Funded but fumed: Here are some startups that failed even after raising millions by Nilesh Maurya

TL;DR - Examples of startups that failed even after raising lots of outside capital

Helpfulness - 4

Tags - startups failure, outside capital, outside investment, venture capital, Theronas, Jawbone, Juicero, Stayzilla, PepperTap

Questions answered:

  • What determines startupsā€™ success?
  • What are some examples of startups that failed even after raising lots of outside capital?

Summary:

  • Raising outside capital is often considered as the parameter to measure startupsā€™ success, making many investors and startups forget that startupsā€™ success depends on their performance - driving sales and profitability - rather than capital.
  • Approximately 90% of startups fail within five years.
  • The failure rate among startups that have raised outside capital has risen recently.
  • Although each startupā€™s failure has unique reasons, over the period the list of reasons for failures condenses to a few reasons.
  • Only 29% of failed startups could not raise capital or ran out of cash; capital only does not decide the face of the startup.
  • In fact, itā€™s the other way round - healthy businesses attract capital.
  • The most common reason why startups fail is the problems they solve or the products they produce are not needed by the market.
  • Other major factors include: faulty team, overcompensation, and pricing or cost issues.
  • Examples of global startups that failed after raising millions of outside capital
  • Theronas: blood testing technology (amount raised: $910 million):
    • Considered the breakthrough technology in biomonitoring systems, it had designed a small device that was supposed to facilitate the small-sample blood collection, testing and rapid communication of diagnostic information.
    • Its product was not up to the mark to what it stated; only a small fraction of its blood testing had been completed on its ā€˜Edison machinesā€™ and the majority of tests had been processed through its competitorsā€™ equipment.
  • Jawbone: consumer electronics (amount raised: $930 million)
    • Backed by leading venture capital firms like Sequoia, Andreessen Horowitz, and Khosla Ventures.
    • Although the company and its products were promising, the over-optimistically projected growth numbers inflated valuation, force-feeding the funding from the investors.
    • Despite the funding, it could not match up to giant competitors such as Fitbit and Samsung.
    • A clear lesson that over-funding (beyond a startupā€™s business fundamentals) could harm the startup.
  • Juicero: juice and juice machines (amount raised: $118.2 million)
    • Although it started out crowdfunding in 2013, promising a high-end luxury juice machine, it could not deliver any product until 2016.
    • The delay resulted in negative press and even the funding from Kleiner Perkins Caufield & Byers and Alphabet Inc.as investors couldnā€™t get the required result.
    • It relied on a faulty business model (pricing and product differentiation); the $699 (later reduced to $399) much-awaited juicer did nothing apart from squeezing out juice from proprietary juice pacts.
    • Bloomberg later broke the news that its juice machine is even less effective in squeezing juice than hand pressing.
  • Examples of Indian startups that failed after raising millions of outside capital:
  • Stayzilla: hospitality - hotel, leisure, tourism (amount raised: $33.5 million)
    • Classic case of failure in terms of mismanagement and bad practices.
    • Pivoted its business model from being tour operators to a hotel aggregator, which allowed it to expand greatly (scaling its business to 1100 cities with over 17000 options and raising capital from Matrix Partners and Nexus Venture Partners).
    • Started faltering to pay its vendors on time and eventually faced legal disputes, causing negative news to pile up and more vendors to force the founders to announce the companyā€™s closure.
  • PepperTap: hyperlocal delivery (amount raised: $51.2 million)
    • Came with a mission to ā€œrevolutionise grocery shoppingā€ as an indian grocery delivery service with minimal charges.
    • Although the app correctly connected local stores to consumers, its discounting policy turned out to be the poison for the company; the whole business model was built around discounting which failed to grab customer loyalty and instead led to a lot of cash burn.

Follow up links:

Why many startups fail and how to prevent startup failure,