Brutal Lessons From 4 Failed Startups

With thousands of startups worldwide building new products, it’s no wonder 75 percent of them fail. It’s actually a good thing because startup birth and death helps the ecosystem overall. Entrepreneurs can learn as much from mistakes as successes. Poor management, ineffective marketing and team stress are some of the many reasons why companies fail.

“It's either you started making a startup with friends who didn't have complementary skills, or the opposite - people you think have the perfect balance of skills, but then completely different ways of communicating,” says Cassandra Phillips, founder of Failcon, a conference featuring startup founders who failed and share what they learned.

Consider these well-known startups that had great promise. Some were acquired or reached IPO, but never took off. Now each of them are just another statistic.

1. Gowalla. Millions of people enjoyed this location-based social network started in 2007 and shuttered five years later. Multiple problems blocked Gowalla from reaching mass appeal. Foursquare stole the limelight. Checking in was not that user friendly. The company was a mobile web app before smartphone technology was advanced enough to create a positive user experience. Usership and enthusiasm fell as Gowalla shifted focus and removed features.

The startup raised $8.3 million in a venture capital round, but was eventually bought by Facebook for $3 million. Even when your company is acquired, it can fail.

The takeaway: Avoid competing with a giant. If you go against Facebook, you’re facing an uphill battle. Make sure technology can deliver what you promise. You have to wonder how things might have been if Gowalla had debuted recently, as mobile apps have gained traction due to faster phones and more users.

2. Pay By Touch. Even with a long list of investors backing this company that used fingerprints to process payments, Pay By Touch never really got off the ground. Fraud allegations, and board issuesdogged the founder before the company declared bankruptcy in late 2007. Investors were unhappy the founder spent hundreds of millions of dollars buying up rivals, but couldn’t afford to pay employees halfway through the year. It might have failed partly because many people are accustomed to credit/debit cards and like earning travel miles.

The takeaway: Pay By Touch invented a solution for a non-existent problem, one of the most common startup traps. “People think what they are making is cool, sexy or fun, and when they ask friends about it they get answers like ‘Yeah, that's cool,’” said Phillips. “To make a product that is actually used, you need to create something that people realize they can't live without. Easily half of the failed startups I hear from fail for this reason.”

3. RealNames Corporation. Founded in 1997, RealNames let users of Microsoft’s Internet Explorer register domain names using the browser address bar. This worked without needing to belong to a top-level domain such as ".com" or ".net.”

The company and its backers raised more than $130 million in funding. RealNames shut down operations in 2002 following a decision by Microsoft to redirect the 1 billion page views per calendar quarter that RealNames resolved from the browser address bar into the MSN search engine.

The takeaway: RealNames depended on the decisions of a giant company for their survival. Don't depend on someone else’s company for the effectiveness and viability of your product.

4. Pets.com. This famous dot-com-era disaster that sold pet care products online only lasted two years, from 1998 to 2000. The company poured millions into marketing campaigns, including a Super Bowl ad. Executives who thought they were tapping into a recession-proof industry discovered the niche pet market didn’t bring in enough money. Pet supplies cost too much to ship. Higher priced items, like toys, couldn’t be offered at competitive rates. Pets.com sales were problematically dependent on discounts that slashed profits.

The takeaway: Be brutally honest with yourself on your progress. “Too many founders fail because they are afraid to ask for help, or don't speak up when they are struggling soon enough,” said Phillips. “I promise things will be three-times easier if you are honest with yourself and those around you. Too few founders are.”

Journalist, Digital Media Consultant and Investor
John Boitnott is a longtime digital media consultant and journalist living in San Francisco. He's written for Venturebeat, USA Today and FastCompany.

 

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