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Career

Software startups: success and failures

Professor Larry Smith

Larry Smith, the most influential professor I’ve had a pleasure of taking a class with, lectures on economics, and acts as an advisor for many University of Waterloo startups. Being an innovative university that it is, there is no shortage of, at least, attempts at entrepreneurship by knowledgeable and passionate students. Filled with stories of experience from both successful startups and failed ventures, Prof. Smith gives talks with advice for essential steps and common pitfalls.

A 40 minute video: UW Software Start-ups: What Worked and What Did Not is available from the University of Waterloo’s Computer Science Club.

A discussion of software start-ups founded by UW students and what they did that helped them grow and what failed to help. In order to share the most insights and guard the confidences of the individuals involved, none of the companies will be identified.

Efficacy

One of the main points necessary for a successful startup is the ability to demonstrate efficacy. Be able to demonstrate your capacity to produce the desired effect. One might be full of absolutely brilliant ideas, but they need an effective demo to attract clients and investors.

Partners

The other point is that one should not venture alone. You could, but it’s a really bad idea. You need a partner to tell you – “Dude, this is the stupidest idea you’ve had in your whole life”. Others might be saying that all the time, but a partner who actually knows what you are doing and where both of you are heading is an essential reality check. Also, a startup’s workload is often too much for a single person. As an added bonus, investors prefer to see teams, instead of putting money into a one-man-show that is not could-get-hit-by-a-bus proof.

Communication

Communication, or rather lack of networking skills is the major pitfall of many startups. People are different, unpredictable, and could even come across as creepy. Yet a face to face communication is required to obtain clients, secure investors, and establish deals. Learn, practice, “go to parties” if you have to. This goes back to the point of demonstrating what an awesome new thing you can do. And building up a network of contacts required to succeed.

Lawyers and Accountants

Don’t be your own lawyer. Don’t be your own accountant. Don’t let your buddy’s uncle act as either. Those things are important, and it is essential to find a good fit to secure the startup, especially from the legal point. In a couple of dramatic stories that Larry Smith presented, some ventures established with a few fellow students and no legally recognizable bindings. Those startups have hit all the above points to come to an enormous success, promising the realization of student’s dreams… but ended in a burning crash when, with no legal obligation, one of the “partners” simply disappeared with all the source code.

Even Google with their high salary, free food, and other perks doesn’t compare to the feeling of burning through millions of dollars of venture capital, working on creating your own vision. It’s the difference between being an employer and employee. Doing so before completing an undergrad degree, for massive bonus points, is possible – just mind the common pitfalls.

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Discussion

  1. Posted by Avinash | March 30, 2007, 5:13 pm

    Great article, Tony! :)

    Reply to comment

  2. Posted by Paul | March 30, 2007, 7:37 pm

    Great video and article. I’ve always wanted to be in a start-up, and UWaterloo attracts me because of this.

    Reply to comment

  3. Posted by Jon Lee | April 4, 2007, 2:06 pm

    I’ve taken econ 101 and 102 with Larry Smith
    Let me tell you.. best class ever!!

    Reply to comment

  4. Posted by Jose Sandoval | November 5, 2007, 10:42 pm

    Good article. One thing I noticed, however, is the lack of focus on “customer needs.” It is true that “ability to demonstrate efficacy” is important, but that could mean many things. For example, demonstrable ability to create software mean nothing if you can’t market it.

    You also write: “Be able to demonstrate your capacity to produce the desired effect. One might be full of absolutely brilliant ideas, but they need an effective demo to attract clients and investors.” What is the desired effect? A flashy, catchy demo is of no interest to clients or investors. On the one hand, if a product doesn’t solve a specific needs, no one will care how revolutionary and elegant it is. Imagine a world with a cure for cancer with nobody suffering from the illness: great product, no market need. On the other hand, investors are interested in profits and long term sustainable business models. A flashy presentation can’t fake numbers and a well research market segmentation.

    Good luck with all your startups.

    Reply to comment

  5. Posted by Tony | November 6, 2007, 4:01 pm

    Thx for the observations Jose. Though demonstrating just a single select ability is not efficacy. The “desired effect” would be to attract the investors to your great idea. The idea on its own will likely not get this job done. Similarly a flashy demo, without an idea behind it, is similarly useless.

    The profitability of the idea should be apparent from the idea itself, or from the presentation. Your example of “a cure for cancer” is not actually a “great product”, if this product is not needed. I suppose that with enough marketing, even a useless widget could be sold, but I don’t think that’s what startup companies do.

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  6. Posted by Jose Sandoval | November 6, 2007, 6:35 pm

    Hi Tony. For the sake of dialog, I’ll reply.

    I meant a great product as a technological marvel, and not because of its use–the cure for Cancer will probably be a great technological achievement, even if nobody needs it (this is hypothetical, of course). In the same context and more realistic example, the Apple Newton was–to me–a great product, but was not very successful in the market (leave aside the timing issue). So marketing plays a big role in the success of a product, but marketing is not only advertising or selling (flashy content, good presentations, etc.); there is a lot more to it. In fact, I did some work for a company Larry advised a few years ago: it failed, and was not for the lack of optimistic visionaries or smart presentations.

    Of course not all startups create useless things, but some did and still do. They must, it’s part of the creative process. Remember pets.com? boo.com? AdExact? Of course, there are successes: Amazon, eBay, PixStream, SandVine. So I disagree and contend that startups must create useless products and dismal ideas, as without failure there is no real entrepreneurship. And the failure is just a way for the market letting us know that the ideas/products/services sucked (including market timing).

    I’m sure you may come across some of the innovation literature at some point, but I have always liked this compilation: http://www.doblin.com/ideas/TenTypesOverview.html. A startup will have an easier time selling its product if they add some value to someone–I think Larry said something similar in the presentation (note that I only watched the first 10 mins).

    BTW, it’s great to get the computer science club at Waterloo talking about business fundamentals. I don’t think it has always been that way.

    Reply to comment

  7. Posted by Tony | November 7, 2007, 1:59 am

    That certainly puts things into a new perspective. You’re absolutely right — there are technical marvels that fail, and those failures are often needed to test the market, or try out something new.

    In the presentation, Larry avoided naming any specific products or companies. For the success stories (in this presentation, and throughout other lectures), new technology often addressed a very specific need that was not previously addressed. Failures often came from the execution. You are right that a brilliant product could address a specific need, but that need could be small enough to cause a failure — though I don’t recall such cases being discussed. I suppose they were not as interesting.

    In part, I think this might also be the VC’s fault for financing a faulty idea. After all, failure to pitch an idea, doesn’t make for much of a startup company.

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