Lessons from a failed college startup
History of Splash
From the start, our mission was to make cryptocurrency function as real-world currency. To this end, we built a number of products: the Splash Wallet and Splash Spend Extension. The Splash Wallet is a non-custodial wallet which works well but is not terribly differentiated. Our differentiating factor was always the ability to spend cryptocurrency at any website using the Splash Spend Extension, and we spent the majority of our upstart energy and money building product and trying to hack together the flow of funds to make that possible.
As we came to realize, allowing users to spend cryptocurrency in real time requires a complex flow of funds and backing from a number of parties. In order to make this flow work, a startup needs to have a banking partner comfortable with transactional crypto flows, a crypto partner to handle conversion between crypto and fiat, a compliance partner (or process) to handle AML (anti-money-laundering) and KYC (know-your-customer), and a reserve of capital for float to facilitate the currency conversion.
We were initially optimistic about our ability to piece together this complex web of interdependencies, especially given some warm intros to banking partners. As we got deeper into this financial engineering, however, we hit a number of hurdles which delayed our speed to market. Staying compliant in this uncharted space with many bad actors revealed itself as an expensive legal challenge. In order for a bank to give us the green light on a transactional flow of funds, they required that we have several hundred thousand dollars in an account with them at any given moment (a prerequisite imposed to make the risk of taking on this crypto transactional flow worth the business of banking our startup).
After discovering the barriers to entry and the cost of actualizing our spend-crypto-anywhere flow, we had spent a large amount of the pre-seed funding we took and needed additional funding in order to get our product to market. We tried for many months to raise a seed round. We also pursued larger companies in the space which had the infrastructure we needed to deploy our product.
At one point, we nearly filled our seed round, but the crypto-focused investor ultimately cooled on the idea that people would spend crypto right now. We also got to very late stages of acquisition talks with a Canadian company that has the rails and compliance infrastructure to support our applications. After months of back and forth, negotiations, tech review, etc., we agreed on acquisition terms. When it came time to sign, their CEO stalled and then cancelled the deal altogether.
Additionally, Facebook announced Libra, a cryptocurrency, and Calibra, their native wallet tightly integrated with Messenger and WhatsApp. Because crypto inherently has positive network effects, Facebook’s entrance was concerning, both for us and potential investors.
Lessons learned
This is obviously not the note that we wish we were sending to our investors. We wanted to build Splash into a blockchain behemoth that could challenge big banks and financial institutions, but we were unsuccessful. Nonetheless, my co-founders and I learned an immense amount from Splash, mostly from the mistakes we made. Here are a few of the biggest lessons that I took from this experience.
Early product market fit is essential
I don’t think I ever truly appreciated the importance of growth hacking for startups. Not only is it validation of what you’re pursuing, but it is a necessary signal to investors of the potential for rapid growth. It also encourages you to ground your startup’s mission in real users rapidly. Paul Graham has an excellent essay on the topic that I wish I had read much earlier: paulgraham.com/growth.html.
Long-term vision isn’t a substitute for short-term, hackable problems.
When we started Splash, we were excited about the grand vision of disrupting the financial system. This was an early advantage because it was thrilling and we generated some early momentum. We believed that we had found a simple hack to get to market with our Splash Spend browser extension. I believe we went from our grand vision to a product that made sense for that vision, but we didn’t apply a critical enough lens on the user stories and the real pain points. We certainly thought about these things, but we weren’t diligent enough about verifying our assumptions with actionable product features.
Product, design, branding are all things that should stay in-house
We got some advice to consider working with a marketing agency on our brand given the importance of brand trust in a financial product. We ended up hiring a firm to build our visual language. What we didn’t realize was our visual language should have been rapidly evolving with our product and startup. Outsourcing the design was actually a distraction from honing in on product-market-fit, and not having that in-house drastically slowed down our iteration cycles.
Fintech is sexy but has large upfront costs
My co-founders and I were excited to build a product in fintech, believing that we could bring something to market quickly with crypto. We didn’t fully appreciate the fixed costs of doing anything that interacts with money. The legal and institutional requirements make innovating in fintech an expensive endeavor.
Startups should measure costs in burn not expenses
After raising our pre-seed round, we were quick to pay for services which felt like essentials. There was this notion that there were normal things for every company to have. What we failed to fully appreciate was that startups are not yet stable companies, they are default-dead. Again, Paul Graham has an awesome essay on this: paulgraham.com/aord.html. We should have measured our costs in terms of burn instead of line-item expenses.
Investors are your allies, and you should communicate regularly with them
After we got our first round of funding, we were eager to hit the ground running. In order to continue breathing while you search for product-market-fit, you need to have funding or be incredibly lean. We should have done a better job of looping our investors into strategy conversations, especially to give outside feedback. We had incredibly intelligent, connected investors and we should have been more active in engaging them in our entrepreneurial process.
Our View of Crypto
My team and I knew that blockchain technology would largely impact our financial system, but I think our grass-roots, consumer-first approach was a mistake. Blockchain is a powerful technology, but it doesn’t compel a consumer to modify their financial behavior. I believe that existing players with strong network effects and financial integration will transition the rails of our system to use blockchain, building on top of trustless technology and leveraging their massive user bases.
Blockchain will be, in my opinion, more of a back-office shift than front-office. The change for consumers will be minimal but the efficiency gains large for their providing financial firm. Crypto will optimize the rails of our financial system without significantly affecting institutional structure.
