It’s Halloween, startups: time to contemplate your mortality.
Amidst all of the hype about funding and the sightings of unicorns, we sometimes downplay the fact that failed startups do happen. But the year that’s passed since last Oct. 31 has had plenty, with tech company failures from the Valley to the Hub.
Halloween week, then, might be the proper time to spend a moment communing with the spirits of startups lost to us. And so I've assembled the post-mortems from some of the notable shut-downs over the past 12 months.
Two are from Boston—Vsnap and Karmaloop—the latter of which is still in business, but only after going through a Chapter 11 bankruptcy sale and the ousting of founder Greg Selkoe. Meanwhile, much appreciation to Vsnap founder Dave McLaughlin for his openness about what happened with his company.
Secret
Anonymous messaging app, $35M in funding
Secret does not represent the vision I had when starting the company, so I believe it’s the right decision for myself, our investors and our team ... I believe in honest, open communication and creative expression, and anonymity is a great device to achieve it. But it’s also the ultimate double-edged sword, which must be wielded with great respect and care.
WSJ:
In August 2014, the Secret messaging app, which was 10 months old, hit its height in popularity. It secured the No. 11 spot in social networking category and No. 61 overall in Apple’s App Store … The following month, the app dropped and failed to rank among the top 1,500 apps ... Garry Tan, who invested in Secret on behalf of his firm Initialized Capital, said the shutdown is just another day in Silicon Valley. “Consumer apps are very fickle,” he said.
Homejoy
On-demand house cleaning service, ~$40M in funding
When Homejoy folded, a slew of media articles pointed to worker classification lawsuits that plagued the company in its final months ... [But] Homejoy was grappling with far more immediate problems that might have deterred potential investors equally or more: mounting losses, poor customer retention, a costly international expansion, run-of-the-mill execution problems, technical glitches and the steady leak of its best workers to direct employment arrangements with its own (now former) clients.
One of its biggest problems was the crippling cost of customer acquisition ... “The key problem is that we weren’t making enough money on our customers,” recalled Daniel Hung, the second full-time engineer to join the company. “We were spending a lot of money to acquire them, but not really retaining them.”
Jelly
Image-based Q&A app, at least $3M in funding
Founder Biz Stone, in The Guardian:
The 40-year-old multi-millionaire’s first post-Twitter foray, a Q&A app called Jelly, was struggling to attract users after its January launch. But the ever optimistic Stone saw an opportunity, one that last month became a quirky new image- and message-sharing app called Super. ...
“When we launched Jelly, it was kind of my first thing since Twitter, and it zoomed to 1m downloads in like 48 hours,” Stone said. “It had taken us two and a half years to get to 1m downloads for Twitter, so it was like – oh my God, this thing is crazy. And then three months in, things weren’t looking right.
“The biggest problem was that people either didn’t want to ask a question or didn’t have a question to ask. When they did have questions, it worked like a charm. The problem was we didn’t have enough people asking questions. I figured we had enough money in the bank and talent to work on Jelly for the next four or five years. But even though my hallucinogenic optimism told me all people want to do is help each other, my hunch was that Jelly probably wouldn’t be the next big search engine.”
It was an insight that shifted Stone’s ambitions down a different path. Rather than launch another product that depended on gathering as many users as possible from the get-go, Jelly would change course.
Zirtual
On-demand virtual assistant service, ~$5M in funding
So what went wrong? Short answer: burn. Burn is that tricky thing that isn’t discussed much in the Silicon Valley community because access to capital, in good times, seems so easy … At the end of the day we grew faster than we could handle. Our burn spiraled out of control even with our high revenues.
To [outsourced CFO Ryan] Keating, the real culprit here might have been a business model that no longer made sense. First, Donovan chose to transition the company’s employees over from independent contractors (i.e., the Uber model) to fulltime employees (complete with benefits). At the same time, however, she continued to insist that each of the virtual assistants — or ZAs, as Zirtual called them — be U.S.-based and college-educated, so as to provide a superior service to clients.
Gigaom
Technology news and research, $22M in funding
Gigaom’s downfall does not offer easy lessons for media start-ups. Gigaom, pronounced Giga-ohm, was special, and not in a good way, according to more than half a dozen staff members and executives, many of whom spoke on the condition of anonymity, citing nondisclosure agreements with the company. It was a company troubled by poor leadership, a history of spending beyond its means and an inattention to major problems that had dogged its businesses for years.
Chief among those problems was a bet on a division that sold specialized market research reports to corporate customers. That division became Gigaom’s largest business, but it became less clear over time that it could deliver on those expectations.
Former Gigaom analyst Michael Wolf:
I do think research and its cost model played a significant role. But I don’t think it was the only cause. Gigaom died a premature death due to many reasons, and if there’s any one overriding cause I’d point to the massive amount of VC funding and the resulting company cost model that was put in place to attempt to scale?—?across all of its business units?—?up to meet the high growth expectations that are incumbent with venture investment.
Karmaloop
E-commerce streetwear site, $70M in funding
No single decision caused Karmaloop’s downfall, but interviews with ex-employees, brand owners, market experts, and Selkoe’s former business associates paint a picture of a CEO who, despite his best efforts and intentions, was the driving force behind the demise. The accumulation of bad business decisions, alienating its core consumers and brands, and the inability to attract major investors, dealt devastating blows …
In its filing, the company said its debts ranged between $100–$500 million. Its list of creditors stretched across thousands of pages …
The company implemented a drop-shipping strategy late in 2014 and for many that was the last straw. Customers placed orders and paid Karmaloop, but it was the brands and vendors that shipped the orders. Karmaloop then paid the brands or vendors—at least in theory. It didn’t take long before Karmaloop couldn’t keep up its end of the bargain …
Customers, many of them teenagers, lashed out at Karmaloop for ripping them off … But the money owed to Karmaloop’s customers paled in comparison to the money owed to brands and vendors.
Vsnap
Private video messaging, $2.25M in funding
Founder and CEO Dave McLaughlin:
The problem for Vsnap as a stand-alone startup is that the first part of our vision never really happened. Generally speaking, people have not yet adopted video messaging in their consumer lives — certainly nowhere near the level we envisioned. This means that there has been no organic momentum around using video messaging in their business lives. In other words, rather than ride a wave of behavior change, we found ourselves trying to create a wave of behavior change.
As such, we have not been able to drive adoption at the rate that we need in order to have a truly compelling business that allows us to really invest and grow rapidly.
As soon as I published that blog post about the decision to wind down, I started getting calls and texts from local investors and fellow founders and attorney friends and clients and so on. “How can I help?” “Do you need introductions for any of your team members?” “What about you, Dave?—?what are you looking to do next?” ... Naturally there was anxiety among the team. And I will tell you that there were a couple of team members who figured this would be a good time to decamp for the Valley.
But Boston just didn’t allow that to happen. This community swooped in too quickly for anybody to get anything going elsewhere. Within 10 days, 90% of our team had had multiple meetings, and had accepted offers at a bunch of fantastic local companies.
Image modified from Creative Commons photo by Jo Naylor — Attribution 2.0 Generic (CC BY 2.0).
