There can be several reasons why these start-ups fail, even the ones that demonstrated an exceedingly promising start in a hot industry and had lots of financial backing.
From legal run-ins to failed marketing strategies to running out of cash – we look at why these once-promising companies end up in the start-up cemetery.
- Homejoy – Poor customer acquisition strategy
Homejoy, the online cleaning service provider that was Silicon Valley’s darling for a while, shocked the start-up world when it announced that it was shutting down on July 31, 2015.
When it was launched in 2012, Homejoy was one of the on-demand start-ups to enter the home services sphere. It served over 30 cities in the US, Canada, UK, Germany and France.
Collectively, it raised nearly US$40 million in funding over five rounds, but had difficulties raising enough funds in the last lap to keep the business going. The last round of funding took place in December 2013.
In the end, despite its shining potential, their poor customer acquisition strategy killed the business. For instance, it would first let customers book a cleaner for US$20 per hour as a promotional package. But next time, it would charge the customer US$85 for a two-and-a-half hour shift. Unsurprisingly, the huge quantum in price increment meant that most customers never repeat their bookings.
Besides money troubles, the company also faced several lawsuits on whether its cleaners were contractors or employees, and suffered a high turnover rate, both of which contributed to the start-up’s subsequent demise.
- Grooveshark – Legal troubles
Grooveshark was one of the first web-based music streaming services that let you play almost any song you wanted, whenever you wanted, with no restrictions.
Operated by Escape Media Group in the United States, the start-up reportedly raised some US$6 million. Besides playing songs, it also let users upload digital audio files, and had a search engine, music streaming features and a music recommendation system.
But free music isn’t always “free”, as Grooveshark learned the hard way. Despite having built a 30-million strong user base, Grooveshark shut down in May 2015 after a long battle to settle legal disputes with copyright holders.
“We failed to secure licenses from rights holders for the vast amount of music on the service. That was wrong. We apologize. Without reservation.” Grooveshark had apologized at that time.
They reportedly paid US$75 million for their share of legal trouble.
- Secret – Lack of foresight
Secret was a hot-shot anonymous communications app that allowed users to send messages anonymously to their friends. It raised US$35 million in funding in about a year. It reached 15 million users, but closed down shortly after.
Of the US$35 million that was raised, co-founders David Byttow and Chrys Bader-Wechseler pocketed US$3 million each.
Byttow explained that the shutdown was due to the app being used in a manner that did not align with the company’s mission. Secret reportedly became a haven for bullies who, under a veil of anonymity, launched vicious attacks on their fellow teens in school.
In a surprising twist, they actually gave investors their money back.
- Quirky – Too many products, too soon
Quirky, a platform that crowdsourced invention ploughed through about US$150 million in investment and filed for bankruptcy on September 22, 2015.
Founded in 2009 by Ben Kaufman, then just 22, Quirky pledged to help regular folks turn their ideas into real products and sell them commercially.
While it sounded like a great idea on paper, Quirky failed for several reasons. For one, it became overly ambitious – instead of focusing on just one or two products at a time, it wanted to make some 20 products in a year.
Former employees also told the Business Insider that Kaufman was impulsive and recalcitrant, even when his decisions did not make financial sense.
For example, Kaufman wanted to produce a “smart” egg tray even though his team insisted it made no economic sense. In another instance, he approved 500 art books with ideas submitted to Quirky by prison inmates to be printed for community and investors as Christmas gifts, even though the company was already bleeding money.
Kaufman himself admitted that the company had bought too much inventory on some products, causing US$25 million of its losses last year.
Ultimately, wanting to do too much, too soon, without a clear roadmap had resulted in Quirky’s failure.
- Zirtual – Poor financial planning
Zirtual provided on-demand virtual assistance to professionals, with features that included carrying out online research, managing emails and scheduling meetings.
All appeared to be going well for the company, who raised a collective US$5.5 million, until it abruptly announced it would be closing down in August 2015. Overnight, 400 of their employees lost their jobs.
Zirtual’s CEO summed up the reason for its failure in one word: “Burn”. To put simply, the company ran out of cash. As Zirtual grew rapidly, its expenditures also increased. Costs went up even further when the company shifted from independent contractors to permanent employees.
Donovan later said that the “numbers were f*****”, and the company had over-staffed without having matching demand.
But this tale has a happy ending to it…for now. It was miraculously “rescued” at the 11th hour when Startups.co, the parent company of services like Launchrock, Clarity, and Fundable, offered to acquire it.
Clearly, start-ups aren’t for the faint hearted. But being part of the start-up grind can also be one of the most exciting experiences you’ll ever have, especially if you’re passionate about turning ideas into reality that can add meaning and have a positive impact on people’s lives.
Although the road to success isn’t always smooth, one can always learn from the mistakes made by their predecessors so you’ll be better off to ensure that your start-up grows resilient to the test of time.