What is a failure for a startup? It is not just the closure of a business as you probably thought but also the so-called «premature exit» when a startup owner sells it before it brings in any real money. We asked several entrepreneurs what were the main reasons that made them close or sell a startup.
Paxaro Labs, a crypto market accelerator, was launched by Azat Bekmagambetov more than two years ago. In late December 2022, on New Year’s Eve, he was forced to close the project. The key reason for the move was the nonperforming business model Bekmagambetov and his partners had chosen.
«We provided training for startups, wrote marketing strategies and looked for investors. Our mistake was the wrong business model. We used to sign agreements about our future stakes in startups but we never charged them,» Bekmagambetov said.
As a result, even though Paxaro Lab assisted in seven successful projects, it found itself financially broken. «We should have focused on investment for our business first,» Bekmagambetov regrets.
Over two years, the project’s founders relied on their own money they made by selling software for the cryptocurrency market. However, the FTX collapse hit the entire industry and caused a sharp decline in revenues for all who were involved in the cryptocurrency market. Bekmagambetov and his partners found themselves broke and with no investments.
«It hurt emotionally. I struggled with depression for several months. We have spent about $500,000 in total. Now we are launching a new educational project, also linked to cryptocurrency,» Bekmagambetov noted.
Airbnb for parking
In 2017, four young people won a contest by Astana Innovations. With the help of the $2,240 prize, they developed the turaQshare mobile app to assist motorists when looking for a free lot in closed parking. Many even compared the app to Airbnb.
The idea behind the app was quite simple. Owners of parking lots in residential buildings and business centers were expected to lease their property to motorists when they were absent. About 30% of revenue was considered to be split between the startup and managing companies of residential complexes and business centers. However, with 1,000 transactions per month, the demand was too low and didn’t cover costs.
«If I had a second chance, I would make a lot of changes. First of all, I wouldn’t develop the app and just use Telegram instead. Also, I know now that Astana wasn’t ready for this product at that time. Many parking lot owners and some managing companies didn’t understand why they should lease their property to people they don’t know,» said Anuar Baytulakov, the project founder.
He also regrets that he had never met a venture investor or professional business angel.
«Our project was born ahead of its time. I do not doubt that we would easily get money from investors now. We saw how many investors appeared after the pandemic. In 2017, we dealt with managers, not entrepreneurs,» Baytulakov said.
In 2019, the team agreed to sell the app to a businessman from Aktobe who offered them $120,000 in cash.
«Apart from investments, we also needed expertise and people who know other people. Smart Money, I would say. We couldn’t even arrange a meeting with owners of big business centers in the city’s downtown. And of course, we should have done our app on Android rather than iOS,» Baytulakov noted.
Moreover, he also has regrets about his team. «I didn’t realize at the time that I need people with experience and certain backgrounds, those who truly believe in the project and can endure tough times with no money,» he added.
Pandemic and eSIM
In 2018, Kazakhstani startup Nommi decided to create a portable Mi-Fi router for high-speed internet connection all over the world. The startup raised $92,000 at the crowdfunding platform Indiegogo. In 2020, Murat Abdrakhmanov, a business angel, invested $300,000 in the project. At the time, Alena Tkachenko and Kairat Akhmetov, the founders of Nommi reported that they had registered their business in the U.S. and would focus on developed countries, although the team was based in Kazakhstan, while routers were produced in China.
In 2020, China stopped all its production activity due to the COVID-19 pandemic which caused a rapid decline in sales. In 2022, Abdrakhmanov said that the project stopped working, although the company wasn’t bankrupt at the time.
Tkachenko refused to discuss the future of Nommi, while Adbrakhmanov openly said that the project just didn’t make it.
«It has become prey to the COVID pandemic as well as a new eSIM technology for iOS and Android. Both Tkachenko and Akhmetov are big professionals. They tried to make a pivot and switch to B2B but failed,» Abdrakhmanov recalled.
What should startups know?
By now, the number of startups that survived is twice as big as it was in the past several years, according to Tatyana Khasanova, a tracker in Astana Hub.
«Modern startup founders know what an accelerator is and why they need to test their ideas before going any further. However, their appetites for profit have grown as well. They want about $1,000 per member of a team; otherwise, they close the project on their own,» the expert said.
Anuar Lenzat, CEO of MOST Incubator, said that poor market research also contributes to the death of new projects.
«The U.S. market is eager for outstanding and new technologies, and many Kazakhstani products just do not fit it. Of course, there are some unique products made in Kazakhstan but you would need a lot of resources to promote them on large markets, which is always extremely hard for Kazakhstani entrepreneurs,» he underscored.
Khasanova agrees. «Often they have a nice idea and an effective team but the product they offer doesn’t fit a market. This means the team didn’t make market research well. For example, even a modest team can offer something that fits a market, and this business will grow,» she highlights.
«And of course, any founder should worry about his team, because when the team’s players come and go all the time, this is a bad sign for investors,» Lenzat said.
Edited by Tatyana Trubacheva