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Top Lessons I Learned from Shutting Down a Funded Tech Startup with a Growing User Base



A man sitting ata  desk with hands clasped before him looking thoughtful as a laptop sits on the desk, open in front of him.

Nowadays many entrepreneurs dream of launching a successful tech startup, and I was no different. I had the vision, the passion, and the drive. My startup raised capital, attracted a decent user base, we attracted some great partners to the platform, had affiliates and had paying users. It seemed poised for success. Yet, despite these achievements, I ultimately decided to shut it down. This experience was a profound learning journey, filled with invaluable lessons that I'd like to share. These insights are not only for aspiring entrepreneurs but also for those in the midst of their startup journey, helping them navigate the lonely and difficult road of being a startup founder.

You might wonder why a startup that raised capital and had a promising user base would shut down. It's a situation that many entrepreneurs face though. I know many startups would have killed to raise any amount of money and have paying users. So many, myself included, think that if you can get to that point you're bound to succeed. And while I wish that was the case, the truth is, success in raising funds and building a user base doesn't always equate to long-term sustainability. 

So, where did it all go wrong, why did I decide to shut it down? Well, before I answer that question I want to share some of the very valuable lessons that I learned the hard way throughout the four years I spent building Areii. Just a heads up this is not a how to build a startup, step by step manual. This is simply a collection of some of the biggest lessons I have learned in my journey trying to build Areii. If you want me to do a deep dive on any of these topics then feel free to reach out and let me know what you would like to know more about.


The Idea and Customer Discovery


Oh boy, what an idea! I’ve already made a billion dollars, I know it!” That was the thought that went through my head in early 2020. I was still riding the high of selling a real estate investment that had netted me my largest, fastest and easiest (although most definitely my most stressful) pay day, to date. Everyone thought I was absolutely nuts for purchasing 11 N Jefferson St in Farmington Missouri. This was a downtown historic commercial building right on our downtown square. It's one of those buildings that as you're walking on the historic square of a downtown that probably has a small little eatery in the bottom and maybe some airBnB lofts upstairs or a really nice apartment, something like that. That was the plan for this building. My partner and I were going to renovate the building and put a great sandwich shop in the bottom and some rental units upstairs. One problem though, there was a rather large hole in the back wall where the brick wall had started to collapse. I'll spare you on all of the details but friends and family thought we were nuts for buying this building, the oldest, still standing, historic building in Farmington, and after a couple months of planning and working on designs it seemed as though they were going to be proved right when i received a call on a random morning from my partner notifying me that the back wall had completely collapsed and that emergency services were on site. But after a couple months we walked away with a huge check after selling the empty lot to the neighbor.

After having invested in multiple properties and doing pretty well on all of them, we had also started a couple other businesses and had just purchased a martial arts studio. Friends and others were beginning to be curious about what we were doing and how we were doing it.  At that time I still didn't have any experience in tech, but decided I wanted to build something that could help others get started in real estate investing. And that is where the idea that ultimately became Areii, came from.

Around this time, Covid hit and the whole world shut down. I had plenty of free time and I decided I would go through something called the Delta-I Fund which was a startup cohort. In it I was given a ton of advice and help in refining the idea based solely on what they called “Customer Discovery”. That process helped a ton, and I believe it is one of the greatest tools someone who is considering starting a business should or could do. It should be step number one which is why I decided to talk about it first.

Customer discovery does two things for you and your startup, first it validates or disproves your business idea, and it does this without you needing to spend a single dollar. Even if the outcome is that your idea is a bad one or is not needed, that is still something that is very valuable to know. Would you rather wait until you have spent thousands of dollars and a ton of time on the project before you realize the idea is a waste, or would you rather find out after a few, free, conversations? The second thing it does for you, assuming you figure out what you will build through this process is it gives you a list of your first customers, or at least prospects.

Here is how it works. If you have an idea for a business or a startup, that is fine, but for now in this part of the process try to forget about it. Begin by figuring out the “who” you think you are helping or building a product or solution for. For me I wanted to build a real estate investment software so my customers were, well, real estate investors naturally, but during this process I spoke to bankers, lenders, contractors, realtors, inspectors, and title companies. See during these conversations you are trying to figure out the problems that your “customers” have. The premise of these conversations is simple: Talk about their problems, do not mention you have a startup, an idea that you're building something, don't even lead them to talk about their problems in the area that your idea relates to! For example a bad question for me would have been, “what do you hate about the current lending process”, that's too leading. Instead when I was talking to a real estate investor I would ask, “During your day as a real estate investor, what irritates you the most or causes you the most headaches?”. It's still a little leading but I didn't want to hear about the problems with their spouse or kids because I had no interest in solving that problem. I am by no means an expert on Customer discovery so for a better guide on how to do this I highly recommend the book “The Mom Test” by Rob Fitzpatrick. It's a great read for anyone looking to do customer discovery.

After conducting these interviews, and not even mentioning your idea, you can ask them if you find something that might be a solution to their problem if you can contact them about it. If they say yes, collect their phone number and email. Now you're building your first list of leads once you do build something! 


Key Takeaways About Customer Discovery

  • Customer Discovery is Essential: Before spending any money, validate your business idea through customer discovery to ensure it addresses real problems.

  • Identify Your Target Audience: Focus on understanding the specific needs and pain points of your potential customers.

  • Conduct Thorough Interviews: Speak to a wide range of stakeholders, including customers, industry professionals, and other related parties, to gather diverse insights.

  • Avoid Leading Questions: Frame questions to let the interviewee share their genuine experiences and challenges without being influenced by your ideas.

  • Build a Prospect List Early: Use customer discovery interviews to compile a list of potential early adopters who have shown interest in your future solution.

  • Leverage Free Resources: Participate in startup cohorts or programs that offer guidance and support in refining your idea, such as the Delta-I Fund or OTECH.

  • Continual Learning: Invest time in reading and learning from experts in the field, such as "The Mom Test" by Rob Fitzpatrick, to improve your customer discovery process.


Organizational Structure

After I finished this process I knew I wanted to raise capital and try to do the “traditional venture backed startup” thing to try and build the super glamorous billion dollar business and go public. My goal was to be one of the few men who were the original founder of a super successful tech company and to be the one still steering the ship when the company had its IPO or initial public offering. The list of names that have done that is pretty small and I wanted to be on that list (I still do). So I did what you are “supposed to”. I started a Delaware C-Corp. That was the industry standard if you wanted to raise capital and all of that jazz. The only problem is regardless of whether you are actively raising capital or not, you still have a couple thousand dollars each year in taxes and franchise tax fees and a bunch of other stuff just to cover the organization. On top of that I franchised through a service called Gust, which is a very cool tool, but it added another expense.

Quickly I realized that I should have waited until I had a check in my hand to incorporate. So if you are starting out and you want to raise capital and go that route, that's fine, just start with an LLC at first and save yourself a ton of money. Then when an investor gives you a check, do the C-corp thing. Most likely you do not even need any sort of entity to get started, just get going and get the smallest, minimalist version of what you need to validate that someone will buy your product.

This is probably a great time to say that I am not a lawyer, but If i had to do it all over again I wouldn't have any business entity at all. I would probably start an LLC once I was ready to begin accepting user payments, perhaps once I would need to setup a stripe integration into my software for user accounts or what not. Then once a Investor was ready to invest I would have them make the check out to the C-Corp that would be created the day the check was written and I would use that check to open the bank account. On top of not being a lawyer I am also not an accountant, so speak to one of them about all of this. But doing this will save you a ton of time, energy, money and headache if you decide not to continue with the idea a couple months down the line. 


Key Takeaways About Organizational Structure

  • Timing of Incorporation Matters: Delay incorporating as a C-Corp until you have secured investment to avoid unnecessary expenses.

  • Start Simple with an LLC: Begin with an LLC to minimize costs and complexity, transitioning to a C-Corp only when needed for raising capital.

  • Minimize Initial Overhead: Avoid premature expenses associated with incorporation, such as franchise taxes and service fees, by waiting until your business is more established.

  • Validate First, Incorporate Later: Focus on validating your product and business model before setting up a formal business entity.

  • Legal and Financial Advice: Consult with a lawyer and accountant to ensure your business structure decisions align with your specific needs and circumstances.

  • Practicality Over Formality: Don’t rush into formal business structures until you have a clear need, such as accepting user payments or receiving investor checks.

  • Strategic Use of Funds: Use the initial investment check to cover the costs of creating a C-Corp and opening a business bank account, ensuring efficient use of resources.


The Need for a Starving Crowd

This is probably one of the most important lessons I learned. It doesn't matter how good your hot dogs are if you're the only hotdog stand that is open when the crowds leave the bars at 1AM. This ties back into the first lesson, of doing your customer discovery correctly. During my calls I kept hearing that investors needed help with a couple things, sourcing deals, finding and managing contractors, securing capital, and confidence in their analysis.

While I did establish that the need was great enough for a product to be built, the need was not ravenous. I love how Alex Hormozi puts it in his book ”$100 Million Dollar Leads”. He said something along the lines of we want our customer ravenous not merely aroused. It was the depth of the need that I failed to validate in my customer discovery and was definitely one of the factors that led to me deciding to shut down Areii after four years of working on it. 

So how do you validate not just a desire but a ravenous desire? To be clear I haven't found a starving crowd yet to build or sell something to so I can't completely validate this yet. Remember I am still learning and am on my entrepreneurial journey, this blog post is about the mistake I made and the lessons I've learned from those mistakes, this is not about how I am a huge success that has it all figured out. That said, I will discuss what I am doing right now and who I have learned from about this subject. First I've already mentioned The Mom Test, go read that book and then go listen to Alex Hormozi. Both are great sources to help with this stuff.

Since you are here though, here is an easy framework for you, lets just look at the words `Starving Crowd' . What do you get when you look at those two words, let's look at the second word first, “Crowd”. So what do you think that means, should i go find one person or a market with just a couple people in it? No, probably not, right, so I am looking for mega crowds, but not just any large crowd, I am also looking for crowds that I have direct connections to that I can access easily. I'm not going to be able to get into the Staples Center and sell hot dogs. I don't have access to that very large crowd that has plenty of desire for hot dogs. So it makes no sense to try and sell to them while they are in the Staples Center. I want to find a large crowd that I can easily and repeatedly access. Now for ‘starving’ this is a little harder to figure out. What I am doing right now to figure this out is a new bit of customer discovery which is really fun because this time I have no business ideas. I have located a large crowd that I would be interested in serving and I am simply talking with them about their problems. After learning about their problems I plan on doing some pointed questions about how much they would be willing to pay me if I could solve their problem and then I will presale them the solution. If I can get some users to pay me some money before I even have a product built, I know I am on to something. 


Key Takeaways About The Need For A Starving Crowd

  • Depth of Market Demand: It's crucial to validate not just the presence of a need but the intensity of that need. Your target market should be ravenous for your solution, not just interested.

  • Thorough Customer Discovery: Effective customer discovery involves understanding the depth of your potential customers' problems and ensuring there is a strong, urgent need for your solution.

  • Target Large, Accessible Crowds: Focus on large markets where you have direct and easy access, allowing for repeated engagement and sales opportunities.

  • Pre-Sell Solutions: Validate the intensity of demand by pre-selling your solution. If customers are willing to pay before the product is built, it's a strong indicator of a ravenous market.

  • Continuous Learning and Adaptation: Stay open to learning and adapting based on market feedback. Use resources like "The Mom Test" by Rob Fitzpatrick and Alex Hormozi's insights to refine your approach.

  • Identify and Solve Pain Points: Engage with your target market to understand their most pressing pain points, and develop solutions that address these issues effectively.

  • Iterative Validation: Use iterative customer discovery to continuously refine your understanding of the market need and adjust your approach accordingly.


Team

This might have been my biggest failure of all. In all of my entrepreneurial endeavors I never had a true “Team ''. I never had employees or anyone to help guide me in my actions or help me as a co-founder. My Partner I mentioned in the beginning of the blog found the deal and brought it to me so I made him a partner on the deal, but since it was his first deal I was mentoring him on the process and teaching him. Besides my Wife i haven't had a partner or team to help with the burdens of running any of my businesses or to help when the burden becomes heavy. 

I do not believe that for a startup to be successful you need to have a co-founder but after my experiences with Areii, you need some kind of support system and some early employees or something to help you in the areas you are weak in. Unfortunately I am really good at figuring out how to do things, I've taught myself everything from bookkeeping to coding, to construction, I am pretty good at anything i want to do but that is in no way a superpower and it is probably one of my greatest weaknesses as I have always just decided to figure out how to do it instead of finding someone who was truly great at that one thing and figuring out how align our interests to convince them to come alongside me to build something truly great. 

In full transparency I am still working on this and of all of the lessons I have learned I have the least insight into this. Currently I have taken on two contracts in a very involved advisory capacity in part to learn how to operate as part of a team. It has been a challenge and a great learning lesson for me. 

Since the age of 15 working in my fathers construction company, I have never really needed to be involved in a team. I never played team sports and I was always a lone wolf even working in construction or with other companies that had other employees. I’ve never had to rely on team members to get my job done. If this sounds like you, I encourage you to find some way to be involved in a team and learn to rely on them. I cannot believe that this is something you will learn by reading a book, this is most definitely something I, and everyone I imagine, will have to learn by doing. 

I have read a great book called “The SaaS Playbook” by Rob Walling which discusses some tactics to bring on early team members for SaaS companies specifically but most of the tactics will work for most industries. I’ll end this section with a famous quote, “if you want to go fast, go alone. If you want to go far, go together”.


Key Takeaways About Teams

  • The Importance of a Support System: Even if you don’t have a co-founder, having a support system or early employees is crucial to share the burdens and responsibilities of running a startup.

  • Recognize and Address Weaknesses: Identify areas where you are not an expert and bring on team members who excel in those areas to build a stronger, more balanced company.

  • Value of Collaboration: Working alone can limit growth. Collaboration and teamwork can drive innovation and success.

  • Learning to Rely on Others: Being a lone wolf can hinder your progress. Learn to rely on team members to share the workload and enhance overall productivity.

  • Practical Experience in Team Dynamics: Gain practical experience by working in team environments, even in advisory or part-time roles, to improve your teamwork skills.

  • Continuous Improvement: Continuously work on improving your ability to work within a team, as this is a critical component of long-term success.

  • Early Team Building Strategies: Utilize strategies from resources like “The SaaS Playbook” by Rob Walling to effectively bring on early team members and align their interests with your company's goals.

  • Long-Term Perspective: Embrace the philosophy that while you might go fast alone, you will go further when you go together, reinforcing the value of teamwork for sustainable success.



Operating in a Non-Tech Startup Friendly Ecosystem

Navigating the waters of a tech startup in an environment that isn’t inherently supportive of such endeavors presents its own set of unique challenges. While this might not earn me any favors locally, the lessons I've learned are invaluable and worth sharing.

Ocala, Florida, where I currently live and do business, is a prime example of this. It's one thing for a community to be "tech startup illiterate," but sometimes, there are additional hurdles. In Ocala, there exists a significant organization that, at times, seems either unaware of or resistant to the needs and dynamics of tech startups. This isn't to suggest any ill intent on their part; rather, it appears to be a preference for maintaining the status quo, which they benefit from through substantial donor and government funding. Understandably, the emergence of tech startups can appear as a threat to their established position. 

Despite these challenges, small towns like Ocala hold immense potential for tech startups. The very lack of a tech presence can translate into an eager market, curious and open to the innovative solutions that new technology companies can provide. Additionally, the competition may be less intense, as potential customers might not have been exposed to your competitors.

Operating in these markets requires perseverance and patience. You also need to get support from other ecosystems. For me, in Central Florida, I found a lot of support in the Gainesville, Orlando, and Tampa ecosystems. Central Florida overall is still pretty early from what I can tell, and those three that I mentioned are still missing bits and pieces for a complete ecosystem. If you live in a similar region, I recommend reaching out to anyone within a couple of hours' driving distance and connecting with them. Spend time with them and support their events. It will be critical for your long-term success and growth. As you get plugged in, begin to build your own ecosystem locally. Be known as "the guy or gal" that starts your local tech scene if there isn't one already. It never hurts to be known as a connector. 

A benefit that is probably the hardest to notice of being in a tech start friendly ecosystem is that there are other companies and founders doing “big” things. So you get to see what success looks like or at least what the path of success looks like and you also get to see what futility looks like. When you're in a tech startup deficient ecosystem you're in a silo. You have no idea if the challenges you are facing are unique or if they are a symptom of something obvious that you just don't know because there is no one to point it out to you. When you start hanging out with other startups and founders it's hard to ignore the glaring holes in your business. When you're by yourself you just think they are nice skylights, when you compare them to other companies you can quickly see that those skylights are actually holes in the foundation.


Key Takeaways About Operating in A Non-Tech Startup Friendly Ecosystem.

  • Unique Challenges in Non-Supportive Environments: Operating a tech startup in an environment that doesn't inherently support such endeavors presents unique challenges that require perseverance and patience.

  • Potential Resistance from Established Organizations: Some local organizations may prefer maintaining the status quo, viewing new tech startups as a threat to their established positions.

  • Opportunity in Untapped Markets: Small towns with little tech presence can offer immense potential, presenting an eager market open to innovative solutions and less competition.

  • Leveraging Nearby Ecosystems: Seek support from nearby tech-friendly ecosystems. Connecting with larger ecosystems in nearby cities can provide critical resources and networking opportunities.

  • Building a Local Ecosystem: Start building your own local tech ecosystem. Become known as a connector and foster a supportive community for startups in your area.

  • Learning from Others: Being part of a tech-friendly ecosystem allows you to see what success and failure look like, providing valuable insights and benchmarks for your own startup.

  • Avoiding the Silo Effect: In a tech startup deficient ecosystem, you may face challenges in isolation. Engaging with other startups and founders helps you identify and address fundamental issues in your business that might otherwise go unnoticed.



Raising Capital


“I believe in what you’re building and would be willing to write you a check” Fireworks went off in my head. A random encounter a week early had led to a meeting where I would finally get some funding for my company. I had already put about $50,000 into Areii of my own capital over the last 4 years and we had some revenue coming in from users but this would allow me to begin advertising, the thing that I most wanted to get going to really grow the user base. 

A couple meetings later I had a check and I deposited into the bank, I immediately began setting up advertising campaigns. A couple weeks later and nearly two thousand dollars spent. I had gotten a couple free sign ups but no more than I was normally getting over that time period, and I still haven't gotten a single paying user from those ads. I had the data to see that tens of thousands of people had viewed my ads, and while I was getting a pretty standard click through rate, my conversion rate was abysmal.

There isn't really a lesson that I want to share about raising capital necessarily but it was a very big part of the decision to shut down Areii so I wanted to make sure I discussed it here. If there are any lessons I could share I guess it would be that capital is not the end all be all. Many companies are founded without raising capital and in fact over the last couple weeks I've been able to build multiple software projects without any capital and launch them and I've already gotten users on them. They have been more successful in less time, with less fuss and tens of thousands in less funding (I didn't put my own capital into them nor am I raising capital for them), than Areii was. 

If you want to raise capital, don't overthink it too much. Here is the basic structure of how I raised and how I stayed compliant with the SEC (security and exchange commission) with my raise. This question was one that took a long time to figure out, and there was no one in central Florida that was willing or able to help me with this simple question. So how does a startup actually tell people they are raising capital but stay compliant with the whole “No public solicitation” rule of raising capital. Just to reiterate, I am not a lawyer so go talk to one of them, this is just what I did. The way it was explained to me eventually was the triggering event is when you give someone terms on the investment. So I was able to tell people i was raising capital, i did not do this publicly but i did this one on one, and then if they wanted to have a conversation with me, that is when i made sure they were an accredited investor. Essentially there are all these rules around when you are allowed to talk to people about how you raise capital and if you don't follow the rules it can be a big problem for you. If you want me to go more into that I can. What I ultimately did was I spoke to people about how I was raising capital and I would tell them the amount but I would not give them terms. Once an investor was interested that is when you have to start the legal process which does not have to be that difficult. If you are confident that they are accredited then have  a lawyer draft a simple offer with a simple disclaimer and an investor suitability questionnaire. That is what i did to stay compliant, again i am not a lawyer, this is not a recommendation to do anything. But I do think it is pretty silly that no one is willing to simply talk about the process. I don't know how many articles, blogs and books I researched to try and figure out this process about how to stay compliant. 

One last note that I want to share. Early on I asked three absolutely amazing people that I highly look up to, to be on my board of directors. I did this because of my lack of a team, I thought having board of director members would be a good move to help me raise capital. Well after starting the process of raising capital I found out from some sophisticated Angel investors and Venture Capitalists that having a board of directors at that early stage was actually a hindrance to raising capital. They were incredibly gracious and agreed to step down so that I could continue to do the raise as I wanted. So if you want to raise capital like that, don't bring on the actual board of directors yet (for c-corps). Bring on a board of advisors if you want and give some advisor shares to compensate them or whatever, but don't get in an awkward situation where you have to ask someone you respect and want to help you build your company that you need to take away their title and what you agreed to. This was probably the most embarrassing lesson I had to learn that might have been avoided if I tried to build Areii in a more tech-startup literate environment.


Key Takeaways About Ra

  • Capital Isn't Everything: Raising funds can be exciting, but it’s not the ultimate solution. Many successful startups thrive without external capital.

  • Effective Use of Funds: Be strategic with how you spend raised capital. Advertising can be a significant expense with uncertain returns; validate your approach before large expenditures.

  • Understand Legal Compliance: Stay compliant with SEC regulations when raising capital. You can discuss your capital raise one-on-one without giving investment terms until the investor's accreditation is confirmed.

  • Simplicity in Legal Documentation: Use straightforward legal processes to ensure compliance. Have a lawyer draft a simple offer, disclaimer, and investor suitability questionnaire.

  • Challenges of Early-Stage Boards: Forming a board of directors too early can hinder your ability to raise capital. Instead, consider a board of advisors and offer advisor shares to avoid complications.

  • Continuous Learning: Navigating the capital-raising process requires learning and adaptation. Engage with knowledgeable individuals and resources to better understand the intricacies.

  • Avoid Overcomplicating the Process: Keep your fundraising process simple and clear. Overcomplicating with too many structures or titles can create unnecessary hurdles.

  • Local Support and Ecosystem: Building your startup in a tech-literate environment can help avoid embarrassing missteps and provide valuable support and guidance.


Conclusion: Reflecting On The Lessons I Learned

So now, why did I decide to shut down Areii? At this point I had somewhere between 150-200 users, we had a decent amount of income from subscriptions, and we had just received funding. Well, it was a combination of a lot of things.

My wife, our kids and I had just gotten to Missouri to visit family and it was the first morning of our week long vacation there. I had spent about $2000 in ads, as I mentioned before and hadn't gotten a single new paying subscriber. I knew that if I kept going I could keep trying and potentially go through all of the investment without seeing any return, that was a big part of the decision. At the same time and because of that ad spend dilemma i started to realize some of the other things that i've talked about, Knowing that my audience was not a starving audience and didn't really want my product, they were curious but from what i could see, they were not ravenous, I had spent 4 years on the project, i had attend real estate investor meetups and was in groups, i was discussing it every day with prospects and i had tried so many ways to get people interested. Perhaps there was a bit of the lone wolf burn out mixed in there as well but mostly I could feel it in my bones that the starving crowd did not exist for Areii. I might be wrong about that assumption, but I knew that there was a very good chance that I would blow through the entire amount of funding I received to validate or disprove that assumption. So if I called it quits then, I could still repay the investor their entire investment. I told my wife what I was contemplating to her utter shock. We decided to give it the week and to leave it into God's hands. If I received one single paying subscriber by the end of the vacation then I would continue working. If no paying subscriber joined, I would shut it down. The week came and went and our paying user count stayed the same. Throughout the four years I spent working on Areii there was always that nagging voice that would tell me to give up, and everytime i would get close something would happen that would give me hope and encouragement. The most recent being the investment. It was a huge boost to my motivation but It also revealed one of my greatest worries, no one cared. That's a pretty bitter pill to swallow after investing years and a ton of my own capital into something I truly believed in.


Shutting down Areii was one of the hardest decisions I've ever made. However, the lessons I learned from the experience have been invaluable. They have shaped my approach to business and entrepreneurship, providing me with insights that I will carry forward in my future endeavors. To all the entrepreneurs out there, remember that every setback is an opportunity to learn and grow. Stay resilient, stay adaptable, and keep pushing forward. I would normally say “and don't ever give up” but I don't think that is right to say. I did give up, but in the weeks since, it has been one of the best things I could have done. My stress levels are essentially gone. I have more creativity and I'm looking forward to figuring out what I will build next. I know I can use these experiences to help other startups and small businesses and that possibility excites me. If you are in a spot where you need help figuring out what you should do or want to discuss this, feel free to reach out to me at Chris@TheChrisMarshall.com 


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