Startups have been the buzzword that are expected to perform stupendously and make investors rich. This belief makes a lot of investors bet on startups and millions of dollars move on a daily basis from investors to startups. But not every startup nor every investor is destined to score big with them. The craze or frenzy, as one may call it, of raising capital has slowly become the parameter to measure success. And in this noise a lot of investors and startups forget that the real taste of success is not in raising capital but in performance -- driving sales, driving profitability.
If one reads all the research that has been done in terms of failing startups, a common conclusion one draws is that approximately 90 percent of startups fail within five years across the globe. But there is very little research done that shows exactly why most startups fail. And this known phenomenon of failure is not restricted to companies that haven't raised capital, in fact, in recent years the failure rate among the ones that have raised capital is also seen rising
Although every failure story and the reason for failure is unique to each startup, over the period the list of reasons for failures seems to condense to a few reasons and others repeating the same mistake which their predecessors have done. Looking at a few global and a few Indian stories should give an insight as to why some of the promising startups failed even after being funded.
Capital only doesn’t decide the fate
For a startup to make money for itself and its investors, there are a lot of qualitative and quantitive metrics that need to be met. According to the research conducted by
CB Insights, only 29 percent of startup failures are because they couldn’t raise capital or run out of cash. This clearly proves that it is not only capital alone that decides the fate of the startup, in fact, it’s the other way round -- healthy businesses attract capital.
If we look into the data points bought forward in the research the biggest reason why a startup fails is the problem the startup is solving or the product it has is not needed by the market. The other major factors include faulty team, getting overcompensated and pricing or cost issues completing the Top 5.
It's interesting to read the facts around why startups are failing, one needs to draw exact point as to what went wrong with them, so here are some top-funded startups, globally and in India, which failed to live up to their vision, to their investors and to the society at large.
Global failures that notched millions Theronas Industry: Blood testing technology Amount raised: $910 million
The company has been the biggest case of funded startup failure. Once a darling of investors, the company went from riches to rags in no time. Considered the breakthrough technology in biomonitoring systems, the company had designed a small device that was supposed to facilitate the small-sample collection, testing and rapid communication of diagnostic information. The company also had a proprietary miniLab that integrated infrastructure that allowed testing, decision making and individualised therapy in almost real-time, enabling laboratories to process early detection and intervention.
Reason for failure: Product failure: While there was more meat than just product failure for Thernos, the product itself wasn’t up to the mark to what it stated. It was revealed that only a small fraction of Theranos’s blood testing had been completed on its ‘Edison machines’ and that the majority of tests had been processed through competitors’ equipment. Jawbone Industry: Consumer electronics Amount raised: $930 million
If we speak about failed startups and not talk of Jawbone, the story would be half told. Jawbone came in early, before their competitors and produced products like headsets, Bluetooth speakers, and fitness trackers. Even with the backing of leading venture capitalist like Sequoia, Khosla Ventures, and Andreessen Horowitz the company failed to live up ultimately announcing the liquidation of its assets in 2017.
Reason for Failure: Overfunding and wrong product planning: While the company and its products were promising , Jawbone is a clear case of how
over-funding kills a company. The over-optimistically projected growth numbers inflated valuation force-feeding the funding from the investors. Even with the funding in place, the company couldn’t match up to the likes of Fitbit and Samsung. A clear lesson that too much money not good for a venture.
Juicero Industry: Consumer packaged goods: Juice Amount raised: $118.2 million
Who can think a company that produces juice and juice machines can ever fail? Well, Juicero exactly did that. The company that began its journey via crowdfunding in 2013 couldn’t actually release a product till 2016. This delay was followed by a lot of bad press as the founder promised a high-end luxury juice machine that was much more than a juicer but couldn’t deliver anything. The backing of Kleiner Perkins Caufield & Byers and Alphabet Inc.as investors also couldn’t get the required result.
Reason for failure: Inappropriate pricing: Juciero struggled because it relied on a faulty business model especially in relation to its pricing and product differentiation. The $699 much-awaited juicer actually did nothing apart from squeezing out juice from proprietary juice packs. Obviously, $699 (later reduced to $399) was too much for such a thing. The worse was yet to come as Bloomberg broke the news that one could get juice better by hand pressing compared to using the machine. The Indian counterparts Stayzilla Industry: Hospitality- hotel, leisure, tourism, travel Amount raised: $33.5 million
A classic case of failure in terms of mismanagement and not all those good practices. Stayzilla’s arrival on the scene of the hospitality industry was quite ordinary. But the company took a stir in 2010 and pivoted its business model from being tour operators to a hotel aggregator. This strategic shift changed fortunes for the company and the company soon started moving up the ladder of success. With this new model, the company scaled its business to 1100 cities with more than 17000 options, not to forget the capital raising that got them $33.5 million from three funding rounds largely coming from Matrix Partners and Nexus Venture Partners.
Reason for failure: Mismanagement of business and lack of communication to stakeholders: The closure of Stayzilla came as quite a shock to most industry stakeholders and people at large. The first signs of the ultimate demise came when the company started faltering to pay its vendors on time. This followed up with legal disputes by vendors prominent of those being non-payment of dues to the tune of Rs 1.7 crore to JigSaw Solutions, an advertising agency which handled all promotional activities of Stayzilla. The news started pilling up and more vendors surfaced forcing the founders to make an announcement through his blog post about the closure of the business which said, “halting Stayzilla operations in its current form, and looking to reboot it with a different business model.” Well, the new business model never came and the company could never scale the mountain again which all the weigh of mismanagement. PepperTap Industry: Hyperlocal delivery Amount raised: $51.2 million
It was 2014-15 when the Indian market saw a spree of hyperlocal startups which came in to help the consumer get their daily necessity at their home at a discounted price. But the speed at which these startups came in, their demise was also simultaneous. The story was no different for PepperTap, which came with a mission to “revolutionise grocery shopping” as an Indian grocery delivery service with minimal charges. While the app correctly connected the local stores to consumers, the discounting policy turned out to be the poison here for the Gurgaon-based company.
Reason for failure: Discount pivoted model - Faulty technology: For PepperTap, the speed of going up was very similar to its speed of coming down . According to the blog posted by founders, the app failed to seamlessly integrate the partner stores as it bought “too many stores online far too quickly.” Also the whole model was built around discounting which failed to grab customer loyalty instead lead to a lot of cash burn.
Definitely, there are some lessons to learn from these startup founders and I hope that they don’t repeat the mistakes or it would be really difficult for them to win trust of the customers, investors, and society at large.
Nilesh Maurya is Director-Investment Banking at Omega Capital Consultants.