A Lesson for Covid-19? How the Dot-com Bubble Burst Saved My Startup

Apr 1, 2020
10 mins | 1988 words
By: Nick Quain

Nick Quain.

In the summer of 2001, I was on a roll.

Although the dot-com bubble was beginning to burst, my fledgling startup, CellWand, had just run a successful pilot of our new #TAXI service with Rogers, and we were inking a long-term contract with Canada’s largest wireless carrier. This included a six-figure revenue guarantee, and it was the first deal of its kind for an automated service using voice recognition. Skeptics of our model in the wireless industry started to reconsider, and long conversations with investors were finally getting real. Our team was exuberant, marked by high fives with friends & family.

Founders crave these moments and that feeling. I was walking on air.

That August, we signed a seven-figure term sheet with an NYC-based seed investor with experience in backing B2C companies – something Canada lacked.  Suddenly, our vision of hiring a CTO and building out our marketing team was more than hypothetical. I had been at this for over a year without being paid. While I rarely spoke about the idea of actually getting a salary, I thought about this more than I cared to admit.

Due diligence concluded, and everything was set for our financial closing on September 30th.

And then 9/11 happened.

When a world tragedy takes place, it should be hard to feel sorry for yourself. This is particularly true when an epic event suddenly takes the lives of more than 4,000 people, plummets the market into a downright financial meltdown, and turns global affairs into a political hornet’s nest.

But it wasn’t hard for me at the time.

How could this happen now? Why had circumstances intervened in this way, right at the wrong time, and right in the wrong place? Our New York City-based investor understandably went silent.

The deal fell through, and I literally never heard from that investor again. Beyond sending a few concerned and optimistic e-mails to let them know our deal was still a go if they were up for it, I didn’t press. Crickets.

It took many years to change my perspective on this. The very idea that this tragedy, and all the economic and social challenges that followed, may have actually saved my company was something I couldn’t even contemplate while I was going through it. It took years of reflection, experience and hindsight to reconcile this.

But in the months and years that followed, we crafted a more refined and savvy form of bootstrapping. Our team demonstrated more creativity, guile and innovation than ever before – it was required to survive.  And if we had secured investment and used the funds as planned, it would have undermined key decisions and actions that drove the growth of our company.

In the end, we avoided major pitfalls of some of the faulty assumptions we had at the time. For example:

  • As a B2C play, we planned to use this financing to bully our way to market share with media buys and aggressive and splashy marketing tactics. We had some good ideas, and this CAN work as part of a B2C playbook, but a few of our key assumptions were off. We learned over time that creating demand and trial was tricky and nuanced. Our initial strategy simply wouldn’t have worked very well. The uptake would have likely achieved only ~25 of our projections. And the worst part: These results would have likely created the false perception that #TAXI had very limited upside and market opportunity.
  • We had a successful pilot that demonstrated demand and problem-solution fit, but we didn’t have the right product optimization in place. While the term ‘customer success’ didn’t even exist at the time, we didn’t have it. We had demonstrated people wanted our product, but we hadn’t demonstrated we could properly and consistently solve user problems. We knew our product “wasn’t perfect,” but we justified glitches by noting the alternatives were worse. But we were kidding ourselves thinking we could quickly plug the leak on the boat once we were out in the choppy seas.

With the worst economic downturn of a generation before us, we set out to try and right the ship.  We knew we needed to chart the next stage of our journey in a more methodical way. As the saying goes, necessity is the mother of invention, and necessity was indeed at hand.

We learned many key lessons over the years that followed – lessons that I believe will apply just as much in 2020, as they did for our company in the early 2000s.

1. Build partnerships: When times are tight, companies are less inclined to take on the world themselves or innovate internally at every turn. Simply put, the months and years ahead are ripe for partnerships, many of which likely weren’t even possible for your company a month ago. During the economic downturn of 2002, we created a massive ecosystem of marketing partners around #TAXI. These partnerships were the most important aspect of what became a powerful marketing machine that generated more than 18 million calls to #TAXI from Canadians alone (and counting). Specifically, we went back to our carrier partners to have #TAXI added to the address book of every new phone. We partnered with MADD in support of their mission and promoted our service as a public service announcement. We also collaborated with major alcohol brands like DIAGEO, Anheuser Busch, and provincial liquor boards to promote our service as a safe way to get home after a night out. We created alliances with hospitality and media partners and promoted our service in the washrooms of bars, restaurants and other urban venues to help mitigate their alcohol liability. We worked with other media partners, enabling them to use our ads as filler when they had unsold inventory. And we worked with up and coming digital marketing firms to use our service and generate subsequent metrics to validate their platforms. We partnered with major players at every turn, many of whom likely wouldn’t have collaborated with us during a different economic climate. As the current COVID-19 crisis begins to settle, and the economy begins to recover, I believe partnership opportunities will be available for the taking like never before.

2. Nail Customer Success: It sounds simple and intuitive, but we focused on making our early customers and users happy, and when they weren’t, finding out why. When you’re not yet on a huge growth trajectory, it’s easier to settle into making sure the products fundamentally ‘scratch the itch’ it was set out to. And it’s hard to be cocky when your acquisition engine is still a ‘work in progress.’ A well-oiled growth machine can blind you from seeing a lack of customer success. Now, more than ever, it is important to focus on product-market fit, which are table stakes for scale. Bootstrappers are often better at finding this over time. The downside to bootstrapping is that you’ll often miss out on the opportunity to outpace a better-funded and more aggressive competitor. But the first and more aggressive mover doesn’t always win at the best of economic times, and even less so in a down market. Having patience in achieving customer success is easier when rapid growth is going to be harder. So now is a time to nail your product just right.

3. Focus on Profit: After 2001, we negotiated contracts in different ways and went after deals through a different lens. We also went back and re-negotiated terms with partners who understood that old deals were designed around different assumptions and different economic conditions. Change was afoot, and our long-term partners were more understanding. Finally, we focused on individual market segments, starting with the most profitable ones. Today, terms like cash flow and burn rate are part of my daily conversation with founders. It is a stressful task as founders try and understand what their future revenue stream looks like (and it is murky for most). In the months that follow, early-stage companies will zero in on deals and market segments with positive cash flow and ROI. In the short-term, it is more critical than ever for founders to focus on defining the value proposition of their product by targeting the most profitable market segments. This is a great foundation to build a company on.

4. Access Top Talent: When we launched our company, it was really challenging to find development and marketing talent. Salaries were at an all-time high. Large multinationals were adding employees by the hundreds. Companies with public stock had even better comp packages. It was extremely difficult to compete with these firms in a growth market. Sound familiar? But by 2002,  there was an abundance of talented people on the market, many of whom were willing to take on part-time contracts with decent terms and little long-term commitment for interesting work and a chance to make an impact on a cool product. We even parlayed one of our angel investors into a short-term marketing engagement, and he subsequently became our VP of Marketing and ultimately helped us build the aforementioned ecosystem of marketing partners.  A month ago, it was a major challenge and uphill battle for founders to access top talent. In the months ahead, some amazing talent will be available and ready to work under simple and fair terms.

5. Respect: Simply put, founders who survive this will wear their battle scars like a badge of honour. During boom times on the startup scene, firms perceived to be stagnating in their early stage can be seen in a negative light. Investors and ecosystem players will often remark about companies that are “still hanging around.” It’s almost like they’re referring to fledgling band members wondering when they’ll give up the dream and get a real job. As new companies pass you by with investment and better traction, it gets even harder. And you feel it. We suffered from this after being named one of the top 20 startups in Canada in 2000 and not lighting it up that same year. But in a down market, it’s different. By 2002, many of the best-funded companies in 2000 were tombstoned. There also weren’t as many new companies succeeding. Our more measured and incremental success started to get a second look. Combined with our’ bridesmaid at the alter’ experience with a prospective investor in 2001, and our story started to sound even interesting. One investor referred to our company as a resilient type of insect that was hard to kill – in a good way. I didn’t take it personally. In one of my finer moments, I deadpanned, “you’re God damn right.” I wasn’t walking on air like I did in the summer of 2001, but I was walking with a more grounded and confident stride. CellWand was recognized as scrappy, resourceful and resilient. And this was now a good thing. Founders who fight their way through 2020 will be respected more than ever by customers, investors, staff and the entrepreneurial ecosystem at large. And beyond the good feeling this brings, this respect can translate into opportunities to attract top talent, investment and new customers.

Now, this crisis will be different than the dot-com bubble burst of 2000, this we all know. Perhaps not as bad in some ways, but likely worse in many others. But the harder COVID-19 hits us, I’d argue the more these lessons will likely apply. And in time, I hope at least some of the founders in our ecosystem can seize the opportunities that emerge from this crisis and turn their company into something special.

For the startups in the Ottawa ecosystem, regardless of how this plays out in the months ahead, rest assured Invest Ottawa’s Venture team is here for you and we look forward to helping many of you through this as we come out on the other side.

Visit Invest Ottawa’s COVID-19 resource page for business support and for ways to get in touch with our team, https://investottawa.ca/covid-19/.

Nick Quain.

Nick Quain is the Vice President of Venture Development at Invest Ottawa. Through his role, Nick leads all programming and support for startups, early-stage and growth companies alike, while supporting Ottawa’s entrepreneurial ecosystem as a whole. Under Nick’s leadership, Invest Ottawa launched the IO Accelerator in 2018, the IO Pre-Accelerator Program and Peer Groups. Previously at CellWand, Nick was co-founder and CEO, where he drove all development, strategy and execution while pioneering the use of abbreviated dialling codes in North America with the award-winning #TAXI (Pound Taxi) service and subsequently in the mobile transportation space, with The Ride app. Highlights of Nick’s accomplishments include raising several million in capital, closing industry-first deals with every major wireless carrier in North America and architecting a marketing strategy that has created #TAXI as a national brand used over 16 million times while propelling CellWand to millions in revenue and profitability.

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