Brickflow was a good story, while it lived (we wrote about them twice already), but it became a really great story in its death. Today the founders share with Forbes what they learned from the failure of their promising startup.
"We told our investors that the project is on life support during the May board meeting. It was shit to prepare for that" say the guys, Peter Langmar, aka. Petak and Tamas Kokeny, aka. Eggdice. We are sitting in an office in downtown Budapest. They moved in recently, the beanbags were delivered a few days ago. The founders of Brickflow did not wait long with their new venture, but in May at the board meeting they asked one last thing from their investors. They want to tell their story and the reasons of failure. Why? "Sharing the take-aways makes the whole thing genuine" says Eggdice.
Brickflow wanted to go with social media trends by making a storytelling tool (→ Forbes 10/2014). "Content is everywhere in social media, you could build your stories using YouTube videos, tweets, images" says Petak about the goal of the business. "The ideal is to build a user base several million strong and exit. But that is the hardest in this industry."
Social media is a very risky market, products usually can be monetized at a later stage. But if you make it, profit is immense. The road is bumpy, as reaching millions of users is not easy, but retaining them is even harder. (Servers themselves cost a lot.)
"Peter is one of the toughest and most systematic entrepreneurs I have ever met" says Andrus Oks, investor, representing the Tallinn WiseGuys accelerator in Brickflow’s board. "We were convinced to invest 20,000 dollars by their passion, their thoroughness and the capabilities of the team."
Looking for the way to go lasted too long. By the beginning of 2014 they had raised more than 300,000 dollars of investment, but growth was lagging. They found what they were looking for after ongoing testing, newer and newer versions, all-nighters, a lot of travelling, pitching and investor meetings. Brickflow was intended to tell stories, but after a while users were only searching for content. The guys jumped on this bandwagon eventually, and realized that Brickflow was working as a great content recommendation system within the micro-blogging community of Tumblr. Traction was happening at last.
The most important figure on the social media market is traction. "If the graph doesn’t show exponential growth, it doesn't matter what you do" explains Eggdice. Investors are looking for a hockey stick, i.e. steep growth. Finding a silver bullet and having users flock in costs a lot, but afterwards it is easier to find new investors.
The guys were able to show a hockey stick, only too late. Social media was a hot topic in 2013, but by the time Brickflow got on the right track, early stage investors did not consider another social media startup sexy. Momentum was gone. "Nowadays you’ll get funded most likely if you can word a few clever sentences and they contain internet of things" says Petak.
"Startups like us aren’t appreciated in Europe" says Petak. European investors prefer businesses that yield return sooner than later. It is not a coincidence that neither Twitter nor Facebook started out from here. To put it plainly, Brickflow should have relocated to America. We have to stop here and go back to the problem of timing a bit. It was too late by the time Brickflow was able to show promising growth. As of fall 2014 they grew weekly 10%, moreover there were weeks when the user-base grew by 20%. But then it was already too late to move to America. "Our investors were European, we didn’t have a network in America, it seemed impossible to find investors there in time. We tried it in Europe, where we had the network. It was a mistake" says Petak. However the team took part in iCatapult’s program and spent three weeks in New York. They started networking there and got some great feedback. "We weren’t asked how we were gonna make money at last. The Americans told us to forget about that nonsense" remembers Eggdice. This was when it occurred to the founders that they were late.
The company got investment from several European angels before the Hungarian iCatapult. "Like in the joke" says Petak. "We had Estonian, German, British and French investors." Except one, they were all debut investors in an industry whose experts are overseas.
Running out of money, this is how the story always ends and that happened to Brickflow too. Andrus highlights this, as well. He thinks that this was the main cause for the project getting stuck. The founders were always skillful in raising money, but they reached dead ends after a while. Last summer it was apparent that the company needed approximately a million dollar capital injection. This amount is considered an A-round, i.e. a first round of venture capital investment in Europe, therefore in Hungary too. When taking a look at the capital requirements of the industry, it can be seen that Brickflow’s competitors raise this amount in a seed round in America.
The problem was that European VCs wanted the company to be in a much later phase for this kind of money. "We needed to reach a million users, but VCs told us that they invest this amount of money only in a later phase" says Eggdice. Petak toured Europe for investment last fall. After it all happened they think that the project could have been saved at this point, if they aimed for a smaller, 200,000 dollar bridging investment.
According to our information Brickflow was one of the biggest investments of iCatapult. The incubator of Primus Capital, an investment fund, wanted to land Hungarian companies on the American market. This shared goal formed a strong connection between Brickflow and Imre Hild, leader of the incubator at the time. They even started to work together before signing the term sheet. In the end the team got to America thanks to this.
Despite everyone’s best intentions several problems arose. Although iCatapult positioned itself as an incubator, potential investors considered it as a seed fund because of the size of the investment and expected it to chip in the next round.
In the meantime iCatapult became an accredited incubator of the state funded Gazella-tender. The Birckflow team and Hild thought that Gazella could mean a new source of funding if terms are appropriate. But they never saw the details as the government did not sign the Gazella-contracts ever since (→ Forbes 07/2015). First the team waited two months at the beginning of 2014, then news broke in the middle of the year that contracts were going to be signed. "Gazella didn’t do any good for those who heard about it early, because it made them wait too long. On the other hand I at least learned not to build any business on state money" concludes Petak. They started to run out of time when they realized that they might be already too late.
The third founder of Brickflow, Mihaly Borbely already left last year. His creative mind could not bear that the company already knew what they wanted. They parted in friendship. The remaining two founders had to make a judgement call: either they fire everyone and have money for another half a year, or they put their own project on life support and start contracting other firms. They got job offers both as a team and one by one. If it had been only about the money, they could have gone anywhere. Everyone stayed even after decreasing the salaries during the fall, so everyone earned half or even one third of the market standards. In January only Petak worked on Brickflow, and he was still in serious negotiations with some investors.
"We worked continuously, several things were going on in parallel. It didn’t end like I was staring out of the window, while it was raining and sighed. There was no time for it to end immediately, it got a little worse every week" says Eggdice. By spring negotiations went cold, and it would have been hard to start new ones, as the project was hibernated.
"It was apparent at the beginning of the year that they wouldn’t get funded, but they went on working. They took on contracting jobs, but lost focus in the meantime and had no money for marketing" says Andrus. A decision had to be made. Investors knew how the guys were doing throughout, they did everything very transparently. "They saw that we didn’t give up in December, that we tried everything" say the guys.
Brickflow was closed in May, liquidation started, servers were cancelled. When I asked one of their first investors, Andrus, if he would ever again put money in this team, should they come up with a new idea, he answered "Absolutely" without hesitation.
"We were there together, knowing what mistakes we made and that there was a team we liked to work with. What was there to do follow?" asks Petak the rhetorical question. Lab.Coop was incorporated at the end of April. They started over.
"At the beginning, in the valley of death you’re are very dependent on your investors. We wanted to avoid it this time, that’s why we started to build a cash-flow based venture and will use the money made here to fund our own projects. The main thing is to invest money in something when there’s momentum" goes on Petak. "When you need the money to boost a business, not when it is a question of survival. Been there, done that" adds Eggdice.
In an end-to-end product house they do essentially what they did before, development, this time for foreign clients mainly. There is one novelty though: they make a lot of money. According to Petak, unless they mess up something, they are going to be at 350-500k dollar revenue in Q4, but it can be even 700k. They have more than one trade, their consultancy and education branches (together with Digital Natives) is kicking off this fall. The latter one is an answer for the 10,000 unfilled jobs in the IT sector. They guys say that this problem will be solved by the market anyway, so they get ahead and start trainings.
Failing a startup gives a lot of learning, enough to try again. Brickflow was closed with five full time employees in May, they are twelve now, and are going to be forty next year. "The employees get shares in the company after every month spent here (employee-owned corporation). Older partners get diluted, but even if we’ll have less shares, they will be worth a lot more. All this to be able to get great minds to join" says Petak.
They are building a scalable organizational structure and a sexy company. The final goal is to realize an American style venture builder, where own ideas and projects are incubated and launched on the market after the first round of funding. Twitter and Medium also stated out from workshops like that. The main point is to catch momentum when it presents itself.
They talk about failure naturally, while making hundreds of thousands of dollars in an other company. They do not seem devastated. When I ask how they experienced the days of insecurity, Petak turns a little grim and says "we grabbed a few drinks sometimes."
Summer 2012 - They run a successful 10,000 dollar Indiegogo campaign. There is money for starting.
Fall 2012 - The first meeting with Imre Hild
December 2012 - The team gets into two international accelerator programs. They start to run out of the initial money.
January 2013 - Eggdice leaves Prezi and becomes the CTO of Brickflow.
February 2013 - Startup WiseGuys, Estonia (20,000 dollar of investment)
March - September 2013 - Startup Chile (40,000 dollar of investment)
End of 2013 - Working together with iCatapult, under the leadership of Imre Hild
January 2014 - iCatapult invests. The company receives 245,000 dollar (combined with the angel money).
Fall 2014 - Salaries need to be decreased, but the team remains together.
December 2014 - They are running out of money again, cash-flow problems occur.
January 2015 - Several promising negotiations.
Spring 2015 - Investor negotiations go cold.
May 2015 - Brickflow is closed, the new company is started.