We all know a handful of busts in the venture capital world. Whether the lesson to be learned is for the entrepreneur or the investor, every failure is a learning opportunity. Bigfoot wrote an article in May about some of these lessons.
Closing a venture round is the dream, right? As Founders, it’s how we know we’ve arrived, primed for our Techcrunch cover.
This transforming event is why we pull our aspirational all-nighters, scour CrunchBase for the latest capital raise news, and espouse mighty, world-altering visions.
After all, with that first, third, or fifth round of venture funding, we’re well on our way to the Unicorn Club!
Let’s start with remembering what a unicorn is: a privately held startup valued at over $1 billion.
So, how does one get into the club? Well, it’s generally based on the amount of venture capital you’ve raised.
A billion dollar private market valuation shakes out from the private market investors that need to justify a valuation in order to make their investment.
Unicorns are a rarity in statistics and reality.
Unicorns are a rarity in statistics and reality.
The venture capital game is binary and with this amount of VC behind you, the path is to either get huge or die trying.
Unicorns die when they have to move beyond raising money and actually build a sustainable business.
Framed this way, our obsession takes on an unhealthy connotation.
Turns out, no amount of capital solves fundamental flaws in a business that, when unresolved, drive it to the graveyard.
Let’s look at two cautionary tales of one-time high fliers that recently flamed out and see what lessons we, as Founders, investors, or employees can learn from their falls from grace.
Image source: bodetree.com
Let’s start off with a bang. There may be no better recent cautionary tale than Theranos, a one-time DECACORN. That’s right, this company (or shadow of a company) reached a peak valuation of TEN BILLION DOLLARS. Now, the company and its CEO and President have been charged with massive fraud by the SEC.
- $1.4B in funding from over 10 rounds
- Two private equity rounds totaling $547B, a secondary market sale of $582B
- Investor Lemming Effect, based on a hope, a prayer, and a promise of revolutionary technology that was never developed and deployed
Shut Down Date: Potentially within next 2 months if cannot get lifeline capital
Time to Shut Down: 4.5 years post first private equity fundraise, 14 years post-founding
Lessons to Learn
- Complexity kills
For years, Theranos promised revolutionary technology that would simplify and speed up the blood testing process. It’s admirable to tackle a big, hairy problem, but it turns out that radically improving chemistry is really challenging and takes forever. Remember this as you: 1) consider problems you want to tackle and 2) consider adding complexity (more people, more process, more product features, more capital) to your business.
- Be suspicious of vague communications
Specifics and details matter, especially when dealing with a highly-specific problem set, such as blood testing. We’re not talking about provisioning servers and pushing CRM code to a repo here. Stakeholders must hold those in executive positions responsible to implement and act under a framework of governance and fiduciary responsibility. Eschewing this responsibility is a major red flag.
- Set realistic expectations
It feels like Elizabeth Holmes and Theranos set themselves up for failure. Why couldn’t they have come out of the gates setting reasonable expectations around their technology and build up to being the massive market disruptor they and their investors envisioned themselves becoming? Maybe they did and just failed in executing, or maybe they promised the moon, took a lot of money from other people and delivered nothing. Let’s remember to underpromise and overdeliver.
A WiFi-connected juicing system
The people need JUICE! The people must not have to clean on their cleanse! Who are these people and how did they ever justify a peak valuation exceeding a quarter of a billion dollars?
Juicero made it almost five years, taking about three and a half of those to get their product to market. Ultimately, they ended up in the venture capital graveyard.
- $119M in funding from 16 institutional investors, Series C
- $70M Series B (3/31/2016) and $28M Series C (4/1/2016)
- All capital raised before the product went to market
Shut Down Date: 9/1/2017
Time to Shut Down: 17 months after Series C
Lessons to Learn
- Don’t be a solution in search of a problem
Part of Juicero’s product appeal was it’s single serving juice packets that made juicing simple and required no clean up. Sure, cleaning juicers sucks. But, is it really a top of mind problem for a significant portion of the population? To generate an equivalent amount of revenue to the capital it raised, Juicero needed to sell ~72,000 juicers to people who were going to consume 3 $8 juice packs/week for a year. Turns out, that market’s likely not out there.
- You must match price to perceived value
Juicero’s pricing scheme required an upfront $400 a juicer (reduced from the launch price of $700) and ongoing spend of $8 per juice pack. That’s a significant capital investment into juicing, which feels possible for the 1%. When people discovered they could extract the juice from the pack without the machine, the company’s days were numbered. Good news for Soylent I suppose!
- True differentiation and improvement are necessary to disrupt
Stripped of its sleek design and wifi compatibility, at its core, Juicero was a cold press juicer (excuse me: a “cold-pressed juicing system”) just like any other. In reality, it was a status symbol, a talking point. It was a Concorde in a market that didn’t really need it. Thus, it was not a sustainable business.
- Hubris is blinding
Please read “A Note from Juicero’s New CEO” four months pre-shutdown. I understand that many of us Americans have a problem with our relationship with food often going for convenience, pleasure, and price to quench our hunger pangs. Now, I have no clue how to solve this. But my first and best thought would likely not be a $400 juicer.
Ok, Imzy was nowhere close to a unicorn, but, hey, they’re an early-stage venture-backed company whose shut down we decided to analyze. Imzy made it about a year and a half, making it to a beta launch. Ultimately, they ended up in the venture capital graveyard.
- $11M in funding from 3 institutional investors, to Series A
Shut Down Date: 6/23/2017
Time to Shut Down: 8 months after Series A
Lessons to Learn
- Markets don’t form around ideals
Imzy was unable to find its footing in the online community space. The Founders came out of Reddit and idealized a nicer Internet. To their credit, they realized somewhat quickly that their desire to provide a troll-free utopia for the sharing of ideas and passions was just not something a massive amount of people were going to flock to.
- Imzy was a vitamin. Strive not to be one too
Yes, this is cliche, but it’s true. The Founders had an idea for an itch they wanted to scratch. The CEO was an entrepreneur who sold his previous company to Reddit. So, chances are, he dreamed up a problem while at Reddit and just couldn’t bear not willing it into existence. That’s admirable, but also dangerous. Turns out people will put up with some stuff they don’t like (i.e., trolls and profanity) if the core experience is satisfying their need.
- B2C communities are incredibly hard businesses to build
This is not a surprising shut down. Scaling an online community from scratch is no joke, just ask the Founders and investors behind App.net, Orkut, Secret, So.cl and what was that other one? Oh yeah, MySpace.
This was not meant to be a slam piece. There’s no shortage of those already out there.
These companies are in the spotlight, with bright lights shining on their flaws, unfortunately for them. Fortunately for us, that scrutiny gives us the opportunity to gain new levels of understanding of both how incredibly hard it is to build a market-changing business and what it takes to keep your startup surviving and thriving.
You need to be more than just passionate, smart, and idealistic.
You need more substance than loads of capital supporting your effort.
Then, you need to build a product that a market truly understands, needs, and values above and beyond the competitive set.
You need to price and package that product appropriately, making it the obvious choice for customers
This article was originally published by our friends over at Bigfoot Capital on their blog. Bigfoot Capital provides growth capital for SaaS businesses that have achieved initial revenue scale ($30K-$150K MRR) by selling to SMBs. Our ongoing capital investments range from $150k-$750k to support efficient growth and help Founders retain the lion’s share of their equity and upside. Beyond capital, we have built relationships with specialized services firms across sales and marketing, product development, and operations to help you scale beyond your current human resources. Want to learn more? Visit www.bigfootcap.com or schedule a time to chat.