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 startups’ 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 startups’ success, making many investors and startups forget that startups’ 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 startup’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, it’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 ‘Edison machines’ and the majority of tests had been processed through its competitors’ 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 startup’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 couldn’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 company’s closure.
  • PepperTap: hyperlocal delivery (amount raised: $51.2 million)
    • Came with a mission to “revolutionise grocery shopping” 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,