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‘The lessons learned in my first startup Paramark were invaluable in my subsequent ventures.’

M y first startup, Paramark, was founded at the height of the dot-com era. There was a gold rush on the internet with an idea to stake out as much territory as one could, as fast as one could. Valuations were sky high, money was easy. Our first round was oversubscribed—we raised over $1 million. Just eight months later, we raised over $10 million and felt on the top of the world. But by 2002, the market had slumped and we had run out of money—we were sold for a pittance at the bottom of the market. Fast-forward four more years. Our closest competitor, Avenue A, renamed as eQuantive, was acquired by Microsoft for $5 billion. Having experienced a full boom-bust cycle, I learned some valuable lessons along the way.

The technology is only a small piece of the puzzle.
Paramark had cutting-edge technology developed by people with doctorate degrees from MIT and Stanford. More than half our company was full of staff with doctorate degrees. Avenue A had a relatively unsophisticated solution but they were delivering a complete solution to customers. A good business plan easily triumphed over good technology.

Find who benefits, who can pay.
We had developed automated ad optimization technology that improved click through rates and campaign performance by over 30 percent. We calculated that for an advertiser who was spending $1 million on an ad campaign, we were generating $300,000 worth of value and they would be willing to pay us some part of that. We started out targeting ad agencies which were managing corporate accounts as a leveraged way to enter the market. Unfortunately, the value proposition for the ad agency was not the $300,000 of campaign performance since that money was not coming from their pockets.

Their saving, at best, was the fraction of the labor cost for the analyst who was managing the campaign. We were lost in the confusion of who the customer was. At the same time Google showed how to monetize automated ad optimization. One of their first backers, Ram Sriram, had come to visit us early on. Later, the Google Ad Sense network, that relied on the automated placement and optimization of ads on websites would become a multi-billion dollar business for Google, larger than their search business. They were not selling technology—they were selling a solution directly to the customer who benefited—the advertiser.

Team chemistry is crucial.
We were four founders, none of whom had done a startup before. While we all had excellent backgrounds—from McKinsey, MIT, Harvard Business School, IIT and Microsoft—we came with large-sized egos. Two of us had product backgrounds; two of us had consulting backgrounds. When the chips were down, we were not able to gel as a team. Lesson learnt: the chemistry between the founding team is really important—you want to spend your time fighting external battles, not internal ones.

You must be able to manage the money. In the flush-with-cash days, we had not learnt how to survive through a downturn.

We had a large development team that was not supported by the revenues we were bringing in. Yet we refused to cut back until it was too late. Ad spending had dried up in the dot-com bust and the way to survive was to hunker down with a minimalist team focused on sales. By the time we realized this, we had burned through most of the cash.

Create achievable milestones that build the business story.
We had a financial model and we had sales milestones. However, even when we consistently missed our sales targets, we did not do a reset of the business strategy and continued with what was not working. The ultimate lesson is—startups don’t die, they run out of money. Focusing on controllables that link cash spent to specific business milestones is more effective than a “build-it-and-they-will-come” strategy.

Ultimately, there are no mistakes; only opportunities to learn. If we don’t learn it the first time, the lessons will get repeated.

SANKRANT SANU is the Founder and CEO of Miloka Inc. (www.miloka.com). He lives in Gurgaon and Seattle.

©Entrepreneur September 2010

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Miloka Inc., Sankrant Sanu