Why These Famous Startups Failed and How Can We Learn From Them

08.02.2018 | 7 min read

Floating company logos of startups that failed on a navy blue background

Undoubtedly, failure is the key to success – all business people would agree with this quotation. Nevertheless, they would surely prefer to learn from other people’s mistakes. If you want to set up your own startup, you can learn a lot from a one which ended up badly.

Although it could seem improbable, 90% of startups fail, a fact that is hard to deny. Starting up your own business is a great challenge, so you have to be prepared to encounter many problems. Stories of company failures can teach you a lot.

Here is a list of five failed startups and the reasons behind their failure. This is not a chronicle of defeats, but it can be a tutorial. You must know that startups rise, and startups fall – it is common. Reading about the falls can help you avoid trouble.

Color: Raise and spend your money wisely

Color was an innovative photo-sharing app in which you could create posts, including social and geographic data. Sounds familiar? TechCrunch reported that Google offered $200 million for the company before the app even launched, but Color turned the deal down. It wasn’t the best decision.

Color launched in May 2011. Although at one point the site attracted 400,000 active users monthly, apps such as Instagram (which was founded almost simultaneously) hit 7 million daily users. After a couple of months, Color turned into an iPhone app for making video clips and uploading them to Facebook. In 2012, roughly a year after its launch, rumors that Color would be shutting down started to spread. Later, Color failed indeed.

Once hyped app is now completely forgotten

The idea was good, but nevertheless, it lost to Instagram. Why? The reason behind it is that the founders have not enlisted the support of a big corporation. Besides, they have spent almost $500,000 on a domain Color.com and God knows how much on a too big, fancy office with a half-pipe skateboard ramp instead of focusing on the product itself.

Zenefits: Pay attention to every detail

A startup founded by Parker Conrad in 2013. Zenefits intended to provide human resource services to small businesses. Quite a useful and noble idea, indeed. After all, a minority of employers can afford to hire an external HR department. These potential problems could have been solved in a creative way by Zenefits.

In good times, Zenefits was valued at $4.5 billion, a perfect achievement for a company that was pulling in $20 million in 2014. At the moment, about 2,000 companies benefited from the services of the company, and by 2015, this number increased to 14,000. However, the company’s downfall came about through a whole slew of mistakes of the founder. Conrad has not paid enough attention to obvious positions within the company such as office manager, IT employees, receptionists. This ignorance has cost him a lot!

The company’s downfall came about through a whole slew of mistakes of the founder

Zenefits also used its software to handle its own HR, with Conrad personally in charge of it. Unfortunately, those issues were just the tip of the iceberg comparing to the internal problems at Zenefits.
Conrad could not fix the disorganization within the company, which led to both: the illegal selling of insurance by the company and revenue decrease in 2015. Last year Zenefits laid off almost half its staff. This is a great example of how trivial details can do damage to a good idea.

Beepi: Don’t run business for the sake of raising money

Beepi offered online peer-to-peer marketplace for buying, selling and leasing used cars, where transactions could be carried out entirely with a smartphone or PC. All cars listed on Beepi’s website were checked and tested. The startup took up to a 9% commission and bought unsold cars after 30 days. It seemed perfect!

This is another example how the lack of discipline can become a path to a great failure. TechCrunch reported that the founders spent $10,000 on an executive office couch as well as on other “significant” expenses such as cars and cell phone invoices.

The idea seemed perfect, but that just isn’t enough

Another issue stemmed from Beepi’s massive funding (or “overfunding”). Literally: they may have raised too much, too soon. They were running the business for the sake of raising money, and then to get someone else to take it on. An investor also thought that they were ”too aggressive” in pushing on higher valuations. The startup’s fiscal policy was bizarre and naive! Confidence in business is a complex matter of great importance – Beepi’s founders seem to have forgotten about that.

Yik Yak: Think about potential problems in advance

Imagine a fully anonymous social networking site for teens. Doesn’t it sounds like a quite good idea for a business? Founded in 2013, Yik Yak grew at first rapidly as high schoolers and college students latched onto the anonymous messaging app. It could be a story not unlike Facebook’s.

This app used to be valued at $4oo million after raising more than $73 million in venture capital. However, application users turned out to be its greatest trouble. Founders faced problems with harassment and bullying in the app and never found a good way to fight it. Thousands of intimidation stories while using the app can be found on the Web. Some are really scary!

Founders faced problems with harassment and bullying in the app and never found a good way to fight it

Over 80,000 people signed a petition calling for Yik Yak to change its policies or be banned from the AppStore after a brave young woman – Elizabeth Long – told her story of harassment. Later, Yik Yak made a groundbreaking decision to get rid of anonymity and add real user profiles, and it never came back to its previous shape again. Yik Yak laid off 60% of its team at the end of 2016, and shut down in 2017.

Homejoy: Take care of your employees

That idea seemed to hit a point. Homejoy was founded by siblings Aaron and Adora Cheung in 2010. They helped connect people who wanted clean homes with house cleaners who could do the job.

The development was spectacular. A few months after being founded, the company received an investment from Y Combinator. Later, they found new capital. Andreessen Horowitz (the famous private American venture capital firm) also provided seed money for Homejoy. At its peak, Homejoy was able to expand overseas and started providing services in the U.K. Its business condition was brilliant: the startup was servicing 31 cities in the U.S., the U.K. and Canada.

Homejoy was a great idea paired with poor execution:

Nevertheless, the startup still failed. The main reasons behind its failure were the lawsuits regarding workers misclassification. Homejoy classified the pros in its network as “contractors” from the labor law perspective, however numerous lawsuits were eventually filed by pros arguing that they should actually be “employees” and have the same wage, benefits and other rights that are associated with being classified as employee. That was the deciding factor in Homejoy’s failure. Competitor companies won thanks to the regulations. Uber and its competitors should look at this very interesting example.

In conclusion

What can we learn from these failures? Well, for starters, pay attention to all the details! If you think about starting your own business, you should remember about the key positions. Another important advice: don’t try to do everything by yourself. Sometimes the devil is in the details. Legal regulations, implementation of new laws or gathering new users may turn out not to be easy to overcome. For sure, too much confidence can trick you!

Share your experience!

Problems to overcome when running a startup are a fascinating topic. We can learn a lot from discussing our experiences. If you have anything to add, share your thoughts in the comment section.

10Clouds is a leading software development and design company from Poland. We have worked with many successful startups – check out our testimonials! If you are ever in need of a team like ours, do not hesitate to contact us

You may also like these posts

Start a project with 10Clouds

Hire us