How Startups Succeed and Fail

Consider this tale of two online startups: One entrepreneur devised a clever software app; raised funds from family, friends and outside investors; and launched his internet-based venture. But it took a lot longer to get the market acceptance he’d hoped for, and the business folded. By contrast, a young woman with a solid savings cushion bought an established customer base and took her new business online. Thanks to her low overhead, high-profit margins and innate sales skills, she became successful. Mary Anne O’Connell, partner at Husch Blackwell, advised both clients. “The cyber-businesses I’ve seen fail—typically money is at the root of that,” she says. “[People] tend to underestimate what it’s going to take to make a go of it.”

Business attorneys like O’Connell advise clients on standard issues such as registration, taxes and legal agreements with partners, investors and suppliers, but they can also address intellectual property questions and other challenges specific to online startup success. “You’re in the world of protecting yourself and your images, so you’ve got trademarks and copyright issues. In some cases, people may even need patents,” says Garrett C. Reuter Jr., with Greensfelder, Hemker & Gale. “You can see some wide-eyed clients sitting there, like, ‘Whoa, I didn’t realize all of this.’”

Hiring the right attorney—one with experience representing internet companies—is critical, says Anthony G. Simon, a patent and trademark litigator at The Simon Law Firm. “I usually get called in after the fact,” he says, noting that lawsuits often stem from common mistakes like inadvertently using a business name that belongs to another company. Simon recommends making sure your business insurance policy offers the proper liability protection. “Innocent infringement is not a defense,” he says.

When it comes to competition, cyberpreneurs should be on red alert. “It’s so easy to start a website and just start selling stuff. In many cases, you’ve got people out there stealing your ideas,” says Reuter, whose online clients include a clothing shop targeted to college students and the developer of a gaming app. It’s also important to shield your online business from cyberhacking. “You need to protect yourself,” Reuter notes, “because that could sink your business pretty quick.”

In many ways, starting an online small business is similar to building a brick-and-mortar storefront. Both require business plans and decisions about incorporating, setting up by-laws and drawing up shareholder agreements. Early-stage cyber-companies, however, may have a tougher time establishing credibility, especially with older customers. “It’s easier to pretend to be a business online than it is to pretend to be a business with a physical location,” O’Connell says. Good internet connection speeds, a startup team that can focus on social media and search engine optimizations, and frequent website updates are must-haves. And waiting on government entities to review your paperwork can take much longer than you think, so be prepared for delays.

Most importantly, get legal and financial advice up front—before you dive headfirst into that big online money-maker. “It’s much easier and cheaper to prevent a mistake,” O’Connell points out, “than to fix one.”

For more information on this area of law, see our intellectual property overview.