Case Study - How one startup denied its way into the startup grave.

There once was a man who came up with a brilliant idea: to automate the accounting process. He sat with friends and colleagues and they came up with an innovative way to develop a tech platform to do just that.

Nope. I am not talking about Xero or Sage or whichever accounting software you are using. I am talking about ScaleFactor. Again, you wouldn’t have heard about it because this startup did not stand the test of time. Or common sense among other things.

Why do I tend to write about the failed startups more than the successful startups?

It’s simple really. Because of two things.

We all know what the successful ones did right. What we don’t know is why the failed ones well, failed. What did they do wrong or what did they not do at all that caused their startups to never take off and what lessons can we learn from them to avoid going down the same path?

Secondly, for every failed startup you will usually find one that succeeded which means that the ideas are (almost) never the problem. It’s the execution that makes or breaks a business. Yet this is where so many of us overlook small things.

So what happened to ScaleFactor?

For starters, they received backing of $100 million from investors. You read that right. They received more funding than any of us can probably hope for in any of our startups. And if you’re thinking “But surely if you have the money to build it, how do you still fail?”. That is because money or funding is not the most important part of a startup.

Now this might be a controversial thing to say because why else do entrepreneurs spend hours on 5 minute pitches to secure a couple of extra hundred or thousand bucks? Funding is important by all means, but it is a dependent factor. Or rather co-dependent.

The #5 success factors of a startups is so well explained in this YouTube video – you can watch it now or later for context. But the main takeaway from this video is the important factors that increase a startup’s chances of success and you might not expect this, but TIMING is the number one success factor. Not funding.


Say you secured a $100 million to build a carpooling company like Uber. What do you think your chances would have been like to succeed 30 years ago? At the height of Uber’s success, what do you think your chances would have been then? What do you think your chances are like right now?

Do you see what I mean? The best ideas will fail if the timing is wrong. And the concept of ‘timing’ involves many factors, not just the date you write down on a piece of paper.

Timing includes:

  • The needs of your target audience at that time
  • The gaps your competitors are leaving at that time
  • If it involves tech, the capabilities of the software you want to use to do what you want from it
  • The persona of your target market – how much education will it require to convince them that they need your product or service? Or is it a no-brainer?
  • The location. Right now, Uber is getting smarter, they recently provided financial backing for a Nigerian motor vehicle financing platform (Moove), providing new growth opportunities. In 2016, SA Taxi acquired a local metered cab service (Zebra Cabs) with a clear intention to expand the existing taxi services to metered taxi’s to compete with Uber. The absence of Zebra Cabs on the road is a clear indication of the eventual outcome. For one, the rates charged were considered ‘fair’ to the drivers but in comparison with Uber’s rates (whether fair or not) it was not even a competition. However, right now with Uber struggling to maintain a leader’s presence in South Africa, the location plus timing is leaving a huge gap. Ready for innovation or disruption. Or both.
By Author on Midjourney

So what did ScaleFactor do wrong?

The idea was sound. Any accountant will probably vouch for the automation of processes to streamline his or her daily tasks. And with the success of Xero and Sage as examples today (I am not an accountant, I’m just familiar with these two), they were clearly onto something.

And we are right back at execution. And some other things.

Like any other tech startup, they needed the funding before they could start building and they managed to get that. Millions of it. So they started building. But the platform was glitchy. Whether it was poor development I don’t know but a tech platform with glitches that are not resolved might as well just close down. Customers expect a seamless experience. While some customers might be very understanding of a new platform and the typical glitches (bless them, we really need these non-complaining and patient users), most people have a low threshold for dealing with glitches.

I would guess on average, more than 2 – 3 glitches on any platform albeit it login issues, password issues or a button that does not work, are enough to have people ditch it and try something else. Except when you are an accountant and have gone through all the effort to upload your data and now need the system to do its thing, it’s not so easy to back out. If it doesn’t get resolved, you will probably stick with it until you get the first opportunity to bail.

Here’s the kicker.

You know what the management did when customers started to leave? Yes, you would think that they fixed the system but instead, they covered it up. Pretended like nothing was happening. They refused to acknowledge the problems at hand. Instead, they spent large amounts on marketing strategies to gain more customers, instead of nurturing those they already had and who were struggling.

Finally, when things turned really bad, they pivoted. Again, you would think that they adjusted their offering by perhaps addressing the obvious pain points, and changing some processes or the billing model. But they completely changed their offering. They pivoted to a marketplace model, connecting bookkeeping companies and SMME’s. This is such a pivot and makes no sense for their existing customers – even though they secured another round of $90 million. It’s like breaking up with your boyfriend or girlfriend and telling them that they will definitely find a new partner if they just go on Tinder.

They basically started over.

And by denying the real problems they faced beforehand, they were doomed from the beginning of this pivot. If they failed to recognise and fix glitches on the original system, what did they think would be different this time around? The tech platform would suddenly be glitch-free? At some point, we should face the imperfections of our business models and fix them. Denial is a sure way to end your startup rapidly.

Then Covid hit and it was easy to blame COVID-19 for their failure. I’m still trying to understand how though because the one and only business model that was in the best position to survive COVID-19 were tech platforms or SaaS companies because you only needed the tech. Location and masks did not matter.

So the takeaway?

Even the best ideas will fail if you a) execute them poorly, b) fail to recognise or acknowledge the normal issues that pop up and deny those as a result of poor execution, and 3) blame everything else but your own mistakes.

On this positive note 😉

How are your ideas coming along? Let me know how I can help HERE.

Have a happy week!

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