3 Lessons to Learn From a Startup’s Failure

Author: Gina Hall | August 12, 2015

It was hailed as “The next big startup.” And then it was all over.

Startups fail all the time, but what made the fall of social media app Secret so interesting was that the company, which was launched in February 2014, had raised $25 million last July from investors and at one point was valued at $100 million. In April of this year, co-founder and CEO David Byttow announced that the startup would shut down and return what was left of its funding to its investors.

What went wrong and what can you as an entrepreneur learn from the lesson of Secret?

Let’s begin with Byttow and co-founder Chrys Bader-Wechseler. The two people at the top of the pyramid sold part of their stake in the business for $3 million each. That’s not necessarily a problem. Such deals happen, although not usually among high-growth startups. What was troubling about the move was that the founders did not inform their employees about the major financial decision.

When staffers found out about that the guys at the top were selling off shares, some panic naturally ensued. Were they planning on quietly jumping ship? The company’s name suddenly must have conjured up a whole new significance. It didn’t help matters that Byttow used some of his newfound cash to buy a Ferrari — a decadent symbol that probably stung a workforce earning earthbound salaries and holding onto company stock.

The lesson here is to keep your staff in the loop when you make major financial decisions with stock, even your own personal shares. Explain why you’re taking the cash in hand and what it means to your employees. Be honest about what the future of the company is.

Byttow and Bader-Wechseler, it should be noted, ended up having to give back to investors the money that the company had remaining.

At its Zenith, Secret had more than 15 million users. However, it was not able to keep up with competing sites, Whisper and YikYak. The apps allow users to anonymously share their thoughts. Secret differed from the other two, significantly, in that it retained a permanence in the way that Twitter and Facebook also do. Eventually, Secret altered its interface to more resemble that of YikYak’s.

The key takeaway from this is an understanding of what users want. Or, more to the point, what they don’t want. In this case, users wanted not only anonymity but impermanent posts, as well.

Unintended Consequences
An unforeseen problem that arose with the app involved the way in which users employed it. The vision of the idealistic founders was that it would be used to further social change. Instead, users secretly threw stones at each other. The app became a vehicle for cyberbullying.

First of all, that users hiding behind a veil of anonymity would secretly snipe at each other should not have been an unforeseen problem. Be that as it may, the company was forced to react by hiring community moderators to monitor and take down negative posts.

“I believe in honest, open communication and creative expression, and anonymity is a great device to achieve it,” Byttow wrote — and not in secret. “But it’s also the ultimate double-edged sword,” he continued. Well, yes. Swords themselves can be really handy tools, but that’s not historically how they’ve tended to be used.

The moral of this story is that having at least a nominal degree of understanding of human nature is essential in business. If your concept is capable of being used for nefarious purposes, the chances are that it will be. Plan ahead and be ready, not reactive, so that your business won’t suffer the same fate as Secret’s.

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