Entrepreneur 2 Entrepreneur: Matt Bauer on ending [Part 1]

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Matt Bauer

Minnesota technology entrepreneur Matt Bauer unexpectedly announced last month that Pedal Brain would be closing shop after 4 years and $1m funding due to “collateral damage.”

We asked Bauer he if would elaborate on the details of what happened, maybe share some insights and lessons learned with the pure candor that he’s known for.  Following is the first segment of our interview as part of the Entrepreneur 2 Entrepreneur series:

What happened to Pedal Brain?

Before I answer, I want to make one thing very clear. The decision to end Pedal Brain was my decision. Yes there were many outside forces that pushed this decision but ultimately only a founder can end a startup just as only a founder can start it. So as you read this, know that I blame no one and accept responsibility for all decisions made whether directly by myself or those acting in Pedal Brain’s capacity.

As far as what happened to Pedal Brain, many good things happened. We actually built something revolutionary and well ahead of its time. The team over came a large number of technological challenges. It wasn’t uncommon for our vendors to come in and learn from us or have us give talks to their teams. We also overcame a number of manufacturing challenges and even created a business model that acheived hardware escape velocity. That is, we were able to generate revenues large enough to afford hardware production and R&D on the next version.

These good things actually caused us a number of problems that I didn’t foresee. Within months of starting Pedal Brian we started talks with a large industry player and that ultimately resulted in a significant contract. Good you say? Well not exactly. It was good in the sense it removed our manufacturing costs and showed traction. It was bad in that investors weren’t so excited about investing in something that we didn’t have complete control over and would make a future exit more limiting. This wasn’t a surprise to me at the time and I purposefully choose to work with the industry partner. Unfortunately, our partner couldn’t live up to their part of the agreement as their staff couldn’t deliver. This was just as much of a surprise to us as it was to them.

As a result, project costs and timelines started crescendo. After nearly a year plus, the agreement was terminated without notice and it was made clear that we wouldn’t receive any of the money owed to us. What they lacked in engineering they had in legal. Pedal Brain never really recovered from this. Had I never entered into that agreement we wouldn’t have lost over a year of work and then have to raise more money in a distressed state.

Split Rock PartnersI did enter into that agreement though, it did fail and I did have to raise money in a distressed state. In fact nearly all the money Pedal Brain raised was under difficult situations. It was only our first raise of ~$200k that was done on a positive note. The remaining ~$800k was all done in hard times. Raising money is very much a skill. After that agreement fell apart we did what you do in a startup: get back to work and don’t bitch. After a few more months we were back on track with a great prototype and plan. We also had new interested parties and this time the conversation was about acquisition. Now this wasn’t just a standard stock swap or cash sale. This was going to be a reverse acquisition were we would be bought by a failing company to turn it around. I wasn’t excited about it at first. A few flights around the world to check numbers in the books and understand the assets, I started to think otherwise. After six months of reworking business model, vendor agreements, debt structuring and the $10m raise, it was done. The final thing was to sign the term sheet.

I will always be very proud of what I and the team accomplished during that six months. That six months changed each one of us personally. It makes what happened next even more gut wrenching.

A term sheet was drawn up and circulated for signatures. One by one the signatures were placed on it except for one. The last signature was from a VC firm (not a local one) who was previously invested in the failing company and was going to invest a fair amount into the new deal. It’s important to note this was after six months of work and two months of due diligence using a very reputable third party. After pressing for three weeks we finally got the answer from the VC: they imploded. I don’t know how else to put it.

At the beginning of the month one of their investments had a huge, huge return. Later in the month the partners were fighting, threatening to sue each other, their building was for sale and any deal on the table was pushed to the garbage. I wish I could say more but honestly, only the partners at that firm know what happened. What happened next for us was the deal that took six months of effort fell apart instantly. The failing company was left to fail as the VC controlled it. We couldn’t get any funds into it to make people’s salaries and save the company. All the vendors went into collections mode. Any money coming into Pedal Brain for the acquisition was gone and we were going to be out of cash soon.

A quick meeting was had at Pedal Brain and we looked at all our options. A new plan was developed to launch Pedal Brain into the market 1Q2013 for ~$1m. I was able to raise half that from one of my investors but my other investor didn’t want to continue anymore. At this point, I was out of options and decided to mothball it.

Comments

  • http://twitter.com/casey__allen Casey Allen

    Phenomenal candor, Matt. I hope more entrepreneurs follow this lead and share the story, lessons, and brutal truth behind keeping startups going.

    Looking forward to 2 (and 3).

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