How I Lost $10,000,000

Alex: What's up, everyone? Welcome back to another episode of Founder’s Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. On Founder’s Journal, I act as your startup sherpa, curating the best content for entrepreneurs, summarizing it so you don't have to read it yourself, and analyzing it so you have actionable takeaways to apply to your business. Before we hop into it, I have one ask of you. Please share Founder’s Journal on social media. Podcasting is a super competitive game and the only way to grow is through word of mouth and promotion on social. A minute of posting on your end will make the dozens of hours that myself and the team spend each week creating this show completely worth it. You can either give the show a shout-out or share the single most interesting thing that you learned from today's episode and make sure to tag me, so that I can give you proper props once you post.

Now let's talk about today's episode. Andrew Wilkinson is the co-founder and CEO of Tiny, which is a publicly traded holding company that is trying to be Berkshire Hathaway, but for internet companies. In 2007, Andrew started a Canada-based design agency called Metalab, which he grew to $40m to $50 million in revenue and $20 million in profit. As you're about to hear on this episode, Andrew tried for a while to launch other businesses, but after doing so unsuccessfully, he pivoted to buying businesses to grow his holding company, which has dozens of businesses under it. Today, what I am about to read to you is a story by Andrew about one of those businesses that he tried to launch after Metalab, and the lessons that he learned from his spectacular failure. Let's hop into it. 

“This is a story about how I lost $10 million by doing something stupid. $10 million literally up in smoke. Money bonfire. That's enough to retire with $250,000 in annual income. Here is what happened. In 2009, Metalab was a small but profitable agency. The business was making a couple hundred thousand dollars a year in annual profit and I was trying to figure out how to invest the profits. Agencies can be great businesses, but they are hard.” 

I will attest to that. People love to shit on agencies. I actually love agencies for a lot of reasons. I think one, because it's basically paid R&D to figure out what you wanna build outside of just the agency, and they're great for cash flowing and you don't need money up front, but to Andrew's point, they are extremely difficult. Any client service business is extremely difficult. Let's keep it going. 

“You lose clients at random. Your pipeline dries up on a dime. It's feast or famine and unpredictable. I kept reading about what DHH and Jason Fried were doing with Basecamp, building software for themselves, then selling monthly access to it. This was a relatively new concept back in those days and it seemed like they were living the dream. I had a business crush, by the way. We all have business crushes. All entrepreneurs have like those one or two businesses that they wish that they thought of the idea first so that they could build the thing because it seems like such an amazing business. The model they used for Basecamp was one, build great software that scratched their own itch, so for them it was project management. Two, assume others have this problem. Three, charging monthly recurring amount to give them access. Four, focus on organic growth via product improvement and public writing. Five, spend less than they make, and six, profit. As a stressed out agency owner, this sounded incredible. Make money while you sleep for building cool software for yourself? Easy. I loved Jason and David's focus on building a business on your own terms in a way that made you happy.” 

By the way, just as a side note, Jason Fried's writing is some of the best writing on the internet, so you should absolutely check out his blog. His name is Jason Fried and his company's Basecamp. 

“I hated the idea of having some annoying VC involved pressuring me to grow or move to San Francisco. Believe it or not, that was almost a hundred percent required at the time. I wanted to stay in control of my business and my life. I had the money, so I decided to follow suit. My biggest problem at the time was managing people. I was up to about 10 employees and I was having trouble keeping track of what everyone was working on.” 

Also, another side note, I think that's actually one of the hardest things for managers and for leaders, is knowing what someone you're managing is working on, to know if they have enough work, to know if they're doing a good job. Like it is very hard to know the work that someone is doing other than their output. Like you don't know how they spend their time, and so it feels like you don't have visibility, and if you want get visibility, it starts feeling like surveillance or micromanaging that will disempower the person that you're managing. 

“I was a huge to-do list junkie, but back then all of the task apps were either single player or weird desktop apps with syncing issues. I decided to build a shared to-do list app for teams. I grabbed a couple of devs from the agency and we started working on it. About nine months later, we were in beta. We called it Flow, and it was actually really cool from day one. It was a huge hit. A lot of people had the same problem and there was nothing else like it. We had Adam Lisagor do a super slick launch video for us, and the beta went viral. When we turned on billing for our beta users, we jumped to 20,000 MRR in the first month, we started growing at 10% per month, and were the new hotness. I got reach-outs from all of the top VCs, and tons of tech luminaries started using the product. We made it—or so I thought. There was just one problem: I was consistently spending two to three times our monthly revenue and losing money, and not venture capital, out of my personal bank account.”

I just want to say here that if this was me, I would've been so incredibly anxious and stressed because the idea of ever in a business burning more than I'm making, like I don't know if I'm actually physically capable of doing that, because it feels for whatever reason, to me, it feels so unhealthy, and now I logically understand that there are certain businesses that you need to burn cash up front in order to grow your audience enough in order to monetize them well and make it profitable, but that just like it gives me such a bad feeling to not be making more than I spend. 

“I kept reassuring my then CFO, Sparling. He was freaking out watching me burn so much money. I thought he was shortsighted. I said, we are going to make millions, maybe billions. You have to spend money to make money. Once we launch this new feature, then everyone will see. Then I heard a name start popping up quietly at first, then a lot: Asana. It turned out that Dustin Moskovitz, the billionaire co-founder of Facebook, was a fellow to-do list junkie and he was quietly working on his own product. A few months later it went live and I breathed a big sigh of relief. It was ugly. It was designed by engineers, complicated and hard to use, not a threat in the slightest. I felt validated with a team a quarter of the size and a fraction of the money. We had built what I felt was a superior product. 

Around this time, Dustin invited me for a coffee in San Francisco. He implied in the nicest possible terms,” I love this sentence. “He implied in the nicest possible terms that they were going to crush us. Emphasis on nice. He's a very nice, humble dude; both Dustin and Christian Reber, my two key competitors, turned out to be mensches. He walked me through who was backing them, how much cash they had, how they had hired top executives from huge companies, and that it was only a matter of time until they beat us on product and outspent us on marketing. I laughed. I was on the bootstrapping train. He was drinking Silicon Valley Kool-Aid. Nice try. I told him, let the games begin, and we left with a friendly handshake. 

Flow kept growing quickly, but our customers were demanding. They wanted an iPhone app. They wanted an Android app. They wanted an iPad app. They wanted a Mac app. Asana quickly released clients on all platforms. After all, they had a dev team 5x the size. Suddenly it was a key feature when people compared Asana and Flow side by side. Mobile was table stakes. We had to keep up. Almost overnight, our burn doubled. I continued to pound cash into the business: $20,000, $40,000, $60,000, $80,000, $150,000 a month for designers, more developers, more marketers, more office space, more everything. Until my bank balance couldn't keep up, we started almost missing payroll and rent.”

I would've been a puddle at this point. 

“At one point in 2012, Chris even had to inject cash from his personal account so we wouldn't miss payroll. It was terrifying. I started to realize how big a bet this was. I had no other investments outside of Metalab, which was struggling at the time. At this point, I had invested millions of dollars without even realizing it. Just continual weekly injections over the course of years, death by a thousand paper cuts, and by the way, this is the way that businesses typically die. It's not one spectacular implosion. It is cut by cut that slowly bleeds out a business, but because they are small cuts, you don't realize how big of a problem they are. Then Asana raised $28 million and started pouring it into marketing. We didn't do paid marketing. It seemed douchey and aggressive. We focused on organic growth. Until that point, we had just done field of dreams marketing: If you build it, they will come, but I wasn't Jason Fried, in my opinion, one of the best marketers of our generation. My blog posts barely made a dent. I didn't understand marketing, and by the way, this is, I would say, a classic thing for engineers and products people, is they believe if you build a world class product and there's product-market fit, you are just off to the races and you don't have to think about marketing, and you're about to see in a second that I think this is completely wrong and marketing matters as much today if not more, because building product is becoming increasingly commoditized, especially with the acceleration of AI. I love this line by Andrew next. 

“We were a fart in the wind. Suddenly Asana ads were everywhere: billboards, bus stops, conferences, airports, Google, Facebook, Capterra. Even our own Google keywords were plastered with Asana versus Flow paid links. We started burning money on ads and hiring salespeople just to keep a toehold, but we mostly focused on making the product better than theirs, our one remaining advantage, but our product was suffering. In order to stay competitive, we underinvested in our engineering team due to cash constraints and stretched them across mobile, desktop, and web. We started to get an endless stream of bug reports from our customers. Our growth started slowing 20%, monthly growth dropped to 5%. Customers weren't getting the features they wanted. Our clients were unreliable and had syncing issues. Our team felt frustrated and under-resourced and we churned through staff. We had to hit pause and spend years, literally years rewriting all of our clients, only to emerge on the other side to see that Asana had hired designers. At first, a tiny little team, nothing to worry about, but after a year or two they started hiring a huge team of incredible people. One day I woke up to see that Asana had fully relaunched their marketing site, looked great, better than ours. Their new app, while not perfect, had all the features we wished we had time to make, worked on more platforms, and most importantly was fast and not buggy. 

By this point we were burning over $150,000 per month. Chris was tearing his hair out and pointed out that we had burnt through something like $5 million with no end in sight. Still we powered on for years. We even doubled down and raised money, too little, too late, from some friends of mine. We decided that we didn't need to quote unquote “own” that market. We could just have a small slice of pie. We focused on base hits; for a while that looked like an okay strategy. Our revenue growth slowed. We kept on growing, until one day it didn't. Churn caught up with us. Customer acquisition costs became unprofitable. Asana and others could afford to spend way more due to higher customer lifetime value. Bugs continued to dominate our time, and Asana and others kept making their product better.

One day recently, I looked at Asana and it slapped me in the face. It's better; their marketing is better, their product is better, their features are better. Their enterprise support is better. Their integrations are better. They won. We lost 12 years and over $10 million lit on fire. We are done burning money in a losing battle. We give up. The writing is on the wall. Dustin was right. We lost the war due to inexperienced product, myopia, and a lack of capital in a highly capital-intensive and competitive space.

 Today, Flow is a shadow of its former self. We were forced to downsize it to break even and shifted to a team based in India, led by my friend Mohit Mamoria, to keep our remaining customers happy. It's a business that has to spend less than it makes, and focus on making its customers happy. We aren't fighting Asana anymore. This is a very expensive slice of humble pie and we are holding our noses and wolfing it down. At its peak, Flow did about $3 million of ARR. Today it's sitting at about $900,000 of ARR, break even with a low growth rate. Sure, it could turn into something, but I will never make my investment back, and barring a miracle, it will never own a large chunk of the productivity market. 

In retrospect, we were like Fiji waging war on the United States with a collection of AK47s and speedboats versus artillery and aircraft carriers. We got obliterated, obviously. Looking back as a more mature entrepreneur, this was inevitable. VCs, friends, heck, my own business partner, all walked me through all of this, but it took years to sink in. It was a slow 12-year train wreck, a thousand paper cuts driven by my complete inexperience and incompetence on my part. The absolute worst part about this is that a team of incredibly smart people, many of whom have become good friends, worked on a company, some of them for a decade or more, that didn't turn out. A huge thank you to all of the people who worked on Flow over the past decade. I owe you all big time. I'm so sorry it didn't work out the way we had hoped, and the responsibility falls squarely on my shoulders. I think that failure is the best teacher, but better than failing is getting to learn by reading about my failures in a tweet instead of losing $10 million yourself. 

In this instance, I learned a lot. The key takeaways are, one, if you are in a competitive VC-funded space, it is foolish to compete without raising money. Don't bring a knife to a gunfight. Two, the best product doesn't always win, and product is not a long-term competitive advantage. Such an important point, and it's more important today, like I said. Three, if a tree falls in the forest and nobody is around to hear it, it didn't fall. Four, every developer in the world wakes up thinking “I should build a to-do list app” and people love jumping between productivity apps and workflows. There is no moat in productivity. Avoid it if you can. Five, running a SaaS business without deeply understanding churn, LTV, CAC, et cetera, is like flying a plane without instrumentation: really stupid and dangerous. Six, failure sneaks up on you slowly and then all at once.” This is him kind of restating the death by a thousand paper cuts point. Seven, R&D is expensive, especially when competing with venture. Eight: If you're competing on features, it never stops and is an ever-increasing line item. Nine, good product with great marketing beats amazing product with no marketing. 10: Bootstrapping works best in uncompetitive spaces or niches or if you have an unfair advantage, i.e., a personal brand, unique customer acquisition channel, et cetera. The best way to learn is to walk around sticking forks in electrical sockets and adjusting accordingly. This one hurt a lot. I'll try to keep sharing my screw-ups as they happen.”

So that is Andrew Wilkinson's recount of the $10 million failure of his productivity app, Flow, and all of the lessons learned from that experience. If you enjoyed the story, I highly recommend you follow Andrew on X whose URL I put in the show notes, as he puts out a ton of insightful content around business building. Before we go, just a quick reminder to give Founder’s Journal a shout-out on social and tag me so that I can thank you personally. As always, thank you so much for listening and I'll catch you next episode.