When you begin your startup business, it is normal to build on the foundation created by those who came before you. But you need to reduce risks to your new venture so you don’t build a House of Cards. Here’s how:
Beware of the 500 Pound Canary
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In the age of Apps many companies have hitched their wagons to big players like Facebook or Twitter. They build third party Apps that access the data from Facebook and Twitter. The Apps offer users nicer looking interfaces and better functionality than the native platforms but the companies building Apps are assuming huge risks.
Third party Apps are vulnerable to the whims of the large players who own the data and the platforms. Those players can unilaterally change the rules of engagement and leave companies high and dry.
This is exactly what happened with the third party App debacle at Twitter. Historically Twitter had treated third party developers as welcome guests. It encouraged them to build Apps to access Twitter data. These Apps collectively attracted large numbers of users and helped Twitter build its user base.
But this all changed in August 2012 when Twitter announced on its Developer Blog that it was imposing limits on data access by third party developers. In a post of a few hundred words Twitter effectively declared that third party developers who had once been welcome guests were now considered squatters on Twitter land.
Twitter unilaterally changed the rules and imposed a limit on the number of users a third party App could have. The number of users was capped at 100,000. Existing Apps with more 100,000 users would only be allowed to grow their user numbers by 200% for the lifetime of the App.
All Apps were required to go through Twitter’s new API which required authentication. New Apps were only allowed to have 100,000 user tokens.
For third party developers the unthinkable had happened. Twitter was turning its back on the very people who had been so instrumental to Twitter’s success. The shock and betrayal was widely expressed all over the web.
Many Apps fell victim to this limit and could no longer make their business models work. When Rowi, a popular Twitter client for Windows phone, hit their user limit they stopped offering the App for download and ceased supporting it.
In October, 2014 Talon, a popular twitter client reached its Token limit. Here is the anguished post from its Founder.
Beware of Trolls
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Another way to fall victim to risks is to violate the intellectual property rights of another company or to be accused of doing so.
There is nothing more gut wrenching than seeing a young, promising company get sued for intellectual property infringement. For many of these companies it spells the end. Litigation costs can exceed $5 million not including monetary damages that may be assessed against them. But perhaps more troubling is the distraction it causes during a crucial time in a young companies life and the enormous stress it places on the management team. It can also be a major buzz kill for venture capital.
I recently watched the excellent documentary, Print the Legend, which told the story of two promising 3D printing start-ups, Makerbot and Formlabs.
Formlabs launched a Kickstarter Project in September, 2012 to raise $100,000 for its 3D printer called Form 1. When its campaign closed in October, 2012 it had raised over $2.9 million and was the most highly funded technology project on Kickstarter. Formlabs was flying high.
Only one month later, in November, 2012 Formlabs dreams came crashing down. It had been sued by 3D Systems for patent infringement. 3D Systems owned patents for 3D stereolithographic printing which they alleged were being violated by Formlabs.
3D and Formlabs entered settlement talks and the infringement suit was voluntarily dismissed in November 2013. Everybody expected an announcement of a settlement but instead, 3D re-filed the suit in a different jurisdiction.
Despite the ongoing lawsuit Formlabs raised an additional $19 million in venture capital in October, 2013. But the lawsuit remains active and the outcome is uncertain. Formlabs is continuing to execute its business plan but one has to wonder what impact the lawsuit will have. The uncertainty it creates will undoubtedly negatively affect Formlabs valuation because of the potential risks to their future revenues.
Beware of Shortcuts
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In my new venture, MondoPlayer, we briefly considered using Facebook Connect as a way of registering new users for our App.
Facebook Connect had some exciting features such as automatically capturing user profile data from Facebook. This would streamline the installation process for new users. We could have saved a lot of development time and resources but it would have been a false economy. Facebook would own the relationship with our users. And if Facebook changed the rules for Facebook Connect in the future it would put our entire venture at risk.
When you evaluate your business idea make sure you keep these risks in mind. Otherwise you may find yourself at the bottom of a heap of cards.
Photo Credit: Emily Raw
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