Post-Mortem: Three new mistakes I made

My personal learnings from closing down a new venture.

A picture of a burning house

I’m not a first-time founder. So, the common challenges of this rodeo are not new to me. But recently, I stumbled upon issues I wasn’t fully aware of until then, and I hardly heard people talk about them.

I was part of the “Euerzuhause” venture, which we sadly decided to close down by the end of the year. We promised people planning to build a house that we would match them with the best construction company and guide them through the entire process. We wanted to simplify the journey to home ownership. The construction companies paid us for leads and signed deals, and we actually made six-figure revenue with that. Unfortunately, our business model failed nevertheless, so we closed things down.

Failure is always overdetermined and many factors are out of our control. So it would be foolish to point to any specific learning and declare it the one reason for failure. The German housing market completely broke down in the past years due to increased material costs and mortgage rates. And there were probably uncountable little mistakes that potentially add up, but don’t make or break a business.

Nevertheless, some mistakes are specific lessons or insights I will take into my future endeavors. This is also my way of processing things to ensure that I learn from failure.

So in the hope that some people might find them helpful and learn from my expensive mistakes, here they are:

Traction does not equal product market fit

Making revenue with a product that doesn’t have a product market fit is possible. This seems contradictory - revenue is widely regarded as the indicator that cures all ills. If you have a product that gets customers to open their wallets, you have struck gold, haven’t you?

Not necessarily. Look at these cases:

• You are selling 1$ for 50 cents. In other words, you have customer acquisition costs exceeding your margins and customer lifetime value. Until you can adjust your product and marketing to a level with positive unit economics, your revenue numbers can lead you astray. Optimizations and scale effects help to improve the numbers but might not be enough to tip the scale in your favor. We never reached a favorable ratio of cost per lead to revenue per lead. The bet that scale will eventually fix this issue is a risky one.

• You sell based on promises. If these promises are being kept, is not immediately visible in revenue but can take up to years - especially with business models that rely on yearly SaaS subscriptions. I have seen mainly the “first-movers” develop a close bond with founders and sales representatives and sufficient convictions to pay for disappointing products for 2-3 years. But even the most loyal customers will eventually churn if you cannot keep the promises.
  Sales overpromising is very common - and honestly, it’s not just negative. You could even see this as solid evidence that a customer is willing to pay for a feature or the solution to a problem. But you need to be able to deliver within a reasonable time frame.
  We promised our customers (contractors) better lead quality than competitors. But to follow up on our promise, we filtered and pre-selected our users to an extent where it was no longer a profitable business case for us.

Just because there is a problem doesn’t mean people are looking for a solution.

So, to give you some specific context about my last venture:
Signing a building contractor is a precarious decision. The private house builder lacks the knowledge to assess the contractor's quality, and statistics and experience show that the likelihood that things will go wrong is concerningly high.

Billions of damages accrue yearly due to incompetent or fraudulent contractors, often sending the trusting customers into bankruptcy. Approximately 10-12% of the total industry revenue is fixing defects. This is no secret. Everybody is aware of the risks and the likelihood.

So, the assumption was people would gladly use our product to find the right construction companies. Especially since we did it free of charge and only charged the construction companies for the lead,

Unfortunately, we were ignorant of the actual behavior of customers who look for contractors. As we found out too late, they look for local contractors that they find likable and trustworthy and who seem okay with the budget constraints. Positive references are a plus but not necessary. 🤯 Yes. Trusting a stranger with hundreds of thousands of euros from a debt you plan to repay in the next 30 years primarily depends on the stranger’s likeability. No wonder this is a paradise for conmen.

These poor heuristics lead to the selection of the wrong contractor. But only very few people are looking for alternatives.

So, despite the awareness that selecting the wrong construction partner can cause financial ruin, only an insignificant number of users were looking for a solution.

I even had one customer researching the contractors' credit scores to deliberately choose a contractor with poor credit scores. It seems absurd, but the complexity of the product (building a house) seems to exceed the mental capacity to such a degree that users prefer to ultimately simplify the decision to a dysfunctional level.

When running the post-mortem on the venture, I could trace back the issue to a firmly held assumption (most people are looking for guidance on the selection) validated by poorly conducted customer interviews. When it comes to your initial research, avoid these blunders. If you didn’t research it yourself and it is poorly documented, immediately invest in validating these assumptions yourself.

Neither product problems nor business problems are customer problems.

At its core, a business aims to create customer value by solving problems or satisfying needs. No news here. It is easy to forget that in the day to day to work. Not intentionally, but simply because we are often distant from the customer. We try to empathize and hypothesize about their motives. But usually, we are not our own customers. What’s even worse: We can’t control our customers. We can’t tell them what to do.

When the numbers don’t add up, we reactively turn away from the customer problem and focus on product and business problems instead. At least we control these!

So, you start tweaking the site, running A-B tests, changing calls to actions, and adding features. You change up processes and policies like pricing and customer support and introduce new tools.

But all those activities failed to show results. How? Experts promised us that this would work! We used all the plays from their playbook: Conversion hacks, process automation, and funnel magic. And engagement rose as a result. But the one line we needed to move (Revenue) was the one line that didn’t move at all.

We realized, potentially too late, that the one service we intended to earn money with (referring construction companies) was mostly worthless to the customer. We were so busy optimizing our business processes and products that we failed to check in with the customer to truly understand their problem. Instead, we changed the design, tried different copy, and bundled the product with additional benefits.

We were convinced that optimization would do the trick when we should have realized the need to pivot. In our last months, we actually pulled off a pivot by focusing more on guiding users through the building process. We hit gold as customers engaged very well with that but it was too loosely coupled if not completely independent from our actual business model. The final decision to then switch-up the business model towards personal guidance and consulting, also meant that this business would not be as scalable as we needed it to be.

Some smaller lessons

Previous learnings I was able to confirm include:

• Never blindly trust self-proclaimed experts. Just because some agency proclaims to be an expert in PR, social media, SEO, or whatever doesn’t prove anything.

• Ownership is an essential incentive for entrepreneurs. It is impossible to drive real entrepreneurs if they are not the majority shareholder in a pre-PMF venture.

• Hire for and create a culture of ambitious amateurs. Ambitious amateurs are people who face a lack of abilities and knowledge, not just with a growth mindset but with vigorous learning and development. You need to be a jack of all trades in an early-stage startup.

• Clear expectations make healthy relationships.

• About fund-raising: Start way earlier than you need to. Building the right relationships takes time and so do the negotiations. But if you are about to run

  out of cash, it puts you in a poor position for the negotiation.

• Product market fit is not binary. It’s on a scale and multidimensional.