A CEO’s account of how his Startup Failed (RewardMe)

Startup Fail

A post that will cost me $13,000 (regarding how I lost $1 Million in Funding)

This post has been long overdue.

Partially it was because I felt rather embarrassed about the unfulfilling results of my startup Rewardme, and partially it was because I had been so busy growing my new business on Gamification Framework in the past few years. Also, I wanted something to clear with a major Silicon Valley Law Firm that we had a detrimental history with before sharing my experiences too publicly, but it became clear that this would take too long and I have given up (in fact, writing this post would cost me at least $13,000 because of that).

But alas, the lessons from my failures could possibly benefit thousands of entrepreneurs out there, so I’m taking the bold step forward to share what happened from my viewpoint as well as some lessons learned during the process (for an account from my life-long friend and former CMO Jun, click here).

An overview of RewardMe

I was running RewardMe from 2010 to the end of 2012. It was generally bringing gamification into the offline retail/restaurant market through a digital loyalty program. Nowadays there are quite many of these companies, but we were the very first in the market if you didn’t count FourSquare’s “Mayorship” system.

Our product metrics were great (actually 10x more than our competitors based on what they published on their press releases), customers loved us, we were covered by large media sites including Forbes and Business Insider. Towards the end of our reign, we closed a $1.5M deal with a big chain store that would allow us to deploy our product nationwide. We were also attracting many of the biggest chains, getting multiple meetings with top executives from Carls Jr, Subway, Swarvoski, and many more.

We decided that going door-to-door was not the way to scale (I still believe in this today, even after seeing the traction of the top leaders in the industry who dumped tens of millions with only thousands of paying stores), but it’s to go through the big hurdle of closing large chains early and deploying nationwide quickly (since chains and mom-and-pops alike like to follow other chains, but not the other way around). That would give us a strong barrier to entry, as when our competitors realized they need to go after chains, we would be one year ahead and compounding our traction there.

Runway is Everything

We however, did not raise a lot of money. We raised a bit over $1M to get to where we were when our competitors at the time already raised over $10M. I wish I had knew more about my own Octalysis Framework and the 8 Core Drives at the time, but since we did not come out of a famous incubator or had a celebrity startup team, fundraising was particularly difficult (so I guess a lesson here is: join a famous incubator if you can. It would increase your fundraising hype regardless how great you can get your company to become. The equity taken is peanuts when compared to decreased chances of dying).

Because of our stellar results mentioned above, the investment/VC community was impressed with our execution, but liked the door-to-door model better because it produced “predictable growth” such as “next week, 30 more mom-and-pops will signup.” They told us that just because VPs of gigantic chains are taking 3rd meetings with us does not mean they will sign a deal with us, which was a fair statement.

So towards the end of our runway, we finally closed a $1.5 Million revenue deal with a large national chain brand, thinking it would get us our next round of funding. The big problem is, this two-year contract would at least take 6 months to implement and revenue collection had to come later.

Most investors became interested and wanted to talk more immediately, but then got to a point where they still wanted to see “predictable growth” and would like to see the second and third big deal come in before they wanted to commit. To take some personal responsibility, perhaps I just wasn’t being a great salesperson and just didn’t close the deal (now I understand it as – I didn’t use any Black Hat Gamification/Motivation Techniques that drive urgency, but merely used White Hat Techniques that makes people feel good and trust me, but no urgency to act).

During this time of fundraising, I was also heavily distracted because of a devastating issue that escalated from some work a “Top Silicon Valley Law Firm” did for us (we can just call them GD). Even though I believe initially it was an honest mistake, instead of spending more time on fundraising, I was stressfully dealing with the IRS day in and day out for many months. To be fair, I know many entrepreneurs who have had a great experience working with this firm, but according to my own experiences and especially how they dealt with it afterwards, I cannot recommend any entrepreneur I care about to work with them (email me if you want details – I’m scared.) Lesson here? Don’t take every sentence as truth just because it came out of a prestigious firm – especially if you are on a “startup deferred payment plan.” Double check and use common sense.

At the same time, when we still had a few months of runway left, we realized how VCs liked the predictable mom-and-pop growth, but we didn’t think door-to-door was scalable (in fact we were rejecting small stores reaching out to us since we only had very limited resources and needed to focus on supporting the chain stores). We started to setup the first self-serve freemium program in our industry, hoping to capture our daily inbound leads. 

At this point, we were at the end of our runway, and since we (or rather, I) couldn’t raise our Series A with the traction we had, we were in big trouble. Our existing investors however, were very excited and impressed about our progress and execution, so they committed a lot more money to get us to the place where we can close those other big chain stores that are excited to sign-on but still waiting on the bureaucracy. Literally, our current investors were at the point of, “Hey, what was the wiring information you gave me last time? I can’t find it anymore but I’ll wire you the money as soon as I get it!”

However, this is when the Big Burnout happened in our company.

The (Anti) Climatical Fall of RewardMe

Keep in mind, all our team members at RewardMe were hard working, smart, and passionate. They were some of the best people I have ever worked with. But to close this million-dollar revenue deal, many of these teammates worked over 100 hours a week in a high-stress environment, and most people were only paid 30% of their market rate (again, we raised a lot less than other companies. I myself NEVER drew a single salary from RewardMe). We all believed that, once we closed that large deal, we would raise that next round of funding, people could get paid better, and we could grow quickly like our well-funded competitors.

When I was unable to close that next round quickly, it demoralized some of the key members on the team, and they felt it would be a never ending rabbit hole. Even if they did work for another 4 months with 110 hours of insurmountable stress every week, and even if that did lead to closing the 2nd or even 3rd big chain, they were no longer convinced that it would truly cause the “Come back with more” VCs to invest.

Their concern was not unwarranted. I have many startup friends who kept surpassing their promised milestones but kept getting “come back when you hit this new milestone” from VCs for YEARS, even until the very moment they sell (which of course, the investors regrettably admitted they should have moved earlier). My teammates were also uncomfortable with taking more money from existing investors because it would just lead them deeper into that rabbit hole of burden without a clear path to salvation. As a result, a few key people decided they needed to withdraw from this dark and overwhelming environment after sustaining it for many years.

Even though this behavior was more than understandable, it obviously created big issues for the company. Remember our current investors were already asking me to send them the wiring information so they could give us more money? At that point I had a moral decision to make. I could give them the wiring information, take the money, and see what I could do with a few more months of runway (which would basically be trying to recruit people we couldn’t afford even with the new money). Or, I could tell them the truth and face the consequences. I thought, “What would I prefer if I was the investor?”

At the end, I decided to I disclose this information to existing investors that have committed the money, and told them that this would also make it more difficult to raise our Series A round. They thanked me immensely for being up front about it, and sure enough they decided to hold onto their money for longer to see what would happen.

At that point, without further investments and many of our key members burnt out, we had no resources to push forward. The quick conclusion was that, in order to not get into overwhelming personal debt,  we had to shut down operations immediately. We did not have any resources to do anything, including servicing or deploying our product.

That was very unfortunate (and depressing at the time), because our online self-serve freemium model was just about to take off too. Over the next year, even though we have winded down and just looking to close the business, we continuously get businesses reaching out to us and saying, “We did our research, and we believe RewardMe is the best. How do we sign up?” At the time I could only painfully stall, “We’re working on a next version, so we’re no longer deploying the last one. We’ll let you know when it’s ready” since I was still hoping that we could possibly revive the company again with a few free part-time volunteers. That did not happen.

Without any marketing or work over an entire year (besides the draining work of turning customers away), over 40,000 individuals/businesses clicked the “Get RewardMe Now!” button on our site, expressing they wanted to use RewardMe. To this day, I still believe we took the best strategy to win in the market, but just were not funded enough to execute on it. As mentioned earlier, other companies have spent tens of millions of dollars, but even the leaders have less than 8000 active customers (Of course, I also highly respect the traction they have obtained since I know how hard it is to grow in this market period – I wish them huge successes! I think they can still definitely win big by being acquired by bigger companies who want to buy their way into this space).

Aftermath of Closing a Dead Company

Immediately after the Big Burnout, that was a very dark and deeply depressing time of my life. Amidst the chaos, confusion, and helplessness, I realized that there was a TON of materials out there to teach startups how to become success, grow, scale, raise funding, find cofounders – but there was almost nothing out there to guide how an entrepreneur should fail (besides….failing fast). There was no service, literature, or even emotional support for entrepreneurs trying to clean up a dead company, and it was extremely lonely. Many of my Cofounders have already moved on to new opportunities, but as the CEO of the company, I still had to worry about organizational structure, company debt, and disappointed investors. I secretly envied a little bit towards my non-CEO Cofounders (who are all still great friends with me today), because if we succeeded, our payout would be the same, but since we failed, I spent a significantly longer time dealing with the baggage and ramifications.

I also spent a long time liquidating the assets to cover the company credit card debt (since I was trying to buy time to see if we could do a turnaround). One interesting thing was that during this time, a competitor reached out to us to discuss potentially acquiring us. That gave me a light of hope to at least return the money I raised from our investors. However, after a few discussions, the acquiring company revealed, “Actually, we’re mostly interested in your team talents [that stayed as free volunteers]. If we could just hire you guys with a GREAT compensation package, that would be ideal for us.”

This was yet again another ethical decision to make. At this point, I burnt out my savings, just got married, and I know my teammates were in tough financial situations as well. Could we try to justify years of uncompensated hard work? At the end, I told the company, “Look, there can never be a situation where we benefit immensely while our investors who believed in us become greatly worse off. If you are interested in us, give us a real offer that respects our investors too.” They replied, “We understand and respect your loyalty to your investors. However, your individual payouts will be A LOT less because of your investor baggage, if that’s okay.” We responded, “That’s okay. Let us know when you figure out something that is fair for both sides.”

Unfortunately, at the end, the acquiring company’s investors couldn’t justify paying for our investors just to get us onboard as talents, so nothing happened (Oops, should have been more talented!). Annoyingly, after every effort of protecting our investors, a few smaller investors still became very aggressive on us, sending lawyers against us and really adding a ton of stress when I was already in this dark depressed time of my life. Luckily, I convinced them that there was nothing they could possibly gain from this that would even justify their lawyer fees, and they let it go.

On the other hand, some of my investors were AMAZING. The day I was supposed to call them and tell them the horrible news that I have likely lost their money, I had this fire burning feel in my head, to the point where I could even hear burning static noises. When I called a few of my investors and told them the news of how I failed them miserably, I expected them to yell at me for throwing away their hard earned money. But instead of yelling at me, a few investors immediately responded with, “Are you okay, Yu-kai?” 

I did not expect that type of kindness at all when it happened, and I secretly cried while reaffirming that I was doing fine and just trying my best to wrap up everything in a responsible manner. Those simple words probably changed a bit of who I am forever. For that, I am forever grateful of DJ Martin and Vicki Young for being the best investors ever. If you could have them as your investors, it would be your best decision ever.

Now, regarding the lesson here. You could see that I made a couple of big ethical decisions here, which didn’t really lead to beneficial results. The question here is, was that better or was that a mistake? I can’t really say as an absolute because everyone believes in different things and has different values. All I could say is, even if I had a greatly successful company, if I knew I got there by lying and cheating, I would not be a happy person. It would be a lot of money, a big house, and a nice car surrounding a piece of crap, and I would be that piece of crap. To me that isn’t worth it. Who I am is more important than what I have. Of course, since I try to be a faithful Christian, I also hold my accountability towards God and trust that things will work out in the end (which it did, as you will see later), even though there may be immediately short-term pains.

I think that’s the best answer I could give to aspiring and struggling entrepreneurs in the field, but everyone has to find their own answers and find peace in their own hearts. Being a leader is about making the hard decisions and stomaching the emotional consequences. That’s why it’s not for everyone, and sometimes I’m not even sure it is for someone like me.

Life After RewardMe

So after all the stuff with RewardMe, I did some soul searching – what many people that have failed in life do. I realized that throughout my life, a big problem I had was that all my ideas were considered “too early.” Ever since my first business in college, I would talk to VCs, and they would tell me what I was doing was ridiculous and wouldn’t work. I then decide to give that up and pivot to something else (after all, of course these grownups were smarter than I was). 3-5 years later, all the VCs were suddenly fighting to fund other companies with that very model I did earlier, but unfortunately I have moved on.

When I approached them again with my new companies, they would say, “Yu-kai, your last business was actually right on! But your new thing here….that’s just ridiculous.” And of course, the same things would happen again. If I was a celebrity entrepreneur, I could raise a lot of money for crazy and audacious ideas, and truck through a few years until the market caught up. I wasn’t, so I shouldn’t play by those same rules. This is important for all those new aspiring entrepreneurs that often read how companies raise tens of millions of dollars before launching a product on Tech Crunch. In general, if you can’t raise money just on your past exit records, you generally need TRACTION before you can raise significant money. Now how to get traction without the money you are raising is the difficult work of a resourceful entrepreneur. 

Upon recognizing my tendency and problem, I realized I could adapt and adjust to that…no more crazy startups. Focus on what the world needs, not what it deserves (thanks Batman for bitter-sounding thoughts haha).

I also thought about what made me happy, and I realized it was when I was creating gamified designs. The term “gamification” became more popular starting 2010, but I in fact have been working on productive applications of games and game elements since 2003 (yes, one of those ridiculous things that would “never work”). I definitely had a lot of experience on it and was very passionate about it.

An epiphany in Gamification

I looked around the gamification industry late 2012, and saw a few things. There were already many established “gamification experts” who had a brand name. Even though I spent ten years working on related projects, I did not have a name at all attached to gamification, because every inch of my muscle was used to push my startups and not myself.

But then I noticed one interesting thing: the established “gamification experts” came from a variety of backgrounds: some were game designers, some enterprise software, some academic, some marketing. And I realized that I had one expertise that they did not have – Personal Branding. This is what you learn working in startups for so many years: in a startup you have no history, no name, and no resources, and you need to get it to the point where within 2 years, everyone knows about you.

So I decided to use one of my expertise to promote my other. Very systematically, I got my blog traffic to go from 1,000 untargeted visitors/mo to 25,000 targeted visitors/mo within a year and a half.

I published a gamification design framework that I originally created back in college called Octaylsis, and it really picked up. It was translated into over sixteen different languages with students reaching out to me from all over the world. The framework was unique in the sense that it went much further beyond the points, badges, and leaderboards (we call them PBLs in the industry) that most people thought gamification was, and derived motivation into 8 Core Drives.

Some Core Drives were associated with White Hat Gamification (things that make you feel powerful and in control, but lacks a sense of urgency), while others were Black Hat (things that made you feel urgent, obsessed or addicted, but gives a bad taste in the mouth), and some Core Drives were related to Left Brain Oriented (appealing more to extrinsic motivation) while others were Right Brain Oriented (appealing more to intrinsic motivation).

Octalysis Gamification Framework

All in all, my life is going great these days and I do feel excited about waking up every day. I’m now recognized as one of the leading figures in the industry, speak/lecture at Stanford, TEDx, SxSW, Accenture and across almost all continents. Many VCs are asking me to help their portfolio companies with my new behavioral design (some of them call it behavioral engineering) knowledge. Instead of working on one project for over 100 hours a week, I get to simply do the thin slice of work that I enjoy the most for dozens of projects (and get some equity in them too). 

This year I even published my own book, Actionable Gamification: Beyond Points, Badges and Leaderboard that summarizes my learnings within the 12 years.

It sounds somewhat odd and even arrogant, but getting the results above was actually very systematic and even easy, especially compared to running a tech startup. Adjusting based on the lessons I’ve learned in the past, I was exponentially more successful revisiting stuff I did many years ago, instead of going after the new things in the future that I’m excited about (trust me, I’m holding myself back for many things that I believe would be world-changing).

I think the lesson here is that, no matter how many successes or failures you have in your life, the key is to make sure you are always learning more about yourself, understanding your unique placement in the world, and do meaningful things that you are passionate about.

Wounds do mend. Success is never a given, but if you are spending every day of your life pursuing things that you are passionate about, the journey itself is what makes it meaningful, not the destination. Very few people I know have beaten the first Super Mario game, but they all have fond memories playing it. Life is not about winning (once you hit your goals, you just look for new goals anyway), but more about whether you are spending your time on things that bring it to the fullest.

 

8 thoughts on “A CEO’s account of how his Startup Failed (RewardMe)”

  1. When people can relate to your story (even if their own story is much different) then you have accomplished something beautiful. As an analogy, I would say that I believe I am a more effective teacher because of the many difficulties (along with some failings) I have gone through. Thank you for your candidness.

  2. Awesome article! Yu-Kai tells great story of entrepreneurship and from what I’m been reading from others he was so close to achieving his startup success. Many successful entrepreneurs tell stories of last second investments, just before lights about to go dark. It is amazing how startup investors do everything last second. You’d expect opposite – planning and preparations. Probably rewarding investors to send checks earlier – like decreasing every day % discounts etc.

    But I want to discuss morality issues as well. If I was an investor in RewardMe I would also insist Yu-Kai would do everything in his power to achieve success. So taking additional dollars form existing investors is no brainer. If you read Brad Feld for example he even suggests for investors to be prepared to invest the same amount they invested earlier. Another thing I learned about myself as entrepreneur is my paranoid mind can sometimes trick me in acting and worrying to much, even the actual unraveling of events and even bad news events is much slower vs. what I think or I predict. Because of that I think Yu-Kai closed shop too early. He would probably squeeze out another year or so of runway and that would be enough to achieve success.

    I was recently watching PBS documentary about Nazi prisoners camps where they forced prisoners to make bombs. What was shocking is they there able to increase productivity by 10X/ We all hate Nazis but seems humans can do much more under Black hat techniques than we realize we can do. Entrepreneurship is a long, traitorous journey and we need to push harder even if we think better choice is just quit. Working 100 hours/week is just one example, but employing clever hacks is a must too. Current popular frameworks tell us to “fail fast” but successful startups prove if you stick much longer, success is just around the corner! “Failing fast” is like picking low hanging fruit. But the fact is in established markets all low fruits already been picked. You have to hack your way up and it will take longer to achieve success, just stick to it and keep going!

  3. I’ve been following you for years and I don’t intend to stop. You’re a genious when it comes to user/customer engagement and your gamification framework is the reason this is such an interest in my web properties. Keep it up Bro!!

  4. This article summarize all my worse fears in opening a business on my own.
    I could never deal with all this crap.
    I admire your dedication and principle Yu-Kai, I have to admit tough, I would have made different choices probably, not because my lack of moral principles, more because of lack of trust in others, especially investors.
    Most of them don’t see farther then their own nose and are not certainly driven by any superior meaning or Calling, just more money than they invested.
    Being a man of faith myself I am glad to see how in the end “fate” finally rewarded you with something far more precious than money (and that too, why not).
    Success comes from within.

  5. Yu-kai,
    I am pretty much master of my emotions, but your narrative demonstrated an exceptional emotional catharsis in your inner being. I even felt a few tears well up behind my spectacles…but not from what you went through. Indeed, my reaction was from your capability to make the reader (including me), feel deeply the experiences in your situation, the pain and buzzing in your mind, and the regrets of losing smart colleagues and staff who had dedicate so much time to the vision.

    We have free will, not because it is free, but because we can direct our will in directions we have the resources to sustain. You have told a masterful “entrepreneurs story” wrapped in a parable. You freely chose to take a number of ethical business decisions, some of which worked out much to your favor, (e.g., with your two mentioned investors), and others that just dragged you down with legal administrivia. Regardless, you proved that every innovative business person cannot just give up, if being an entrepreneur is in his/her blood and DNA.

    I was most touched, and excited in the passion, as well as control, you demonstrated in the storytelling process. I actually could not wait to read the next paragraph, and find out what happened next. Sometimes sh*t happens, and sometimes we create our own “donkey detritus.” You have created further opportunities that puts the buffalo pies further and further into your history.

    You earned every benefit you have accrued through your persistence, motivation, and grit. I pray that with this incredible suite of lessons learned, your story can be shared quite widely. Other entrepreneurs, who have never heard of gamification, can at least relate how their experiences are not solitary and, thus, can see a potential positive outcome.

    You are the inadvertent author of a new 12-step program ™ for failed entrepreneurs who have stumbled and need to find their way back to the journey they are choosing freely to experience. You have provided confidence to those who are trying to make their dream a reality. An entrepreneur, in my humble opinion, is one who can actually create a miracle (thaumaturgy). An entrepreneur can actually take an idea, formulate it into a vision, build a mission, with goals and objectives, and with appropriate resources and managerial direction, that entrepreneur can turn that vision into reality (i.e. ether into pragmatic products and services).

    Welcome fellow thaumaturgist.

    Cheers…michael

    1. Thanks for the thoughtful response and encouragement. The reason why I post this is definitely to help fellow entrepreneurs so they could avoid all the crapholes I went through.

  6. Yu-kai,
    Great article. I’m sorry that you had to go through the tough times with RewardMe. I think most entrepreneurs can relate to the negative feeling of having to break bad news to stakeholders.
    Do you have any plans outside of gamification? Any other business interests or ‘great ideas’ that you might take the leap on?
    Hope the rest of your life is going as well as your gamification thought-leadership career.

    1. Haha, right now I am building up my “cash cow” engine before jumping into new endeavors. As you saw, lack of funding was a huge issue and I want to try avoiding that.

You must engage in the conversation!!