Famous Startups that Failed Despite Millions in Funding

Famous Startups that Failed Despite Millions in Funding

In this article, we examine startups that were previously very popular, but ultimately failed to live up to the hype. These startups can be used to examine reasons for startup failure, that we at Startup Storey hope will be useful in your entrepreneurial journey.

 

Segway

Segway remains the canonical example, and I think offers lessons still.

In 2001, breathless commentary was held up in anticipation of something that would promise to “be to the car, what the car was to the horse and buggy”.

VC’s pumped in $90M (and in those pre-unicorn days $90M was actually a lot of money), and insiders (including people like John Doerr) claimed it could be bigger than the PC.

But when the Segway was finally released, even despite some truly amazing balancing technology, it was clear to everyone that the automotive industry was safe, and the only thing about to be disrupted was the movement of security staff around airport terminals (Segway PT).

VC’s focus 100% on market opportunity and CEO strength. Everyone (myself included) says ideas are worthless, only execution counts.

The problem is that this statement is only true when there is no technical risk.

It is true for 99% of companies, but there are 1% of companies, typically with charismatic CEO’s and no-brainer markets (think Theranos and Ubeam), where in fact is the risk is all about getting it to work. In this case, it really is all about the ideas.

The darwinian startup ecosystem model based on competition doesn’t seem to work so well here. VC’s are poor at assessing technical risk, it’s just not their bag.

In fairness, everyone is poor at assessing technical risk. The best thing you can do is to have as many eyes as possible looking at this.

Scientific research is collaborative, not competitive. It’s tempting to think of Einstein as a lone genius, but as you delve into Relativity you’ll meet Lorentz, Minkowski, Riemann, Schwartzchild… the list goes on.

Physicists haven’t failed in unifying General Relativity and Quantum Mechanics to date because “they lack commitment”, or because “they can’t execute”. You can’t just Google it. It’s because it is actually a very difficult thing to do.

Right now, there is a huge amount of hype around Artificial Intelligence. Barely a week goes by when some investor doesn’t get all lathered up about some startup using “deep learning” technology. It’ll end in tears.

Startup Storey Entrepreneurship Guide

Netscape

n 1995, they went public in one of the most successful IPOs of all time, astounding for a company that had yet to make a profit.  The timing was perfect, as their browser had the leading share in the very quickly growing “internet”.  

Later they sold themselves to AOL in a transaction ultimately worth around $10 billion.  The idea was that its browser, Netscape, and its online web properties, under the umbrella “Netcenter”, were a leading brand and destination…

But ultimately they lost their browser share to Microsoft, and with it, the primary driver of traffic to NetCenter.  There was never anything as hot as their namesake browser.

 

Why did the Netscape browser lose market share to IE during the 1996-2000 era?

1) Distribution blocking/monopolistic tying  

In this era, Microsoft tied co-op marketing funds for HP, Dell etc. to making IE the *exclusive* browser that was pre-installed on all their machines. Gateway was the only PC maker that stuck with Netscape preinstalled and as a result they had a cost-disadvantage in the market place. You could literally track the market share loss month by month as a result of distribution loss.

 

2) Apple’s weakness

As part of the grand deal to keep Office for the Mac alive, Apple was forced to make IE for Mac the exclusive browser for the Mac for a number of years.

 

3) Poor product development decisions

As a result of a continual race to add features vs. IE, which disallowed refactoring/rearchitecture time to the browser team, by version 4, the code base was a tangled mess which was very difficult to QA.

As a result, version 4 was a buggy mess that was released about 6 months before it should have been. IE4 was arguably a better browser than Navigator 4.

 

4) IE platform tying

Reportedly, the Microsoft IE team put everything performance -intensive directly into the window kernel so it would be faster vs. netscape.

 

5) Pricing

Technically, I believe you had to pay for the Netscape browser until February 1998. IE was free.

 

6) Superior IE execution on internationalization

This is more speculative, but I believe that the international versions of IE were better executed.

Startup Storey

Better Place

Better Place was a startup based in Palo Alto, CA and Tel Aviv, Israel that developed battery charging and switching services for electric cars. They raised an incredible $850M in funding before shutting down.

The company filed for bankruptcy in 2013 and sold the remaining assets of the company for only $450,000. According to Wikipedia: “The company’s financial difficulties were caused by mismanagement, wasteful efforts to establish toeholds and run pilots in too many countries, the high investment required to develop the charging and swapping infrastructure, and a market penetration far lower than originally predicted”.

At their peak in 2012, Better Place had a charging network of 80 stations in Hawaii, 21 stations in Israel, fewer than 20 in Australia and Denmark and a few in the mainland USA and Japan.

In addition to building the battery switching and charging network, Better Place also partnered with Renault-Nissan, who build an electric car named Fluence ZE that run with batteries by Better Place. A total of 948 cars were sold in Israel, and 400 in Denmark before the company was shut down.

Better Place’s main differentiating idea was to lock in the customers to mileage contracts by owning the car batteries, and by selling power to these batteries. It goes without saying that the model didn’t quite work out as planned.

 

Iridium SSC

Iridium SSC is the epitome of hyped-up startup failure. (Wikipedia).

Iridium aimed to be the global satellite phone company.  With over a decade in development and $5 billion in funding, they finally launched their product/service in 1998.  A short 9 months later, they filed for bankruptcy and were eventually bought for a meager $35 million. (Fire sale on satellites, yo!)

They never found product-market fit and failed to adapt to a changing market.  Pitted against rapidly growing (and literally, down-to-earth) cellular networks, Iridium’s $3,000+ satellite phones and $7/min. rates just didn’t make sense.  

Steve Blank wrote a fantastic learning piece, No Business Plan Survives First Contact With A Customer, from which I’ll quote:

In the eleven years since they had been at work, Iridium’s potential market had shrunk nearly every day.

But Iridium’s business model assumptions were fixed like it was still 1990. They were dead on arrival as a mass market cell phone service the day they went live.

Startup Storey Entrepreneurship

Colour.com

Color.com was the most overhyped startup in recent history.

Back in 2011, serial entrepreneur Bill Nguyen raised $41 million to build a location-based photo sharing app called Color.

Right off the bat, the startup sunk $350,000 into buying the color.com domain name (and an estimated $150,000 for the British-English variant, colour.com).

They then furnished their office with a skateboard half pipe, and hired a large team of expensive developers.

They did all of this before launching their app – or even validating its fundamental premise.

Here’s what Color was supposed to be like, from a reporter who got to use it before they pulled it from the app stores:

  • It acts as a group camera collecting photos and videos from all Color-enabled phones in the same proximity.
  • Photos and videos are automatically posted to the cloud.
  • Other Color users can see your photos and videos but only if they are physically near you.
  • Other Color users don’t know who you are, you don’t know who they are, all that links you is that you share the same space: a restaurant, a club, a concert, a party, a high street, a hiking trail — anywhere.
  • You can message other color users.
  • The connection between you and other Color users gradually goes away over a two week period but can be maintained if you continue to browse their photo/video stream. It’s an elastic network.

The range is roughly about 50 yards but can be extended to as much as half-a mile.

As the reporter mused: “People walking along city streets try to ignore each other. Do they secretly wish they could interact with each other through an application such as Color? We’ll find out.”

It seems the answer to that question was a resounding no.

Few people bothered to try out Color, and the ones who did weren’t physically close enough to other Color users to actually see any of their photos. Color turned into a  network of ghost towns. The tech media declared Color dead-on-arrival.

It wasn’t a total wash, though – Apple was able to hire some engineers on the cheap. They paid a mere $7 million to acquire the 20 developers who hadn’t quit yet.

 

Lessons from the Color.com’s Demise

Just because an entrepreneur had an $80 million exit doesn’t mean you should give them $41 million to build their castle in the sky.

Don’t spend precious capital on expensive domains (especially when your product is a mobile app that is going to be downloaded through an app store – then your domain doesn’t even matter).

Instead of trying to maximize hype by being secretive, focus on getting a rough beta into the hands of your users so you can find out what’s wrong with it – before you start hiring tons of developers.

Developers are often the last people to be laid off – and the most highly compensated in the event of an acquisition. If you aren’t already a software developer, you should consider becoming one.

Startup Storey Entrepreneurship

Duplan

Founded in 2011 by Duplan and three Stanford classmates, the company had visions of revolutionizing the payments industry by allowing people to transact with one another and with businesses through their mobile phones.

In the company’s early years, Duplan benefitted heavily from his Stanford connections, recruiting fellow classmates to work on Clinkle and developing relationships with professors in the computer science department, some of whom would later invest in his company.

Stanford-funded accelerator StartX provided early resources to the company while University President John Hennessy served as Duplan’s academic adviser and an adviser to the company.

With an impressive team and grand vision, Duplan was able to leverage his connections to meet high-profile investor after high-profile investor.

In June 2013, the company announced that it had raised $25 million, a figure that later swelled to $30.5 million by October that year as more people wanted in on the action.

The post fundraising exuberance lasted less than six months, as Clinkle began 2014 with layoffs and the unusual departures of several high-profile executives, who had been recruited from places like Netflix and Yahoo to move the company beyond startup phase.

Moreover, the company, which had yet to launch a product, lost its technological edge to new products like Venmo, a peer-to-peer payments app, and later Apple Pay, which achieved what the company had originally set out to do.

By the beginning of 2015, Clinkle had about 30 employees left–down from a peak headcount of about 70–and by May the majority of that remaining group chose to depart.

While Clinkle had a number of factors that led to its failure, some point to its fundraising strategy as a major impediment toward future success.

The company raised what some venture investors call “a party round” in which many people contributed relatively small amounts of money to create a sizable investment sum. No investor took a board seat, and no firm or individual contributed enough money to take responsibility and ensure that the business was healthy. Clinkle Up In Smoke As Investors Want Their Money Back

Clinkle imploded after employees quit en masse in May, protesting how its young CEO Lucas Duplan was mismanaging the $30 million-funded payments startup but Duplan won’t quit.

TechCrunch has attained emails showing Duplan is pivoting Clinkle away from its former ultrasound payments and loyalty debit card products. Now Clinkle is an SDK called Treats that other apps can integrate to offer users a chance to win rewards for inviting their friends.

The Strawberry Startup

Know the Difference between Failure and a Failed Idea

We have to remember that, “With the benefit of hindsight, everything is so obvious and everyone an expert. But the most difficult part is, having the foresight to see that obvious.” Richin Jose on Twitter

One more thing, failure doesn’t mean you’ve failed, it’s just that your idea has failed.

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