From the September 2001 issue of Startups

You daydream about what you really want to do. You can't wait to talk to co-workers, friends, family or anyone who'll listen to you talk about your business idea. Thoughts of being the boss, setting your own hours and fulfilling your life's passion get you more pumped than anything else.

So what keeps you from taking the first step? For many aspiring entrepreneurs, it's the fear they might fail. The moment they're about to muster enough courage to launch out on their own, their minds race with thoughts like these:

  • What happens if my venture flops?
  • How would I save face with my family and friends?
  • I couldn't bear to be forced back into working a "real job"-that would be humiliating!
  • If this thing doesn't go, how would I get back on my feet financially?
  • How would I regain my credibility with people?

And with all the failed companies of late, how do you diminish these anxious thoughts to gain the confidence you need to move forward on your business? Change the way you view failure. Understand that failure is not the end of the world-nor the end of your entrepreneurial career-if you learn from it. Not that you want to start a venture only to fail, but as entrepreneurs Jeffrey Henning and John Doffing can attest, failure can actually be the thing that makes you the most successful. Learn from their stories-and maybe those first few start-up steps won't seem so terrifying.

Index

Index Software
Life Span: 1991-1993
Cause of Death: Insufficient Funds
Subsequent Venture: Perseus Development Corp. , founded 1993
Vitals: Revenues exceed $1 million, with 40 employees to date

Jeffrey Henning, 32, learned the hard way that it takes more than a great idea to build a winning venture. In 1991, at age 22, Henning co-founded Index Software to provide auto-illustration software to people who couldn't draw but still needed custom graphics at an affordable price. Based on his research, there was a clear need and a ready market for his product. In fact, Henning says the start-up was on the verge of getting the software bundled into Lotus SmartSuite, which would have been a major score for his company. But the deal never got off the ground.and neither did Index Software. Henning shut the doors after two years.

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The problem? Sure, they had a great idea, but they didn't have a fully developed product, nor enough cash to make it happen. "We lacked funds to invest in completing the technology," recalls Henning. "With the recession [during the early '90s], venture capital firms were not providing seed funding. They were only financing companies that had completed development of their products. But our product was too labor-intensive for us to do that, requiring a team of artists to create customized clip art."

What were the lessons learned? Henning cites three:

1. Design a business model where you can self-finance product development. This way, your business' survival isn't 100 percent dependent on outside funding.

2. Secure sufficient lines of credit, even at times when it doesn't seem you would need to access them. This will give you leverage when you want to raise expansion capital.

3. Start with a very basic initial product, and get it to market ASAP to begin generating revenues. This way, you get money in the bank and more relevant customer survey research to build a revised, more robust version.

Armed with these lessons, Henning quickly turned things around to co-found Perseus Development Corp., a Braintree, Massachusetts, firm that develops and sells software for conducting more efficient market survey research, in 1993. And the failure experience seems to have served him well. Now the COO, Henning has helped grow Perseus from three employees in 1997 to more than 40 today, with revenues exceeding $1 million.

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"We developed the survey first for our own use [at Perseus] to provide better market research services to our customers, and we kept investing in the software until we were ready to.sell a mass-market version. This avoided the need to raise capital," says Henning. Instead of being 100 percent dependent on outside capital, as he was with Index Software, Henning and his team designed a business model where Perseus would self-fund software development with revenue from consulting services. And then they gradually transferred more focus to the software development side of the business. Here's the breakdown: In 1993, 100 percent of Perseus' revenues came from consulting services. Today, consulting accounts for 54 percent, with the other 46 percent generated by software sales.

What motivated Henning to start a new company and put the disappointment of Index Software behind him? "There was never any doubt that I would do anything but start companies. I've been starting companies since I was a kid," Henning reflects.

PlanetArts

PlanetArts.com
Life Span: 1999-1999
Cause of Death: Inability to convert online services into profitable revenue stream
Subsequent Venture: StartUpAgent Inc. , launched in 2000
Vitals: Projects revenues near $1 million for 2001, with team of 12 employees and contractors

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John Doffing, 31, wrote the original business plan for PlanetArts.com while he was a graduate student at Cambridge University in 1994. Five years later, during the height of the Internet bubble, Doffing, the founding CEO, and four partners officially incorporated PlanetArts.com. "Our goal was nothing less than to transform the art world through the Internet!" Doffing reflects. Their vision was to create an online art gallery to provide an unprecedented way for emerging artists to expose their work to a global audience. PlanetArts would make money by collecting "slotting fees" from the artists.

But it didn't happen. Just months after launch, PlanetArts.com ceased operations.

Why did PlanetArts fail? As Doffing points out, it's hard to make much money when your paying customers-"starving artists"-don't have the money to pay you. "We entered a crowded, undefined market with no viable path to monetizing traffic," Doffing laments. "In retrospect, we were probably a bit idealistic."

What lessons did Doffing come away with? Here are three:

1. Make sure your target customer not only has the need for your product, but can also afford to pay you for it.

2. Target a big enough market to make it worth your while.

3. Design a clear-cut revenue model to make money from that market.

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"From the PlanetArts experience," says Doffing, "I think I definitely learned the value of building a company upon a legitimate business need that can be viably monetized."

The following year, Doffing launched his current venture, StartUpAgent Inc., an upstart recruiting agency in San Francisco that specializes in building teams for high-growth tech companies in San Francisco, Silicon Valley and Los Angeles. Despite the recent market downturn, Doffing has grown the company from one person to a team of 12, with revenues projected to reach $1 million for 2001.

How has the PlanetArts failure impacted his current success? "StartUpAgent has been profitable, literally from the first week," says Doffing. "And the business model is decidedly straightforward, [unlike PlanetArts]. We connect great people with great early-stage companies, and we charge for it! In several ways, StartUpAgent owes at least a portion of it success to the failure of Planet Arts."

NEXT STEP
Work out the kinks of your start-up before you open for business with Start Your Own Business by Rieva Lesonsky and the staff of Entrepreneur.

Sean M. Lyden is the principal and senior writer of The Professional Writing Firm Inc., a Kennesaw, Georgia, company that specializes in ghostwriting articles.