FAILED-START-UPS-THAT-COST-VCs-HUGE-MONEY

Airbnb, Instagram, Whatsapp, SpaceX are classic examples of entrepreneurship and innovation. However, not all start-ups make it to the top. There are many failed start-ups who started off with a high but ultimately had to shut operations. Young entrepreneurs sometimes lack the vision that is required to drive the company. They fall short of prompt decisions. Like these, there are various other reasons that have led to the collapse of huge start-ups.

In this article, we bring to you 5 such failed startups and the potential reasons behind their failure

Failed Start-ups: Beepi

Beepi, the used car buying and selling start-up was established in 2014 in California. The company had raised a whopping $149M of total funding in over 7 rounds throughout its lifecycle. They were a marketplace for used cars. Beepi shut operations in 2016 after 2 acquisition deals that fell through- Fair.com and DGDG. Ultimately, Beepi was sold off in parts to fulfill the debt obligations.

The Business Model

Beepi was a third-party dealer for selling used cars. Beepi promised a fixed price for customers to buy cars. They made revenue from the commission on the sale of each car. The company gave customer service the most importance. Since a car is a huge financial investment for individuals, good customer service increased consumers’ trust in Beepi.  Beepi executives would go on the sight for inspection of the car and ensure that it is in the best possible condition for resale.

The car was delivered to the customer (with a big bow on it). Customers were allowed to drive it for 10 days and then return the car if they weren’t satisfied. They also guaranteed the seller that the car would sell in 30 days, if not, they would buy it. They also offered buyers a 3k miles full coverage service. In short, Beepi was the amazon equivalent in the car dealership industry.

Beepi- the start-up's failed business model

Why did the startup fail?

Beepi had a good vision. They had solved consumers’ pain and shortened the car buying process. Beepi offered a complete virtual solution wherein the end product was delivered right at your doorstep.

In the US alone the ratio is highly skewed towards the used car sales. Hence, signifying that people prefer buying used cars over new cars. In 2019 the ratio of new car sales to used car sales was 1:2. Data shows that consumers in the US have always preferred buying used cars to new cars.

Ratio of new car sales to old cars in the US

Beepi could serve a huge target market and with the top-notch customer service, sales were assumed to increase. However, what fell short for the start-up was the execution-style of the founders. The start-up’s failure was a classic example of ‘good idea, bad execution’. The company was spending more than what they were making.

They were trying to eliminate costs for the customer but that was increasing the company’s cost. The company spent a lot on some avoidable expenses. Techcrunch mentions that the company spent $10,000 on executive sofas. Grossly high employees’ salaries burdened the company balance sheet. With this, the company had an incredibly high burn rate of $7million per month. Focusing the most on customer service spiked the company’s expenditure.

Another reason contributing to the start-up’s failure was eliminating the most import part of buying a car- ‘the process’. Individuals buy cars after test driving various models. Beepi provided an online substitute where customers had to buy a car just by looking at posted pictures and reading specifications of the model. Trust plays an important factor when buying heavy goods like a car. Consumers often find it difficult to buy a car from a third party due to the trust-factor.

Thus, overall Beepi was a great business idea that failed due to lack of founders’ vision and other administrative reasons.

Our Suggestion

Instead, the company could have developed software that could do a virtual quality check. Zipline has developed such software to check its drones before launch (check out our Zipline review on the same).  Vroom a similar start-up is making use of technology and inspecting used cars virtually. This saves the conveyance cost of mechanics to various locations, ultimately reducing the company’s expenditure.

Failed Start-ups: Quibi

Quibi had a rather short life as a start-up. The company shut just within 6 months of operations. Quibi had raised $1.8 Bn in just 2 rounds of funding. It was a mobile-only streaming platform. Quibi streamed original content with some reputed people from the industry- Jennifer Lopez, Chrissy Teigen, and Liam Hemsworth. The platform streamed only 10 minute long shows. It costed $4.99/month for a subscription with ad and $7.99/month for a subscription without ads.

Quibi- failed start-ups

What went wrong with Quibi?

In 2019, a viewer on average spent six hours per week watching online content. This is a 59% increase from 2016. Netflix in the US currently has 159 million subscribers. Clearly indicating that there is potential in online video streaming. Thus, Quibi had made a good choice of market, where it could capture millions of subscribers. However, due to its different streaming style, the company could not attract consumers.

Average viewing time of people in the US

The rather ambitious platform could not make it big because of their failed product. Quibi was slightly over-ambitious with its approach when, despite being a new platform, it decided to stream originals. Secondly, they overspent on their advertising and marketing. The company reportedly spent close to $500M on their promotions. However, despite such heavy promotion efforts, many people don’t recall the name of the company.

Our opinion

Whereas, the company could’ve first attracted customers by streaming known series and shows. They could have started with Youtubers and asked famous YouTubers to upload 10-minute videos on Quibi as it’s Youtubers forte to make short entertaining content. The company could have saved some money by choosing what was needed for the platform. Quibi could also have started with some children’s streaming platform. They could have attracted that market first by streaming cartoons and animated movies. This would be a different model than the ones that already exist like Netflix and Amazon Prime Video.

After this, the company could venture into originals with YouTubers for light hearted content. However, the start-up failed despite being founded by Jeffery Katzenberg who previously was the chairman of Walt Disney. The company couldn’t capture the market as the product was a slightly ambitious but did not provide anything different from what other players in the market were already providing.

Failed Start-ups: Scalefactor

Kurt Rathaman founded start-up Scalefactor had raised $103M in just 6 years of operations, before it went bust in 2020. Scalefactor was an AI-powered software for accounting and book-keeping for small and medium-sized firms. The company had to shut operations in 2020, attributing reasons to the pandemic. The company stated that the slump in small and medium businesses due to the pandemic has resulted in loss of customers, and they had to ultimately shut the operations.  However, employees at Scalefactor cite other reasons for the company’s failure. Scalefactor majorly flunked due to the problem of ‘over commitment and under delivery’

Scalefactor- Failed Start-ups

The Business Model

Scalefactor was targeting not-so-big companies as these companies have professionals doing the job for them. Also, these big companies have high cash flows that can support accounting roles. However, for small businesses like a café or a general store, accounting and book-keeping are secondary aspects. Such business owners would like to DIY accounts and bookkeeping to save the cost of hiring professional accountants. Thus, Scalefactor provided the exact solution to these businessmen so that they needn’t worry about employing people for maintaining books.

Why did the start-up fail?

Scalefactor was the perfect solution for small and medium businesses. Initially, the company was successful which landed them a series of funding. However, despite a good business idea and the perfect marketing strategy, the start-up failed. The company did not conduct the business with transparency. It is extremely important, as it allows leaders to develop trust and long-term client relationships. A Forbes article alleges that Scalefactor, was promising AI for accounting and book-keeping, whereas all they did was employ people who would manually maintain their customers’ books.

The selling point for Scale factor was the increased efficiency and reduced cost by eliminating human work. With this, the businesses would be able to focus more on their core business to avoid the additional cost of recruiting people to maintain books.

Scalefactor promised that their AI-powered product would do the work for businesses by pulling out data from various other software and then maintain it as per their business standards. However, in reality, the tool had many glitches which ultimately increased the customers’ burden. Many businesses had to rehire accountants to redo the book because Scalefactor had messed up many entries. An entrepreneur also lost $17000 due to a company made an error, she was compensated for half the amount.

All-including, it can be said that the founders’ integrity and conduct are more important than the business idea and product. Saclefactor cites COVID as a reason for defunct, whereas the company’s poor management made it one of the failed start-ups.

Failed Start-ups: Munchery

Munchery was a San Francisco based on-demand food start-up. The company failed after 8 years of operations. Munchery had raised  $125.4 Mn in over 9 rounds of funding, with Menlo Ventures and Sherpa Capitals as the lead investors. They hired local chefs who prepared gourmet food and the customers were allowed to order this food. Munchery also executed the order delivery. Customers could rate the food and the chef on the basis of their satisfaction level.

Munchery- Failed Start-ups

What led to the start-up’s failure?

During its initial years of operations, Munchery flourished. They were able to generate revenue and attract high venture funding of $28M and $85M during 2014-2015. This made the company ambitiously expand to New York, Seattle, and Los Angeles.

However, the problem was that Munchery was attempting to be a successful food delivery company as well as a good food company. In its attempt to balance both these aspects, Munchery burned a lot of cash. Ultimately the company had to shut operations in New York, Seattle, and LA. Food delivery was a new concept when Munchery had started out. However, after facing close competition from DoorDash, Uber’s Eats spinoff it became difficult for Munchery to sustain in the business.

Our Opinion

Munchery should have waited some more time before expanding to top tier cities in the United States. The company already had an extensive burn rate as it was performing preparation of food and delivery both. Another option could have been to focus entirely on the quality of food and outsource the logistics part. This would have helped the company in the long run. Also, as they already had an established base, they could have further expanded on the same, which would have helped them in reducing cost. Munchery is an example of a good business idea that could not succeed due to prompt decision making. The founders should have made the choice between delivery and food preparation in order to succeed in the long run.

Failed Start-ups: Shyp

Shyp- failed start-up

The Kleiner Perkins funded start-up- Shyp had raised $63M from various investors. The company was once valued at $250M. Shyp was an on-demand delivery service. It was often referred to as the ‘Uber of shipping’ because of its prompt service. However, the Shyp sunk in 2018 after the lack of available funds.

Shyp’s Business Model

Shyp offered on demand delivery service to customers at just $5. The customers had to click a picture of the item that they wish to deliver, and a delivery pickup would be made by Shyp. The company negotiated rates with FedEx, UPS, and others. logistics partners. Sometimes the delivery executives turned up just within 20 mins to carry out the pickup. This was how prompt Shyp was.

Failed start-ups

Why did the start-up fail?

Shyp flourished in its early days. It attracted huge investments and also received some praise from John Doerr whose net worth alone is $7.7Bn. However, the company started facing problems as it could not suffice for the burn rate with the existing cash flow.

Failed start-ups: shyp

They mover the couriers from contractors to employees. The moment a company starts hiring employees it has to provide for employee benefits, training, and other employee benefits. Shyp was the first company to do so. This, sky-rocketed Shyp’s expenses which were previously avoided as they were hiring only on contract. Delivery in itself is a very labor-intensive process that engages various activities, the pick-up, assortment, delivery, and also returns. Shyp with its low charge of $5 was not able to sustain these expenses in the long run.

What the company also missed out on was to address demand. On-demand shipping is not a huge addressable market. People don’t ship products regularly, it is only a ‘one-time thing’ for families.

Instead, the company should have targeted small retail shops and businesses. They could have provided logistics services to these retailers who have several delivery orders. However, the company did not take quick action to increase their revenues. Shutting off operations in New York and Chicago didn’t provide much help either. Ultimately the start-up failed and laid off all employees and shut operations in LA as well.

Conclusion

In conclusion, we can say that not all start-ups become unicorns, and not all VC deals are successful. A good business idea, which has a huge target market can also collapse due to the lack of vision of its founders. However, founders are not the only reasons that can cause the companies to fail. A successful business like Munchery can also become unsuccessful in the long run.

Apart from the vision of the entrepreneur and demand for the product, integrity is also equally important. Entrepreneurs who are honest and conduct their business ethically have a higher chance of sustaining in the long run. Unethical founders are recipe for disaster for any startup.

There are many failed start-ups that had everything in their favor but lacked proper administration. The inability of using the funds has also been a cause of failure for these start-ups.

Running a start-up is not easy due to the huge investments and higher stakes. Thus, an entrepreneur should make sure that he is selecting the right product and the product has sufficient demand to keep business operations running. Founders should ethically conduct business as that would help them gain trust and create a mark in the ecosystem.

Are you a startup that wants to raise funds? We can help you reach the right investors (total 40,000+ investors) and have a private 1-on-1 discussion with them. Our fundraising services are affordable and discrete as we use tech and do not charge high fees like traditional investment banks. Please contact us for more details.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

error: Content is protected !!