Instead of analyzing the Dell's, Microsoft's and Apple's of the world, how about learning from a few businesses that went down in flames; see what sunk them, and how you can avoid becoming the spectacular failure that they did.

Disaster #1: Furniture.com
Legacy: Humiliating

Of all the entrepreneur case studies, Furniture.com might be the most famous. The premise was simple: Sell furniture online. Online businesses were becoming the rage, and the founders of Furniture.com wanted a piece of the action. Online stores are usually quite profitable due to lower fixed costs. Low fixed costs + furniture sales.. A match made in heaven right? Unfortunately, shipping a 200 pound couch ends up being expensive (who would've thought?). The shipping costs alone sliced and diced the potential profit margins for this new online startup. But shipping costs weren't the only problem.

Furniture.com failed to provide any meaningful sales advice to its customers. It also lacked a selection of furniture that anybody other than your great grandparents would want in their home. Unsurprisingly, it went down in flames.

What you can learn
A website is not a business; it's a medium, that helps put you in touch with potential customers. If your products are junk, nobody is going to buy them. Period. And if you are able to sell something, make sure you factor in all of the factors that are going to eat at your profit margins. Furniture.com never took a holistic enough approach, and as a result, they went under.


Disaster #2: Webvan.com
Legacy: Embarrassing

Webvan.com is one of the entrepreneur case studies that is studied in many MBA programs. The company was designed to sell groceries online, and have them delivered to customers' houses. The business model sounded reasonable, but Webvan didn't account for several possible problems:

• Customers typically like to feel their vegetables, fruit, and meats, and hand-select their food
• Customers did not value the convenience of having their groceries delivered enough to pay for it

These issues ended up being the least of Webvan's problems however. Webvan decided it would be a good idea to begin building large distribution centers before fully validating their business (by validating, we mean accruing enough paying customers). Each new distribution center ended up costing Webvan around $30 million dollars. Each center had the latest and greatest information systems, and seemingly everything the company would need to ship out groceries successfully. These centers chewed plenty of Webvan's investment capital, and were a major reason they ran out of money.

Customers never truly warmed up to Webvan the way investors expected. It didn't help that Webvan was being run by a pack of executives with virtually no previous knowledge of the grocery industry. Without this knowledge, Webvan was obliterated by smaller supermarkets that were more in tune with customers' needs and wants.

What you can learn
Don't invest in something you don't understand. Warren Buffet lives by this rule, and you should too. It applies to your time, as well as your dollars. When starting a business, ensure that you are fully versed in the market, and that you understand your customers' needs. You can get this type of information by collecting feedback from them (see here).

Lastly, remember that fancy CRM systems and other technologies are designed to augment your business; they can not be relied upon as sole providers of customers, or sales.


Disaster #3: Barings Bank
Legacy: Shame

Barings bank was the largest merchant bank in London, until one employee sunk them. The bank had a star trader, Nick Leeson. Nick's job was arbitraging; he basically bought futures contracts in one market, and sold them on another market. The difference in price when he sold them was minimal, but the sheer volume of his transactions created a profit. Unfortunately, Nick thought he would start trying to hit home runs, instead of singles. Rather than selling the contracts at small gains, he thought he would wait until a larger gain could be realized. This went on and on, and the bets kept getting bigger. Leeson was also in charge of auditing, and he ended up auditing his own transactions! He used his auditing authority to mislead company executives into believing that he was actually making a profit, when in fact, he had lost huge sums of money. In 1994, he reported a 'gain' of £102 million, when in fact, he had lost £200 million. Not surprisingly, Barings collapsed soon after.

What you can learn
Sometimes it only takes one employee to tear down a company. This doesn't have to be viewed from a purely financial lens; if one of your employees actively tarnishes your company's image on different social media networks, the effects can also cause catastrophic damage. Make sure that your employees are projecting the brand you want your business to be known for. And as you've seen, it's a good idea to have objective auditors, rather than employees that audit themselves. You don't need to be a cheapskate with spending, but as a new startup, your financial capital is your lifeblood. Make sure you know about every place it's going.

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There are many reasons entrepreneurs fail; but these two are by far the most common

Overestimating the response to your product
It is common to believe that your new product or service will be received well by customers; often, their response will surprise you (often, not for the better). Having an overly optimistic expectation for your product can throw off all of your cash flow estimates, and even prevent you from obtaining a single client. When trying to gauge how customers will view your product/service, ask yourself the following questions:

• 1. What important problem am I solving for customers?
• 2. Who is my first customer going to be?
• 3. Where will I find my first customer?
• 4. What will I do if customers don't care for my product? (Adapt it, scrap it?)
• 5. Where will I find subsequent customers?

If you have good answers to all of these questions, you can avoid problem number one. If you can't answer all the questions, that's OK. Now is the time to find the answers to them; it's much less costly to find the answers now, as opposed to later. If you can save yourself 3 months of work on a project that was likely doomed, you can invest those 3 months into a product with a much better chance of succeeding. The second major reason that most entrepreneurs fail is actually an extension of the first problem:

Locating your first real customer
This can't be a friend or family member. You need to locate a real customer, and make certain that they will invest in your idea; they have to agree to pay for it. Having them simply say that they are interested is not enough. By securing a paying customer, you will validate your product's worth in the marketplace. If you can't find a single customer, and you've exhausted all avenues, then it's time to re-evaluate question number 1 above:

What important problem am I solving for customers? Revisit this question, and adapt your product accordingly. Add features, drop features, whatever it takes to make your product viable in the market. You will move in a loop through the two questions that we've discussed.

• Create a product that solves an important problem
• Locating your first real customer (one that will actually pay you)

Continue looping until you have balanced this equation. If customers won't pay for your product, revise the product until somebody will. Note that you need to look hard for customers, but not so exhaustively that you are spending months locating a single customer. You should know where your customers will be located (their industry, company names, names of possible leads), and you should ask them directly. The process should only take a few weeks. Use their reasons for not purchasing your product, and build them into your adapted version. If they tell you that your product only solves half their problem, find out what you're missing, and add it in. Then come back and re-pitch if necessary. This ongoing loop will eventually lead to a product that they will value enough to purchase.

If you can't feasibly meet their needs, or they simply tell you they have no interest in your product, it might be time to throw in the towel, and move on to the next idea. By being agile, and failing quickly (and cheaply), you can save yourself plenty of time and money.

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Everyone has heard of cloud computing by now; but how is it relevant to your startup? Read this, and start leveraging "the cloud" today.

What is cloud computing?
Cloud computing (also known as Software as a Service or SAAS) is a software architecture that basically allows you to run computer applications from the browser (Firefox, Internet Explorer, etc). The application is hosted on a provider's servers, and you essentially "lease" the software and maintenance from them.


Cloud computing benefits: Why you should care
In previous times, your software setup would often require an installation CD, server, and workstations. You would also need to pay a computer technician to backup the devices, ensure everything was connected and running smoothly, etc. SAAS minimizes all of these extra costs. Because SAAS runs on a server in somebody else's server room, you are not responsible for the maintenance


SAAS saves you from the following headaches and costs

• Installing software
• Patching/upgrading software
• Backing up software
• Keeping servers running
• Paying for extra tech support

Because the software runs off of your SAAS provider's server, they ensure that you are always using the most recent edition. Another huge benefit is that you can use almost every SAAS application from any computer with an internet connection! You no longer need to install it on every machine that you want to use it on; simply browse to the program's website, log in, and that's that. Many SAAS applications will work from your mobile phone too


Cloud computing benefits specific to startups
As a startup, cash flow is paramount. You don't want to be throwing away your capital on expensive computer systems, followed by labor costs for technicians, etc. On top of that, you could lose weeks of work if the systems go down and lose your data. SAAS is an affordable alternative to the traditional method. You essentially pay a low monthly fee (or free for many SAAS programs, such as Windows Live Office), and that's all


Free SAAS programs
Some of the best SAAS programs are completely free. Microsoft's Office Live provides free Office applications straight from the browser. Instead of investing big dollars in the stand-alone versions, use the free SAAS versions to save some cash.

Google also provides a suite of free SAAS programs, ranging from calendars to collaboration tools. Try them out, and see if you can cut down some of your costs.

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Split Testing is a must-know website optimization technique that will get you more conversions. Read this, and in 5 minutes you'll be a pro.


What is split testing?
Split testing serves different 'variations' of your website to visitors, and lets you track how successful each variation is. Think of split testing as a controlled experiment, where your users will provide all the data for you. Free software will take care of all the technical work; we'll get to that in a bit. First, let's cover the basics.

There are 2 different flavors of split testing. Each has their own benefits and drawbacks. Here they are in a nutshell


A/B Testing
A/B testing is the vanilla of split testing flavors. It tastes OK, it does the job, but it won't knock your socks off with large amounts of data (which can be a good thing).

Use this method when you don't have a lot of visitors coming in, or if you only want to test 2 different variations of your page at a time. Let's use an extremely basic example to demonstrate. Suppose you have 2 different logos, and you want to see which one leads to more conversions. You would define each 'variation' of your page within the split testing software, then you would serve each of the variations equally (each variation would be shown to 50% of visitors). After a few hundred (or thousand) visitors have used your site, you will be able to compare which logo was more effective. You can disregard the poorer performing logo, and work off the better one.

A/B testing can be used to test logos, headlines, closing sales statements, offers, etc. Pretty much anything you can think of can be tested. The results show up within the free software. This is the simplest form of split testing.

The big thing to know with split testing is that you can only test different variations of a webpage. Multivariate testing is the other technique we will examine, and it allows you to test different variations at an elemental level.

To illustrate this difference, we could test 2 different pages. On page 1, we have a blue logo, with a very comedic headline. On page 2, we have a black logo, with a very serious headline. Let's suppose that page 2 outperformed page 1. With A/B testing, we wouldn't know exactly why page 2 outperformed page 1: was it because of the black logo, or the serious headline? Or both? This is where multivariate testing comes in.


Multivariate Testing
If A/B testing is vanilla, multivariate would be an organic fruit sherbet. It would take a lot more work, but it will provide you with a more complex dessert; perhaps something for those with finer palettes.

Multivariate testing is only really practical if you have a lot of visitors coming into your website. It basically extends split A/B testing to allow for more than 2 different variations at an elemental level. The testing software will then serve different versions of your page, with each element being 'scrambled'. Here's a simple illustration:

MyTestWebpage

Headline (1 of 3 will be served)
This is my first test headline
This is my second headline
This is my third headline

Closing Statement (1 of 2 will be served)
This is my first closing statement
This is my second closing statement

Price (1 of 3 will be served)
This is my first price
This is my second price
This is my third price

This MyTestWebpage shown above has 18 different combinations to be served up! You could use headline 1, with closing statement 2, with price 3; or 17 other combinations! Conversely, A/B testing will only have 2 at a time. This is important because to get any meaningful results, you'll want to see how each variation performs at least a hundred times. With A/B testing, that means you'll need about 200 visitors. With multivariate testing (for the MyTestWebpage example above), you'd need about 1700 visitors! A very big difference.


Free Software you'll need
Google provides free split testing software called Google Optimizer; it's easy to install into your site, and it's very easy to use. Installation and setup instructions can be found here.


Setting up an A/B experiment video
Here is a video that displays exactly how to set up an A/B experiment:

Setting up a multivariate experiment
Here is a video that shows how to set up a multivariate experiment:

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