Nine years ago, BugHerd founder Alan Downie launched his startup with fresh-faced enthusiasm and a desire to take on the software world.
But, once a fast-growing startup and magnet for investment dollars, BugHerd soon found itself stagnating, creating new products the market didn’t want and wasting time and money on needless development work.
Missteps along the way led to Downie laying off staff and ultimately entering into a buyback agreement, whereby he paid investors back their money.
But while BugHerd may have lost its hype, it didn’t die. Despite everything, it still had loyal customers using the original product. And, amazingly, it was still cash positive.
Now, it’s on the up again, under the leadership of new chief executive Stephen Neville. It’s even been able to re-hire eight of the same staff members it had to make redundant.
But it wasn’t just a bit of luck, a fresh pair of eyes, and a whole lot of dogged resilience that brought BugHerd back to life. Amid everything that went wrong, there were a few things the original team got spot on, which ultimately kept it afloat even in the toughest of times.
A wrong turn
Founded in 2011, BugHerd is a bug-tracking tool for web developers, effectively building in a way for them to capture client feedback more quickly and more efficiently.
It came through the first-ever Startmate accelerator, and saw some early wins, raising $550,000 fresh out of the program, and another $1 million two years later, according to Crunchbase data.
But, by 2014, mistakes had been made, and the business was crumbling.
Downie tells StartupSmart the experience was “challenging to say the least”.
“We all thought we were going to be on this hypergrowth rocket, and that turned out not to be the case,” he says.
“Did we have the wrong vision? Did we have the wrong team? Did I make mistakes as a founder, did I not make my vision clear enough? Or were we just building for the wrong market?” he asks.
“All these questions come to your mind, and as the founder and the CEO you wear that on your shoulders.”
But, despite being diminished in size and stature, it hung on to loyal customers and remained profitable.
After about four years of just ticking along, new chief Neville came to the rescue, taking the reins and breathing new life into the lacklustre startup.
From Neville’s perspective, BugHerd had experienced “a classic startup story”.
When the business was on a strong growth trajectory, the team was doing everything it could to continue that growth, he says.
“BugHerd is a fairly niche product,” he notes.
But, decisions were made to try to reach a bigger market, with the startup creating new, additional products rather than iterating on the one they already had.
“A lot of development was done to try and broaden the market that we could chase,” Neville observes.
“In hindsight, they weren’t the right things,” he adds.
“A couple of years of product development was done with a fairly large team, and all of it, really, went in the bin.”
Fallen out of love
When Neville came into the business, both men agree that Downie had found himself in something of a rut.
Two years of development had been done that hadn’t made it to market, and the 18 months Downie spent paying investors back meant there was nothing left to invest in the team or the growth.
But, the business was still growing, Neville says, albeit “in very small multiples”.
Neville saw a resilient business with satisfied, engaged customers and very little churn.
Those customers were crying out for development on a product they loved, he says. But Downie couldn’t quite see the potential there.
“When you’re looking at the one problem all the time and when there’s a lot of emotion — sometimes negative emotion if it doesn’t go the way you expected it to — then you can’t see clearly anymore,” Neville explains.
“He had reached that point. He needed another set of eyes on the problem.”
Downie himself points out BugHerd is almost nine years old now.
“I’ve been working on it for an awful long time,” he says.
He had fought hard to keep BugHerd alive, and to stay in control of the business. But at this stage, he just needed to be reminded of why.
“It took someone else to come along and say ‘here’s the reasons why you did that’,” he says.
“I could have walked away at any stage, and I chose not to. So I must have had a good reason at the time.”
A year ago, Neville laid out some 12-month targets, and at the time, Downie scoffed at them.
“I was super sceptical,” Downie recalls.
But, lo and behold, they’ve hit those goals.
“This product that perhaps I had fallen out of love with still has a lot of love with our customers. And he [Neville] has a lot of love for it.”
“A really difficult place”
When probed about the process of buying equity back from investors, Downie says it was a complex process, and a time fraught with emotion.
“The first challenge was that conversation. As an investor, how do you return their money?”
The startup had VC backing, but it had also taken on money from angel investors — people who had become friends. The founder didn’t want to leave those people out of pocket.
He put all of his options out on the table, he says.
“I don’t think many people would have had the fortune we had,” he explains.
“We were fortunate that we had investors that were happy for us to keep the company if we returned the investment.
“That’s ultimately what we did.”
It was a “very difficult and time-consuming” process. And Downie’s mental health at that time was “not good”, he says.
“It was a really difficult place.”
By coincidence, this was all going on in the year of the founder’s 40th birthday.
“That’s always something that hits you when you turn 40. You think: ‘What have I achieved in my life?’
“When you couple that with the business and where it was at … it was incredibly challenging on a personal level,” he says.
It wasn’t just the failure of the business. Downie was also having to let employees go (although eight of those employees have now be re-hired), and dealing with the effects the turmoil was having on his own family.
While he had a few good friends and some very supportive investors to lean on, he largely felt he was dealing with all of this alone.
“I didn’t know anyone that had been through a similar situation. I still don’t.”
It’s left scars that even the resurgence of BugHerd hasn’t quite been able to paper over.
When asked if the struggles have made its renaissance even the sweeter, he says he’s “not quite there yet, emotionally”.
However, he is grateful that Neville has come on board “with all the enthusiasm of a new founder that I guess I lost”, he says.
“He has the energy to really drive the team and lead from the front,” he adds.
“Now, I’m just starting to get a bit optimistic.”
Mistakes, exceptions and lessons learnt
There are lessons others can learn from this startup story, and Neville chooses to start by focusing on the positives.
“The reason we are still here today is that at the beginning phase of the business they created something that solved a customer problem,” he says.
It may sound simple, but that’s what has kept BugHerd’s head above water.
In fact, customers put up with four years of very minimal product development — unusual for a web-based product.
“They put up with that because the core thing that they built early on solved a need and took away a pain point,” Neville says.
“That bought a huge amount of customer goodwill, which is what allowed us to get through the bad times.”
On the other hand, Neville says there is “no doubt” that when trying to develop new products, the BugHerd team missed the important step of validation.
It’s a common mistake startups make, he says.
“You build new things and then you expect people to buy them.”
For Downie, the biggest lesson others could learn from BugHerd’s story is to really consider the implications of venture capital.
“We were very fortunate with our investors that they were happy to go along with the buyback,” he says.
“But I think it’s an exception to the rule”.
Before taking VC or even angel investment, Downie urges startups to really think about whether it’s for them.
“Not every business should raise venture capital. Some businesses definitely should,” he says.
“You have to know which camp you’re in.”
If you’re in the latter camp, it’s important to have a clear understanding of the outcomes your investors have in mind.
“Because if you’re not heading on that journey, you’re in for a troubled existence. At some point, you’re going to run into trouble.”
That said, Downie maintains BugHerd couldn’t have got to where it did without the VC funding it raised early on. It took a long time to become profitable, and wouldn’t have been able to bootstrap its way there.
“If I had my time again I would still have taken investment,” he says.
At least, he would have done the first time.
“The second round, we probably weren’t in a position to be raising funding,” he admits.
“But I can’t A/B test life, unfortunately.”
You can help keep SmartCompany free for everyone to read
Small and medium businesses and startups have never needed credible, independent journalism and information more than now.
That’s our job at SmartCompany: to keep you informed with the news, interviews and analysis you need to manage your way through this unprecedented crisis.
Now, there’s a way you can help us keep doing this: by becoming a SmartCompany Supporter.
Even a small contribution will help us to keep doing the journalism that keeps Australia’s entrepreneurs informed.
And it’s not all one-way traffic either. SmartCompany Super Supporters get to dial into our monthly editor’s meeting and attend a monthly, invite-only webinar with a big-name entrepreneur.