Tales from the Crypt: 13 Unlucky Tales of Failed Startups (& How You Can Avoid Their Fate)
This Friday the 13th we’re bringing you 13 cautionary tales of promising tech companies that met untimely ends.
Most entrepreneurs don’t need a reminder that only a handful of startup dreams actually come to fruition. They’re very familiar with the stats (that 75% of venture-backed startups never make it out of the expansion-stage, let alone to the point of an acquisition or IPO). Whether that failure is due to bad decisions, unpredictable market changes, or just a little bit of bad luck, the end result is the same — a once promising idea sputters into the startup graveyard.
What is useful is a reminder that these figures and the failures that spawn them are in fact useful learning opportunities. With that in mind, below are 13 particularly infamous startups that shot for the stars but ultimately crashed and burned, and the key lessons that can help you avoid their fates.
In 2007, entrepreneur and 500 Startups limited partner Yee Lee founded TipMobile, an SMS group chat and app developer platform. Things were going well (Marc Andreessen was an angle investor), but then the 2008 real estate collapse hit — and the company lost its investors. As Lee writes in a guest post for FounderDating, the company’s founding team worked for a quarter without a salary, but eventually had to shut down because it no longer had the funds to keep its servers running.
Key lesson: As Andreessen told Lee soon after the company went under, “There’s very little difference being early, late, or just plain wrong.” TipMobile couldn’t do anything to control the real estate crash, but Lee admits that it was his responsibility to adapt to new conditions and tailor his company to survive in them.
In 2009, cloud gaming platform OnLive was the talk of the annual Game Developer’s Conference in San Francisco. After revealing its newest service — which allowed monthly subscription users to stream high-definition computer games over the Internet — The Verge’s Sean Hollister writes that the company saw 100,000 users sign up for its private beta. Soon after that, the company raised $40 million in venture capital, reportedly at a $1.8 billion valuation.
So, how does OnLive qualify as a nightmare startup story? Incredibly, by November 2012, OnLive was on the verge of bankruptcy and eventually sold its remaining assets for just $5 million.
Key lesson: Despite its innovative technology, OnLive’s growth outpaced the market for its services. The company invested significant capital into server space and content partnerships, while only ever acquiring around 1,600 users (at a monthly subscription fee of $16.95). Ultimately, the company never proved its market and its growth was unsustainable.
Once an innovative diagnostics company with biomarker technology that had the potential to revolutionize cancer treatment, On-Q-ity suffered from serious management and product issues that ultimately caused it to fold just three years after receiving $26 million in Series A funding.
Key lesson: As Bruce Booth, an investor in On-Q-ity, wrote in this blog post, the company got its technology right, but its market timing was wrong. Ultimately, that created problems for On-Q-ity because the company’s investors couldn’t justify ponying up the capital to fund the idea until the market caught up to it.
Labeled as the “Yelp for investor-backed startups and middle-market private companies,” ChubbyBrain’s management team bought into the “build it and they will come” school of thought. Unfortunately, even when users came to ChubbyBrain, the company still found itself in muddy waters — mostly because there was no incentive for people to manually upload and review the businesses ChubbyBrain was interested in, and moderating the community required a lot of time, money, and effort.
Key lesson: In a post on its blog, the ChubbyBrain team admitted that its biggest mistake was that it never actually talked to users or customers to gauge their interest in the idea. As a result, customers told ChubbyBrain what they really thought about the product through their indifference.
5) Better Place
In 2009, Better Place was the toast of the auto manufacturing, green technology, and renewable energy world. The company’s electric car infrastructure promised to change the world of transportation for good and investors had lined up to get a piece of the action — to the tune of nearly $1 billion in outside funding. The problem? A combo of bad luck, hubris, and cost inefficiencies ended up squashing Better Place’s vision. By mid-2013 the company was in shambles and headed toward bankruptcy.
Key lesson: As FastCompany’s Max Chafkin revealed in this expose, Better Place is “a case study of the limits of innovation, the difficulties of getting customers to embrace new technology, and the perils of believing your own (hype).”
According to former Intellibank VP of Sales Gary Swart, this cloud collaboration company could have been the next big thing — a version of Dropbox before Dropbox was ever really a vision in Drew Houston’s mind. Instead, Intellibank ended up being an example of what Swart calls “Dropbox done wrong” in this post on LinkedIn.
Key lesson: In his post on LinkedIn, Swart reveals that Intellibank never achieved product-market fit. “Every customer was asking for something different and we gave it to them,” Swart writes. “We had six markets with 40 different types of customers, and in hindsight, we should have developed just one product. By failing to declare our major, we created a world of chaos for our sales, product, and marketing teams.”
One of the biggest success stories in tech is Mint.com — a financial management platform that was founded in 2007 and sold to Intuit just two years later for $170 million. Wesabe — the brainchild of co-founder Marc Hedlund — could have been Mint, particularly since it was founded a year before Mint. But, as Hedlund explains in this post, the company made two big mistakes (and experienced a little bit of bad luck), which sunk the company a year after Mint was acquired.
Key lesson: Hedlund stands by the assertion that his product was superior to Mint’s, but Mint’s platform was more user-friendly and intuitive. Ultimately, with the market the two solutions were targeting, that mattered more than data accuracy or fancier tools.
When Nate Westheimer founded open source social content platform BricaBox in 2008, the company delivered a solution that gave people and businesses a framework for building completely new websites with diverse content functions. The idea was a good one, but as Westheimer explains in this post, an idea is only one part of the startup equation. The other three — money, traction, and team — were missing from BricaBox’s formula.
Key lesson: As Westheimer points out in the company’s post-mortem, BircaBox was a solution to a technical problem he had. And while it’s good to scratch that itch to see if there’s something there, Westheimer admits that it’s better to scratch itches that you share with a greater market.
At one point, Everpix had built one of the world’s best solutions for storing and managing a large library of photos. It had 55,000+ active users, acquisition interest from bigger companies, and a promising future. Yet, in October 2013, the company was forced to shut down — no longer able to pay its employees’ salaries and its Amazon Web Services server bill.
Key lesson: Everpix’s ability to scale was tied closely to its ability to secure outside funding. When those efforts flopped and acquisition deals fell through cracks, the company’s runway was cut short and it could no longer afford to eat its net monthly losses.
Officially launched as Handy Elephant in 2010, Unifyo pivoted six times in just three years until it finally settled on building a sales tool for new business teams at enterprise B2B companies. The tool enabled salespeople to create introductions and build relationships with prospects through their company’s own internal network. Unifyo raised $700,000 in funding and built a small team, but the product never took off — mostly because co-founder Benjamin Wirtz says the business lacked the bandwidth to really attack the B2B enterprise market.
Key lesson: You’ve likely heard about product-market fit, but Wirtz says founder-market fit — an idea first introduced by renowned entrepreneur and investor Brad Feld — is equally important. Unifyo’s team was mostly consumer-focused and it lacked the passion and expertise to really throw its weight behind enterprise sales.
Often labeled as one of the biggest (and costliest) flops of all-time, Webvan was an on-demand, online grocery delivery service that raised $800 million in venture funding soon after it launched in 1999. By June 2001, the business had just $40 million in the bank according to the San Francisco Gate, less than a month later it shut down for good.
Key lesson: Though this failure is now more than a decade old, startups can continue to learn from it. As stock analyst David Kathman points out in the SF Gate story, the company was unable to follow through on its high expectations for its product
Some of the world’s most successful businesses have disrupted stale markets that were ripe for innovation (see: Uber). Outbox, a startup that promised to provide an easy alternative to the old system of postal delivery, seemed like it could be the next company to join that list when it was launched in February 2013. But by January 2014, the company folded, even as user demand increased.
Key lesson: So, what was Outbox’s undoing? As co-founders Evan Baehr and Will Davis explain in this post, it had a lot to do with the company’s economic model. Specifically, Outbox’s customer acquisition costs were unsustainable, greatly exceeding the $5/month subscription fee those users paid.
Pitched as a data and information-gathering service for investors, Monitor110 secured $16 million in outside funding and signed up more than 100 clients at a variety of firms, including hedge funds, traditional asset managers, and investment banks. And while the company’s users seemed to love the product and the service received widespread acclaim in the media, it failed to secure the funding it needed to continue growing the service. As a result, it shut down operations in 2008.
Key lesson: A confluence of factors made success impossible for Monitor110, writes founder Roger Ehrenberg on his blog, but the biggest mistake the company made was failing to establish a single, “buck stops here” leader until it was too late. Ultimately, that lack of leadership caused disagreement on strategy both within the company and its board.
It’s Not All Gloom and Doom: A Story of Startup Good Fortune
Interestingly, Yee Lee, the founder of TipMobile (the first failed startup on this list), was also part of a startup story that benefited from a dose of good luck.
In 2011, Lee was one of the founding members of Katango, a social contact sorter that was originally designed to help Facebook users better organize their friends into distinct groups or “circles.” Around that same time, Google+ had launched a feature called “Circles” that was supposed to accomplish the same thing.
That could have spelled disaster for Katango, but it instead presented an incredible opportunity.
As Lee writes in this post, journalists and consumers actually preferred Katango to Google+ Circles, and Lee says that ended up generating a lot more traffic for Katango than the company could have generated on its own. A little while later, Google decided to buy Katango for an undisclosed sum, and the company became a success story, rather than just another addition to the startup graveyard.
Of course, luck was just one component of Katango’s success.
Equally important was the company’s ability to focus on the right problem, build the right solution, adapt to changing market conditions, and step on the gas when the time was right. Unfortunately, for one reason or another, the 13 failed startups listed above weren’t able to do the same.
What other startup failures (learning experiences) should we add to the list?
Photo by: Cornell University Library