Watching an acquirer ruin your company

The startup media world doesn't devote as much ink to what happens after the acquisition

“I think you should take the deal,” I said. “Even if it’s not life changing money, it sets you up as an entrepreneur with a track record of success.”

That was my advice to Steven Dourmashkin in early summer 2018 when he told me that Sphero had approached his company Specdrums with an offer. Specdrums was a promising gadget company that produced really fun musical rings. You could tap them on surfaces with different colors and they would make your phone play color-corresponding sounds. If this is confusing, watch the YouTube video below.

Steven ended up taking the deal, and what happened after that was high flying success followed by an incredibly mystifying defunding of the entire program. I’m going to explain what I observed from my perspective in hopes that it can help you evaluate your own potential acquirers when they come knocking.

Rebuilding

Steven and I first met in October, 2017 in Boulder Colo. at Galvanize, a coworking facility on Walnut St. He already had a small team made mostly of interns and contractors tied to the University of Colorado’s Innovation and Entrepreneurship Initiative.

Specdrums was several months old and a model of bootstrapping success. Their Kickstarter campaign hauled in over $188,000 with nearly 2000 backers. With this bankroll, we expected they would have a reasonable budget for software development, but in our meeting we learned that most of it was already earmarked for manufacturing the kickstarter backers’ rings.

The product was impressive, but it definitely wasn’t ready for a mass market. Steven had singlehandedly built an iOS app that allowed users to configure rings, create virtual synthesizer and play loops. The app didn’t have a professional looking design, but more importantly, the features—especially the ones that allowed for setting up virtual synthesizers—required knowledge of music theory and complex multi-finger gestures.

In an email proposal, I said we could “make some decisions around a better more professional looking and usable UI/UX.”

The budget for this work wasn’t available, so Kelsus only did a little bit of work in those early days to make Specdrum’s Android app match their iOS app.

Fast forward a few months—we hadn’t really spoken with Steven since we couldn’t be of much help beyond that first project. That’s when I got the surprising and happy call from him about the potential Sphero acquisition.

As soon as Sphero completed the acquisition, bringing Kelsus in as an app developer, two things happened: 1) Sphero told us they needed fully revamped iOS and Android apps six months later with no schedule wiggle room. 2) Sphero spent the first two of those six months organizing a team on their side and hashing out requirements for the new apps.

We wanted to do our best, so we bent to the task. Four Kelsus developers started working feverishly against a new design that included more wow-factor animations and sound effects than most other work we do.

Some screenshots from the new design

Then we hit two major obstacles. The sound processing system on the Android app had problems with latency—meaning you wouldn’t hear the notes the rings were supposed to play without a noticeable lag after tapping the rings on a surface. And the rings’ bluetooth system for connecting and updating their firmware depended on libraries from Sphero that were incomplete and buggy.

What looked like an impossible project became a hate filled, death march. Everyone at both Kelsus and Sphero was frustrated. Sphero realized that they needed to nix features or change the deadline, but since the Jan 2019 deadline was aligned with the biggest electronics showcase on earth, CES, they couldn’t move it. So they started dropping features.

Kelsus lost a developer over the project who quit in polite protest, and Sphero shipped, in my opinion, a shadow of what they had initially designed.

Going global

Despite the lack of some wow-factor animations and a few really fun features, the CES debut was a resounding success. Specdrums got rave reviews in Rolling Stone and The Verge. They were listed by Wired in the Best of CES showcase. Steven’s dreams were coming true.

It gets better. Specdrums CES success turned heads at Apple. In a lightning fast distribution deal, Apple agreed to merchandise Specdrums in a playable demo at every physical Apple Store in the world! Our team was so proud of the videos that came in from shops in Asia and Europe with people playing Specdrums.

The rug pull

Then the numbers came in. Sales were weak. What would you do, Startup Win! reader, if you had a hot product but weak sales? That’s right, you’d look at pricing.

But Sphero had other issues to contend with. Weak sales across their whole business, a rocky transition to being an education company instead of a toy company, and a recent acquisition were causing their cash on hand to plummet.

The acquisition was the nail in the coffin. The additional people from LittleBits weighed heavily on Sphero’s balance sheet, and they decided to slash the workforce. They included the entire Specdrums team in the layoff. Steven and other project members called me to express their frustration. Sphero had given Specdrums one quarter to sink or swim, and they sank on the back of a price point that was obviously too high, and an app that didn’t quite meet expectations for the people that bought it (remember those features we punted.)

I was furious about this gross mismanagement. Just today, looking for news on what happened in the post-Specdrums era, it looks like the board was too. A new CEO took the helm in early 2020.

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So the obvious lesson here is to know your acquirer. Make sure you’re convinced that they understand the level of investment needed from them post-acquisition. Inexperienced entrepreneurs make the mistake of thinking they only need enough cash to build their MVP, and they learn that marketing their MVP is way more expensive. Similarly, inexperienced acquirers think the investment is over after they pay for the company.

Despite Sphero’s waste, and the departure from the world of the only toy I ever helped make that my kids loved, there’s a silver lining. The thing I told Steven about having a track record as a successful entrepreneur was true. He’s already deep into his next adventure having founded Chiplytics, a company that creates microelectronics supply chain quality assurance tools.

I wonder if he would make the same decisions if he could have a do-over? Steven, care to comment?

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By the way, next week I’m moving to Spain with my family. It’s a gran aventura! I’m not sure if I’ll be able to write an issue of Startup Win!