Every battle is won before it is fought. This bit of pop wisdom, brought down to us from Sun Tzu and countless motivational speakers, is the koan for a generation of can-do entrepreneurs. But there is another version of this line, one that is less rosy.
Every battle is won or lost before it is fought. In the all-singing, all-dancing world of entrepreneurial theatre, the important part is the part that nobody tells you. It’s the part that you forget when you’re at the pitch-off, when you and your friends are eating ramen, when the world turns from ink to pink and gold and blue as you fly across the country to meet VCs.
Nobody says you’ll lose.
This is how we lost the first battle.
When I last wrote about Freemit we were in an interesting place. The team was nearly 10 people strong — two Eastern European programmers, a big data guy from Colorado, a young lawyer and a young UX person. There were the founders — Richard Svinkin, my college buddy and a true product guy; Paul, a friend I met at Lamaze class; and myself. We had gotten a little bit of money from angel investors who saw a promising team and we had joined the Alchemist Accelerator. Rich had spent months living in the Valley learning how to pitch and scale and build and we were on the road to lots of great meetings and lots of great results.
We were trying to build a remittance product. It was bitcoin-based with an M. Night Shyamalan twist. See, we saw an interesting disparity that a lot of people had used individually to make a profit. If you bought bitcoin with one currency and sold it for another, the exchange rates were most often very competitive to legacy systems. That’s what we set out to test, build and scale.
One of the primary tools we gained from the Alchemist Accelerator was that a startup is a hypothesis testing machine. You ran a test, you got numbers and ran another test. You needed something to show. This has always been true, but in some eras — namely between 2010 and 2014 — we saw a VC market that would dump dumb money on silly ideas like Clinkle. Then, in 2016, we tried to raise in a market that was down on bitcoin investments generally and where unicorns were starting to be re-evaluated. VCs were looking for products that had traction, revenue and even profit. We had none of that.
What we have is a dream that we could beat the market by optimizing bitcoin price (and we saw that we could) and that we could beat major players using this technique (again, we saw that we could). And we could even move money at rates competitive to legacy, non-blockchain remittance services around the world. But we needed to asses if the bitcoin markets were liquid enough to support the necessary scale to woo investors. What we learned within a month of talking to very smart VCs was that the risk of bitcoin markets not being liquid enough in the near term was too high and there was no way we were going to survive as a business with that model.
But we fought. We met with VC after VC and explained our position. Our bet was that bitcoin markets would eventually catch up to our idea. There would be enough transaction volume and high enough speeds to make it work, and we explained that we would build the product to target travellers instead of remitters. If you were sitting with your friend in Madrid you could simply Freemit them a few Euro from your wallet. If you wanted to buy flowers for grandma you could send the florist 60 zloty in Poland via Freemit. It would be fast, free and seamless. Heck, we even had a way to get cash out in India using a point of sale partner. It was an amazing idea.
There were three reasons it failed. First, the bitcoin markets couldn’t support our dream. Using the amount of BTC we would have to touch would move the markets in very real ways. It was akin to dumping a bowling ball into a bathtub — the effects could be catastrophic. Second, American VCs never felt the pain we described because they were too rich and didn’t care. Why did they need our service when they had an Amex Platinum? Finally, we were beset on all sides by regulation. People were getting arrested for operating money transmission businesses without a license, so we couldn’t actually launch the product without funding and we couldn’t fund the product without launching.
Every battle is won or lost before it is fought. We had just started the fight, but we had already lost the battle.
April is the cruelest month
We pitched to nearly 50 VCs and every answer was the same except one. Our former CFO introduced us to an old colleague who saw something in this ragtag team of misfits. That was the last investment we got.
We entered what Keith Teare called the Valley of Death. This was a stage after incubation — during which we were energized, funded and staffed — when we, like all other startups, went to VCs to assess whether or not the business was worth funding. The answer we got, in the end, was “No.”
As the year progressed we decided we needed to regroup. We got rid of the entire team — everyone we had worked with for half a year — and tried to code things ourselves. Our competitors were catching up to our vision and companies like Revolut and Circle launched products that attacked our use cases. They proved that this could be done in different ways, but they also put our limitations — geographic, legal and financial — in stark relief.
Our tech lead and CFO both left. Friendships frayed and faltered. It was a tough time. Hoot all you want about confidence, power and the go-go-go attitude you need to be an entrepreneur: Unless you are a fully blown sociopath, this process is hard. We got sick. I gained 20 pounds. I had back pain and panic attacks. There is a clear path from building a startup to mental illness, and it’s well worth exploring in order to prevent susceptible folks from hitting a wall or worse. But that’s a discussion for another post.
We learned from our mentors Ash Rust, Hans Reisgies, Ravi Belani and Edith Harbaugh that because one hypothesis fails doesn’t mean you’re on the wrong path. It just means you’re asking and trying to answer the wrong questions.
Rich and I were working daily from each other’s houses and we ran through a number of permutations to figure out the best way forward. We started working with a new tech lead who had a different technical solution that wasn’t reliant on bitcoin trading and Rich and I surveyed where the bitcoin/blockchain world was heading. It had changed a lot while we were in our startup tunnel and we had some interesting new ideas.
Necessity is the mother of invention. While working through the mechanics of the new technical solution we encountered a serious obstacle. We were stuck… but not for long. The conversation got heated and nearly went off the rails during one meeting in May. That was when Rich stopped everything and said in his deep Brooklyn brogue the best words an entrepreneur can hear:
“Wait a second. I’ve got an idea…”
The battle, the war
We’re not licked yet. But this isn’t a story of startup redemption… not yet. We are here to bury our first idea, not to praise it. The future is unclear, still, as it always has to be with businesses like this one. But it feels good to explain what happened and how things work in a modern startup.
Modern startups work like this: After gathering data you have to have the strength to let go of the stuff that doesn’t work. “This doesn’t work” doesn’t mean you suck. “This doesn’t work” means you try again.
By going through this process and being true to the startup way, one failed idea may yet lead to one successful one. And so we take a few more steps forward, take a few steps back and keep walking.