The Dip

Why do the most interesting bits of startup stories always get airbrushed out?

History isn’t fact. It’s narrative.

I sometimes feel sorry for journalists, who only ever get to write about tiny slivers of the lifecycle of a startup - a new company is founded; then there are new investors; the product is launched; then the company is sold.1

Those are all great days, if and when they happen. But they are the rare and fleeting exceptions.

I’ve had the opportunity to work on and invest in startups that have been incredibly successful and have ticked off all of these milestones. But by far and away the most interesting parts of all of them are the times when there were significant stumbles or backwards steps.

Unfortunately those stories are often entirely brushed over in the popular mythology.

When I think about Trade Me, Xero, Vend and Timely, one of the few things all four companies have in common is that they all had significant near-death moments…

2001: Trade Me

Trade Me was only two years old and still quite fragile. In just 18 months we had grown from 10,000 members to over 100,000 members. That was exhilarating. But the original business model (free online classifieds, supported by advertising)2 had failed to generate any significant revenue. We’d spent all of the cash, and new investors were seemingly uninterested in giving us any more. The company was being propped up by loans from existing shareholders.

I had only recently become a shareholder myself, after Trade Me acquired my own startup, Flathunt. I didn’t have any cash to lend, but I did work for several months at a significantly reduced salary, before that became unsustainable. I finally left and moved overseas. If I’m honest, I didn’t expect there would be anything to come back to at that point.

Actually, three out of the four people from the original team all left, including the founder, Sam Morgan and his sister Jessi, who was the first employee before me. At one point, all three of us were living and working as contractors in London, leaving Nigel Stanford running things more-or-less by himself back in New Zealand. That period of time has never been properly documented. Partly because it doesn’t really fit the arc of “up and to the right”.

One of the last changes I was asked to make to the website before leaving was to implement success fees. It wasn’t so much that we realised this was the golden ticket - more that we’d run out of any other options, so had nothing to lose from giving it a try. Eventually this would become an amazing business model that would fuel a very successful company.

Sam, Jessi and I all later returned to executive roles in the business. In 2006 the company was sold to Fairfax for $750m.

Let’s not pretend that outcome was obvious at the time.

2008/2009: Xero

Some people, especially those in Australia, think that the Xero story started around the time of the listing on the ASX at the end of 2012. The share price then was A$4.65, and by early 2014 it had jumped to over A$45.

But there is a long pre-history prior to those glory days, where the market performance wasn’t nearly as good and the outcome for the company was much more unproven.

I invested and joined the team just prior to the inital public offering (IPO) on the NZX in 2007. That valued the company at $50m, and raised $15m of new capital at $1 per share. For several years after that the share price was below this listing price. Despite the stated global ambitions, there was pretty modest customer traction, more-or-less entirely in New Zealand.

The IPO prospectus forecast that the company would have 1,300 subscribers by May 2008.3 The actual result was 1,408. Although as this graph from the first Annual Report shows, a good percentage of those signed up in the final few weeks of the reporting period.

Source: Xero Annual Report, May 2008

The total subscription revenue for that year was just $134k. The company actually made more money from interest on the unspent IPO funds. It was an anxious time!

The company was burning through cash too quickly. It wasn’t obvious that the market would be patient long enough. One analyst a speculated that it could be the first public company to be named after its share price. There was a high turnover of senior staff during this time, especially sales and marketing related roles. I was one of those who left. Thankfully, I didn’t table flip completely and sell my shares!

In 2009 the company raised NZ$23m of new capital from MYOB founder Craig Winkler. MYOB was the incumbant that Xero was hoping to disrupt in both New Zealand and Australia. Craig had only quit as CEO a year prior to that after MYOB shareholders had blocked his share option grant. It’s mostly forgotten now but the price on the new shares issued to him in that round was 90c (i.e. below the IPO price from two years earlier) and after that investment he owned 24% of the company.

With the benefit of hindsight that was a turning point. Within the next three years Xero raised a further $170 million from various investors, the number of subscribers increased from 6,000 to 78,000 and revenue increased 20x. Now it has millions of subscribers, is valued at over A$10 billion, and hasn’t looked back.

Let’s not pretend that outcome was obvious at the time.

2015: Vend

I was one of the original investors in Vend in 2010. In the crazy five years that followed we had raised three subsequent investment rounds - all led by international venture funds - totalling over $35 million. We were growing at an eye-watering pace, but also still burning significant amounts of cash.

By the end of that year we came very close to shutting the company down.

We had signed a term sheet with a new investor who then changed their mind at the very last minute. This left us with some hard decisions to make and no time left to make them.

We were default dead. We had willingly signed up to a growth path that required us to get permission to continue to exist from investors every 18 months, and in this round time had suddenly run out.

When this all unfolded I was in Berlin, with Barry Brott (who was also an investor and director). The intention was to meet some of the new team we had recently hired there. Instead we spent the day working through the process of telling that same team we would need to shut the office.

We spent that night on a series of urgent phone calls with existing investors, trying to raise further funding. Not surprisingly, there were a range of reactions to that request. I got some very direct feedback on my performance as Chairman of the Board. Trying to find consensus in that environment was tricky.

By the time we finished all of this it was the middle of the night. We decided to head out for some food, and for our sins got flashed by a drunk German teenager in the elevator. I was too exhausted to do anything other than laugh at him. I don’t think that was the reaction he was expecting.

I flew straight from Berlin to Auckland where there were a number of further difficult decisions and hard conversations waiting. We had to urgently reduce the team size, and make a number of people redundant. That was painful - those people had believed in what we were trying to build and done the hard yards to contribute to that. And I acknowledge I was on the easier end of all of those conversations.

However, a few weeks later we came out the other side of that with new funding confirmed and a plan forwards for the team. Within a few months there was almost an entirely new board (Barry was the only survivor) and executive team (Alex Fala, who we had recently hired in a strategy role took over first as CFO then as CEO) and the business continued.

In 2021 Vend was acquired by Lightspeed, one of our fiercest competitors from back in those days, for $485m.

Let’s not pretend that outcome was obvious at the time.

2020: Timely

A more recent story (so much so that it almost feels too soon to tell it)…

Timely was nearly one of the first victims of the COVID-19 pandemic. As the virus started to spread around the world, in early 2020, the vast majority of our customers (hairdressers, beauty salons, spas etc) were suddenly shut. By aggregating forward booking data as the world shut down we saw the size of the problem ahead. We kept a close eye on the impact on our subscription revenue, and it wasn’t pretty. We had no idea how much longer this would continue, but the graph trended pretty quickly to zero.

Rather than hide from that fact, we shared it publicly. I know lots of people in the sector found that incredibly useful as they worked on their own response. We did the same thing internally: a simple graph showing the revenue impact and the level we needed to stay above to avoid worse outcomes was updated and shared with the whole team regularly. Giving everybody the information they needed to make good decisions was key.

We had to immediately bury our old plans. This was a moment that required remarkable leadership. Co-founder and CEO Ryan Baker, who with his executive team had spent the last few years building an awesome team, committed to preserving every job. We offered generous discounts to customers. We immediately cut board fees and made deep cuts to executive salaries, and then asked the team what they could do to help. He described the approach to everybody:

All of us will be affected a little so that none of us had to be affected a lot.

Overall we reduced the already lean cost base by 20%. Some staff agreed to bigger cuts so that others, who would be more heavily impacted, didn’t have to be. It was an amazing collective response.

This created a positive feedback loop. With job security, the whole team was focussed on helping customers navigate the lock downs, providing whatever support we could. This helped us retain the bulk of our customer base, albeit on reduced subscriptions. Because many competitors were missing-in-action during this time we actually managed to gain market share. That revenue allowed us to keep the cycle going.

Remarkably within a few months we were able to repay staff the salary amounts that had been cut. And shortly after that we started the conversations that would eventually lead to the sale to EverCommerce (one of the terms of that sale was that the wage subsidy we’d received from the New Zealand government was also repaid, which was a nice full stop to this phase).

Let’s not pretend that outcome was obvious at the time either!

When a startup is a big success it’s really easy to focus on the end point, and forget about the route. When the stories are re-told over and over, details get re-written or forgotten. And the bits that are omitted and updated are nearly always these dips.

That’s a shame, because it obscures the lessons other people can learn from those hard moments. Those who are just starting out on their own venture don’t always anticipate that it might happen to them. The biggest deceit is thinking that it won’t.

For me, there are some very negative personal mental scar tissue attached to each of those stories. Amazingly, they all had happy endings.

People sometimes describe working on a startup as being like “a rollercoaster”. I think that’s the wrong metaphor, for lots of reasons, but specifically in this case because every theme-park ride ends where it started. That’s very seldom true of growth-stage businesses in my experience. You get exposed to so much in such a short period of time, that when you come out the other end you’re a very different person.

These dips are the moments of truth for investors too. It’s easy to be an investor in a company that only goes well. When things go badly it separates those who are really helpful from those who are just along for the ride. Normally these are expensive lessons for those investors who are prepared to step up. But also the most rewarding, in both senses of that word, when it works out.

It doesn’t always.

  1. This was really highlighted to me when I watched The Social Network movie about the early stages of Facebook. In one scene they are a small team struggling away in a house in Palo Alto, and nobody has heard of them. Then, it jumps quickly to them moving into their first office and celebrating 1 million users. As if that just happened while they weren’t looking! I couldn’t help but feel like they just skipped over all of the most interesting bits in the story, in a montage↩︎

  2. Remember, as per the original Trade Me billboard: Only turkeys pay for classifieds Only Turkeys Pay for Classifieds, billboard ↩︎

  3. The prospectus also estimated that the APRU would be $75 (actually it’s been consistently between $25 and $30 ever since), and contained this wonderful underestimate of the breakeven point:

    Dependent on pricing, the Directors assess, based on their current estimates of Xero’s cost base, that Xero’s New Zealand revenue will begin to exceed its New Zealand cost base at around 8,000 customers. However, Xero will also be investing in the development and growth of the business and pursuing expansion of the business into the UK and Australia. Therefore, the Directors do not currently expect that Xero will record an overall profit for at least three years.


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