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Lessons From a Startup That Scored $836 Million in VC -- and Failed Better Place, based in Palo Alto, Calif. won funding from investors like General Electric and Morgan Stanley, yet had to shut its doors in May. Here are lessons to learn from the startup's missteps.

By Peter S. Cohan

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In 2007, Shai Agassi founded Better Place in Palo Alto, Calif., hoping to lower the price of electric cars and make them more accessible. To do so, he planned to build switchable electric car battery stations around the world. But while the company secured $836 million in venture capital from funders including General Electric and Morgan Stanley, on May 26, it was forced to shut its doors.

Here are four valuable lessons for any entrepreneur growing their business:

1. Be close to your target market.
In today's global economy, there's a good chance you'll be reaching markets far beyond your home base. That said, if you are trying to get customers, partners, employees and investors to feel confident in your business -- particularly if you have bricks-and-mortar operations like Better Place -- it's important to make the effort to be near these stakeholders.

The cultural and physical distance between Better Place's CEO, based in Palo Alto, and its target markets in countries including Australia, Denmark and Israel was gaping. Better Place's leader was simply too far from disparate customers and partners to know how best to implement the company's ambitious strategy.

2. Co-develop your product with early adopters.
After six years, Agassi managed to get only one manufacturer of electric cars, the French company Renault, on board. Meanwhile, the company burned through its funds by building dozens of stations while only signing up a few hundred participants.

Many shun buying from startups because they think they may fail. To boost your odds, find marketplace pain points that competitors are not addressing and work on a prototype with customers to solve them. If Better Place's idea of swappable battery stations was better than, say, Tesla's -- it might have attracted electric car makers and their customers.

Better Place offered a service that did not have an existing market to back it up. The company had technology in search of a problem or market. Instead, it should have started with a need and met it. To make matters worse, in May, Renault's CEO, Carlos Ghosn turned around and called battery-swapping a technological dead-end.

3. Start small and build gradually.
Before investing in a grand vision, prove your startup's product works on a small scale.

Better Place was like Webvan -- the national network of grocery delivery warehouses and trucks that burned through billions in capital before collapsing. Both had the idea that their capital-intensive businesses would attract tons of customers and become profitable for investors.

In both cases, it might have been better to try the idea at a much smaller scale -- creating prototypes in close collaboration with early-adopter customers -- before building a huge, capital-intensive network under the assumption that they had to be first to market.

4. Don't take prior success for granted.
Agassi's previous experience as an executive at the German software company SAP did not give him the automobile-industry skills and contacts he needed to turn his idea into a profitable company. In an effort to turn the business around last September, the board of directors replaced Agassi, but by that time it was too late and his successor only lasted a few months.

Don't bet your startup's success solely on your track record. Cling too firmly to the reasoning you used in the past and you might repeat prior decisions that were right for your last business, but actually impede the success of your new venture.

At Better Place, this perfect storm of missteps that lead to the company's eventual downfall could have been avoided had Agassi been more cautious with his growth strategy.

Peter S. Cohan

President of Peter S. Cohan & Associates

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy (Berrett-Koehler, 2012) and a full-time visiting lecturer in strategy at Babson College in Wellesley, Mass.

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