negotiations with venture funds.

Previously it was:
Part I - how ideas are born and part II - build a pilot