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In Tech, Starting Up By Failing

Fab.com sale
Source: Fab.com
Fab.com sale

Every entrepreneur hopes to start the next big thing. But sometimes the first try doesn’t go as planned.

Bradford Shellhammer remembers the exact moment he realized his fledgling Web start-up, Fabulis, a review site and social network geared toward gay men, was a flop. Last November, he and Jason Goldberg, one of his co-founders, flew to London, expecting to hold a festive party for their users there. Instead they found themselves among a sparse crowd at a tacky club in Soho, listening to an off-key singer doing show tunes and being served overpriced drinks by shirtless bartenders.

“No one showed up!” said Mr. Shellhammer, burying his face in his hands at the memory. “It was so awful. We were just like, ‘What are we doing?’ ”

After that disaster, Mr. Shellhammer and Mr. Goldberg laid off more than half of their employees, threw out the code they had written and changed course. Six months later, they introduced a high-end e-commerce site called Fab.com.

Theirs is just one example of a start-up that decided to cut its losses and pivot — choosing an entirely new direction in the hopes of transforming a dud of a business into one that might have a shot at success.

To pivot is, essentially, to fail gracefully. While the term has been in the start-up lexicon for decades, it is coming up more often in the current Internet boom, as entrepreneurs find that many investors are willing to keep the money flowing even if a start-up takes a hard left turn.

“Ideas are like lightning in a bottle, so if the company is small enough and didn’t seem to capture lightning on their first try, it makes sense to try again,” said Ben Horowitz, one of the founders of the venture capital firm Andreessen Horowitz. “The art of the pivot is to do it fast and early. The older and bigger the business, the harder it is to change directions.”

Mr. Horowitz speaks from experience: A decade ago, he went through a pivot of Loudcloud, a publicly traded enterprise services firm that he founded with Marc Andreessen, into Opsware, a networking software company. “That was very public and very scary,” he said. “We dropped down to 35 cents on the Nasdaq, and although we went back up to $14, it took awhile. When you’re a small company, no one really notices if you make a big change.”

Sometimes a pivot is necessary when the pace of Internet evolution has made a start-up’s original plan obsolete. “The Web we were building for a few years ago is almost no longer relevant,” said Michael LaValle, the co-founder of Gojee, a recipe recommendations app. “The Internet changes so fast.”

Mr. LaValle and his team pursued two different food-related ideas before settling on Gojee, which has attracted a quarter of a million users since its release in September.

Last spring, Matthew Rosenberg, a developer in New York, had the discomfiting realization that if his start-up did not change tactics, it was doomed. He and his team had hoped to make a big splash with a novel group-messaging application, Fast Society, at South by Southwest Interactive, an annual technology gathering in Austin, Tex., where people are eager to try out new social services. They rented buses to shuttle conference attendees around town and held parties to try to attract new users. Instead, they found themselves struggling to compete with several sleek rivals for attention and traction.

“It almost felt like gang warfare,” he said. “The nerdiest gang warfare ever, but still, gang warfare.”

By the time the conference was over, Mr. Rosenberg and his team knew it was time to quit. They shut down Fast Society and are readying a new mobile sharing application called Cameo, which they are hoping to unveil at this year’s conference.

For start-ups, abandoning one idea to try another is easier than ever, because the cost of building and running a Web site or app keeps dropping. But it is still risky. Entrepreneurs have to keep from burning through their funds and appease venture capitalists who may be unhappy that the money they invested in a photo-sharing site is now backing an online dating service for cats.

Most investors like to say that they are betting on people, not specific ideas, and are willing to wait while entrepreneurs iron out the kinks in their companies. But some put their foot down if the new idea is outside of their comfort zone.

Mitch Kapor, the software pioneer who is now a partner at Kapor Capital, which invests in early-stage start-ups, said roughly 15 to 20 percent of the companies in his portfolio have gone through radical transformations.

But when the founders of StickyBits, a company that made bar-code stickers that could be scanned with a mobile phone, told him and other investors that they wanted to use its remaining cash reserves to turn it into a social music service, he balked.

“It was outside the scope of our portfolio,” he said. “We don’t do music or entertainment start-ups, so in that case, we just said, O.K., we’ll take back our remaining interest.”

That music service, Turntable.fm, became the viral hit of the summer, eventually attracting one million users and an additional $7 million in venture financing.

“It’s not absolutely clear that we made the right decision,” Mr. Kapor conceded.

So far, Fab.com’s do-over has also been a success. On its first day, the company signed up 175,000 new users and generated $60,000 in sales, far more than Fabulis’s typical daily take. It says it now has 1.7 million members. Fab.com has raised nearly $50 million in venture financing from heavyweight investors that include Andreessen Horowitz, Menlo Ventures and First Round Capital.

But even companies that try to reinvent themselves can still end up spinning their wheels. Many people point to a start-up called Color as a cautionary tale. At first the company, backed by $41 million in financing, offered an ambitious application that let people share photos with others nearby. It never took off, so Color recently revamped itself as a Facebook photo-sharing service, which has also been slow to gain momentum.

Even so, some of the biggest Web success stories are the products of successful pivots. The photo service Flickr, for example, started out as a feature of an online game. Before PayPal became a kind of Internet currency, the company was focused on the idea of beaming money between hand-held digital assistants.

There may be more pivots happening nowadays because investors are determined not to miss out on the next Groupon or Facebook, so they are putting money into companies that have not yet proved their ideas will work, said Kartik Hosanagar, a professor of Internet commerce at the University of Pennsylvania’s Wharton School.

That is in stark contrast to a decade ago, when venture capitalists, burned by the bubble, would have wanted to see a working prototype or clear business model before investing in a fledgling company. These days, investors “are moving earlier and earlier into the cycle,” he said.

Pivots are not unique to the tech industry, though they may happen at a higher rate there than in other fields, Professor Hosanagar said. For one thing, it is a lot less taboo to acknowledge failure in Silicon Valley than in Hollywood, for example, where if a new album or a blockbuster movie goes belly up, it could spell disaster for one’s career.

“In the legal and entertainment industry, you can only fail so many times,” Professor Hosanagar said. “But the culture of Silicon Valley is one where failure is embraced.”

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