HTC is becoming like Color, the app that raised $41M and then died

Recently, an angel investor asked me to provide advice to a start-up in which he was the sole investor. I researched the space and came to the meeting with a hypothesis on why they weren’t doing well: the product was bad; they scaled too quickly, at one point with 50 people at the company; tried to do too many things, etc.

The founder, investor and I met up at Starbucks and after a couple hours discussion, the investor shocked the entrepreneur and me by declaring that — based on what he just heard — he’s going to liquidate the company. Wow! He later clarified with me that he was already thinking it, and wanted to get my input before he made a final decision.

I just hope I don’t cross paths with the entrepreneur…or if I do, to make sure there are plenty of witnesses around in case he decides to take violent revenge!

I share this story because something in the news about HTC’s new business unit, HTC Creative Labs, which created apps like the ZOE on HTC One, caught my eye.

One nugget in particular:

The team, which includes 260 people from across HTC’s offices, is based in Seattle, but includes people in San Francisco and Taipei.

260 people?! That is not a typo. This is the group that made ZOE, so it’s a talented bunch, but 260 is an insane number. This is another case of premature scaling.

The average tech worker in the US earns $87,811. In addition to payroll, there are many additional costs like insurance, benefits, computers, etc. So let’s assume it costs HTC on average $100k per person. Employing such 260 people would imply an annual burn rate of $26 million!

Let’s assume tech workers in Taiwan earn less than those in the US. Let’s assume not everyone does tech but is in admin, marketing, etc. We can quibble with numbers, but even if we halve the per employee cost assumption, we’re still taking about $13 million annually in headcount.

This is an aggressive burn rate for a company with Series B funding; the kind that has proven market validation, has a strong view for what the end business model will be, and simply needs to scale as quickly as possible to grab market share. HTC’s new business unit is not at that stage.

HTC would have to create an extraordinary app to justify that kind of spend. Remember Color? That was a start-up widely ridiculed for raising $41 million before having made anything. Employing 260 people is the same level of ridiculous, except worse because the $41 million was meant to last Color for many, many years while HTC will spend it in three.

The Taiwanese company should take a course in Lean Startup. The basic idea is that start-ups are organizations in search of a repeatable business model, whereas companies are organizations geared around at least one. If you are a start-up, you should be experimenting as quickly as possible to find that model — build just enough to test a hypothesis and then pivot until you find something that works.

You don’t need 260 people to test a mobile app idea. HTC is scaling prematurely and will experience a lot of pain over the next few years.

Granted, this move may have simply been about redefining a cost center (that developed features for HTC phones) to a business unit to create accountability, so HTC’s total cost doesn’t actually increase. Granted. But in the start-up world, 260 people on a team that hasn’t proven anything is outrageous.

I love the ZOE app and plan on getting it, so am rooting for them.

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