Why This Startup Lost $2 Million (And How To Avoid The Same Fate)

It's hard to talk about failure and it's especially hard to talk about other people's failure without coming across as an ass.

However, our greatest asset as human beings is our ability to learn from the mistakes of others. As such, I'd like to share the story of a startup called Quest that, at time of writing in 2022, recently shut down having burned through nearly $2 million in funding.

Why Quest?

Countless startups close their doors forever every single day, so was there a particular reason that I chose Quest for this article?

Not at all.

I have no connection to the company or the founders. It was by pure chance that I came across the founder's announcement on Twitter that they were shutting down the company. Any failed startup could have been the focus of this article and that's what makes it so valuable as a learning opportunity.

Because, when we look at the history of the company and the public announcements of the founders as to why they were shutting down, we can see that the reason they failed is the number one reason behind every startup failure - they fell into the product-market fit trap.

The Product-Market Fit Trap

Quest was founded by Dutch entrepreneurs Robert Gaal and Emiel van Liere in 2018 and started life as a private professional network called Cooper.

The idea behind Cooper was that LinkedIn was too impersonal and led users to create networks based on quantity rather than quality - as evidenced by the fact that most people's professional networks are filled with people they have never met in real life.

For the two founders, this was a problem and so they created Cooper as a way to rectify this. Cooper would allow its users to create a professional network filled with those that they knew personally or those who they had been introduced to.

This seemed like a good idea to not only the founders but also several investors who gave the two men $2 million in seed funding to help bring their vision to life.

Now, we don't need to look at their business plan to see how Robert and Emiel planned on growing their business. They had a problem that they wanted to solve and an initial solution created to solve it - clearly they were planning on selling their product to potential customers.

Of course, this isn't exactly surprising. This is exactly how virtually every single business in the world operates - they sell their product/solution to potential customers. But, this is how startups fall into the product-market fit trap.

Why?

Because this approach is based upon an underlying belief that, in order to grow, a business needs a great product. As such, every single startup in the world prioritizes building a great product that its target audience aka potential customers love - otherwise known as finding product-market fit.

But the problem with this is that, not only is the underlying belief wrong, but it is also a trap. And the reason that trying to find product-market fit is a trap is because it costs a lot of money.

Emptying The Bank Account

Every startup only has a limited amount of money to pay the bills and keep the lights on. Regardless of whether that money has been raised from investors or comes from the founder's own pockets, once it runs out, the startup will be forced to close.

As such the priority for any startup needs to be bringing in as much revenue as possible to, at minimum, pay those bills and ensure it doesn't run out of money. The problem is that looking for product-market fit stops startups from being able to do this.

And here's why.

This is what the process of finding product-market fit looks like:

Step One: Come up with a solution to a perceived problem.

Step Two: Build a working version of that solution.

Step Three: Try to sell it to potential customers.

Step Four: Make changes to the product based on success or failure in step three

Step Five: Repeat steps 3 and 4 until satisfied that the target audience loves the product aka product-market fit is found. This is signaled by demand for the company’s solution skyrocketing and customers flooding into the business.

Whilst this is good in theory, what inevitably happens is that the startup is unable to find product-market fit the first time around and so it ends up ‘pivoting’ to a new solution and new problem and starting over at step one. And this doesn’t just happen once, many start-ups go through multiple pivots.

This makes it incredibly hard to build a solid and consistent revenue stream because you are constantly changing your product and pivoting to new problems. Each time you are starting over again. And, although product development (especially in the software realm) is cheaper than it has ever been, it still costs money. 

What’s more, this process takes time. And time is money. Even if, by some miracle, product development was completely free, the startup still has bills to pay and mouths to feed. And the longer it goes without generating enough revenue to pay those bills, the more that cash reserve gets eaten into.

It's for this reason (the product-market fit trap) that running out of money is the biggest reason why startups fail.

And this is exactly what happened to Quest.

The Death Of Quest

After two years of trying to find product-market fit with Cooper, the founders realized that they couldn't find product-market fit with a professional network. So, in 2021, they pivoted to a new product and a new problem - an application that hosted speakers like author Nir Eyal and employees of tech companies like YouTube who would who give career advice via Q&A style audio soundbites.

They raised $125,000 from startup incubator Y-combinator and set about looking for product-market fit with this new solution.

But, as is often the case, this pivot didn't work out for Gaal and Liere. Product-market fit didn't happen with the career advice application either so the company pivoted their solution a second and final time. The founders turned their Q&A application into a tool that podcasters could use to interact with their listeners. Listeners could leave audio messages for the host that would give them ideas and topics they wanted to hear in the next episode.

But, by early 2022, this pivot failed too and it was the end for the company. Out of the $2,125,000 that the founders had raised, only 10% would be left after final bills were paid.

This drive to create product-market fit had drained their business of nearly $2 million in funding, money that they needed to keep the business afloat, and stopped them from actually being able to generate the revenue they needed to replace that money.

What's more, unfortunately for them, this was also compounded by the fact that their solutions were free.

So, How To Avoid The Product-Market Fit Trap?

The answer is quite simple - don't go looking for product-market fit.

Note that this isn't an excuse to have a terrible product. You will eventually need a great product to offer your customers otherwise your churn (that is the number of customers that stop buying from you) will increase to the point where you'll be losing more customers than you are bringing in.

However, a great product is not necessary to create massive growth (both in terms of number of customers acquired and revenue generated) in those important early days of your startup's life. If you have a great product already, fantastic. But if you don't, you do not need to worry about improving the product and finding product-market fit. Because, if you do, you run a very high risk of running out of money before you ever do find it.

This is something that serial entrepreneur David Cancel discovered after selling his company Performable to HubSpot in 2011 for $20 million and joining the HubSpot team as Chief Product Officer.

Standing on stage at GrowConf 2012, he explained to attendees that for years he spent a lot of time and money trying to find product-market fit for his startups. As an engineer, he had bought into the idea that growth only came from a great product.

But, upon joining HubSpot, he realized that HubSpot’s massive growth between 2008 and 2011 had come with a product that didn’t have product-market fit. As both Cancel and HubSpot founder Dharmesh Shah both say, their product was far from great. But, despite this, the company had grown from zero to $29 million in revenue by the time Cancel joined and had a fiercely passionate customer base who loved them.

What's more, the company achieved much of this growth during the 2008 recession (whose effects lingered long after the first year) despite the financial crisis hitting its target audience of small-to-medium sized businesses the hardest. Whilst others struggled, HubSpot thrived.

So what had HubSpot done?

The BLUNT Method

HubSpot hadn't sold its product. Instead it had sold a belief called inbound marketing.

This belief was made up of five characteristics that can be summed up in the mnemonic BLUNT...

• Brand New - the belief was brand-new to HubSpot's target audience of small-to-medium sized businesses.
• Leading - it led back to what made HubSpot's product unique.
• Unfamiliar - it introduced an element of unfamiliarity into the target audience's life.
• No Product Required - although it led back to HubSpot's product only, one could implement it in their lives without buying HubSpot's products or services.
• Traction - HubSpot's internet marketing solution already had existing demand (aka traction). That is to say that its target audience were already buying it from others.

It was by selling this BLUNT belief instead of its product that enabled HubSpot to create massive growth in those early days with a product that, in Dharmesh Shah's own words, sucked. Of course, HubSpot eventually had to drastically improve their product - something that happened thanks to David Cancel's work as Chief Product Officer. But they had the luxury of only having to do this when they had a lot of satisfied customers and tens of millions of dollars in annual recurring revenue entering their bank account. In other words, by then, they could afford to focus on improving their product.

For Dharmesh Shah, selling the belief in inbound marketing and not his product was the reason for the company's success. As he states on stage at the SaaStr 2016 conference:

The breakthrough success, which is the thing we hope to aspire (to), you all are aspiring to, requires something more than just technology ...You have to have a philosophy* ... you have to have a point of view that you can pitch outside of just features. Even benefits, that’s not enough.

*Note that whilst Shah calls it a philosophy and I call it a BLUNT belief, we're talking about the same thing. I just find the term BLUNT belief a more accurate and useful description of what HubSpot sold.

It's Not Just HubSpot

HubSpot isn't the only company to have used this strategy (what I call The BLUNT Method) to create massive growth:

• Apple: used it to turn itself back from the brink of bankruptcy in 1997 and become, in 2018, the first company to ever be valued at a trillion dollars and then the first company to ever be valued at $3 trillion in 2022.
• Salesforce: Selling a BLUNT belief was the stone in the company’s sling that allowed them to take on the Customer Relationship Management (CRM) industry goliaths and win. Today, it is the dominant company in the industry, with a 2020 revenue of over $17 billion. To put the company’s dominance into perspective, in 2019, its increase in market share was more than its top 13 competitors combined.
• CrossFit: Selling a BLUNT belief grew CrossFit from a tiny cult fitness craze to a global brand. The brand makes an estimated $4 billion in annual revenue and has over 13,000 gyms worldwide.
• And several others

As these companies and decades of psychological research prove, The BLUNT Method is the most effective growth strategy in the world. It is more effective and reliable than any other growth strategy out there.

Applying This Strategy

Unfortunately, although a number of startups (and established businesses like Apple) have used this strategy to create breakthrough growth, it has been largely misunderstood and misapplied.

It's why I've created thebluntmethod.com. Visit the website to:

• Read the case studies of other startups that have used this strategy to create breakthrough growth.
• Read exactly how The BLUNT Method makes sales & marketing messages more persuasive, creates more word-of-mouth growth, increases the size of one's target audience, enables businesses to sell more things to existing customers and create unbeatable long-term differentiation.
• Learn how to apply this to your own startup to create breakthrough growth.

About Chris

Chris has spent nearly two decades (and counting) marketing and selling products, services and software, both on and offline, in multiple countries around the world.

He has worked with businesses of all sizes – from startups to companies like Microsoft, Google, SAP, Oracle, Groupon and others, and has also created, marketed and ran multi-million dollar industry conferences in many different industries and countries around the world.

Chris is also, an accomplished writer, having written for numerous publications including The Times, one of the United Kingdom’s most well known newspapers.

Chris helps startups find breakthrough growth using The BLUNT Method.