By Eric Siu
A startup that finds the right niche, develops a realistic business model and then successfully navigates the path to profitability is very appealing, but also very rare. Most startups that succeed do so only after a series of pit stops and pivots that put them on the right path. And the vast majority fail.
Failure is an inevitable part of life, and the entrepreneurs that readily accept that are the ones most likely to become successful. Learning from our mistakes is also the best way to learn in the business world. If you ask me, those are exactly the types of startup stories that we should be learning from if we want to be successful in our own business endeavors. Let’s take a look at a couple promising startups from the '90s, and how they went bust.
Webvan (1999 - 2001, 2009 - present)
In the past decade, we’ve learned a lot about the online grocery market. Namely, that it is roughly only 1.2 percent of the overall grocery market, which was estimated at $620 billion in 2013. In other words, Jeff Bezos and AmazonFresh -- run by former Webvan execs -- are trying to take over and grow a $7.44 million market despite the fact that grocery margins are only 1.3 percent.
Although Jeff Bezos has a lot of money and is known for his grand experiments, that was not the case for Louis Borders (of Borders bookstore fame), who launched Webvan back in 1999. Webvan hyped up a relatively novel idea -- delivering groceries to customers’ homes -- and raised a lot of money. $375 million, to be precise. In fact, at its peak, Webvan’s stock was valued at $1.2 billion.
Yet the warning signs were all there: No one in the C-suite had ever worked in the supermarket business. Competitors like HomeGrocer, which had opened a year earlier, were hemorrhaging money year after year. And despite raising only $375 million, Webvan signed a $1 billion contract with Bechtel to build warehouses in 26 cities. Ultimately, the massive IPO went bust only two years after it wowed investors the world over.
Lesson Learned: Is there a term for the polar opposite of a “blue ocean” market? Louis Borders and the countless online grocery aspirants who followed in his wake have been trying desperately to monetize a small market with a low margin that has very little consumer interest. When it comes down to it, a good idea (even with execution) may still not be good enough. Ignore customer demand at your own peril.
Pay By Touch (2002 - 2008)
Pay By Touch really had everything going for it, including a cool logo.
Founded in 2002 by John P. Rogers, Pay By Touch was on a mission to change the way people paid. Rogers was a man with a great idea, a solid business sense and a legendary pitch. First, he convinced former Oracle and Accenture execs to join him. Then he told angel investors that they were starting a revolution: That one day, cash and credit cards would be irrelevant and Pay By Touch stations would be used around the world instead.
The investors listened to and believed him. By 2007, Pay By Touch had amassed $340 million in funding. A year later, the company closed its doors and filed for bankruptcy. This time, what happened was much less of a mystery and much more of a madhouse mishandling of the way the business was run.
After spending over $150 million buying out payment competitors, Rogers allegedly began spending upwards of $8 million a month on a hiring and drug-induced spending spree. He began throwing outrageous parties and even offered drugs to coworkers. He was accused of sexual misconduct. He allegedly wanted to hire and offer shares of stock to attractive women he met on the street.
When the board realized what was going on and asked for his resignation, he reacted poorly and went on a rampage, firing board members and any employee who dared question his ethics. Unsurprisingly, Pay By Touch was already falling apart at the seams, and Roger’s meltdown was the last nail in the coffin. In 2008, Pay By Touch filed for bankruptcy and shut down without informing any of its clients beforehand.
Lesson Learned: Pay By Touch’s implosion is a cautionary tale. Despite an absolutely brilliant business idea and all the talent, money and direction needed to see it succeed, Pay By Touch was reduced to rubble by a single bad egg in the basket. Rogers was a con man. Pay By Touch’s failure shows us that the right leadership can be more important than the right idea, the right team, or even the right business model.
It takes more than a great product or idea to succeed. Without thorough research, market testing, marketing and learning to delegate and scale (for tips on scaling, listen to my interview with Scott Martineau here), no business can succeed and thrive in an ever-changing consumer world.
Eric Siu is the CEO of San Francisco-based digital marketing agency Single Grain and also interviews entrepreneurs on his podcast, Growth Everywhere.
