Before they reach their fifth year almost half of all U.S. businesses go under. Among startups, that number is even higher. From those failures, fortunately, there are plenty of lessons learned to help future entrepreneurs avoid those same mistakes and increase their odds of founding a company that outlives them. In this article, we explore what happened to three startups some believed would take over the world, and extract lessons learned to help readers like you build a successful business.
Fab.com: The pitfalls of abundance and excessive investor capital.
At its peak, Fab.com was valued at $1 billion and was home to nearly 700 employees. But earlier this year, the company sold to PCH for $15 million. Some suggest the company’s surprising downfall was the result of excess and hubris. Fab.com hemorrhaged cash by splurging on unnecessary staff and underperforming marketing strategies, all whilst consistently raising round after round of financing. Because investors kept giving it, former CEO Jason Goldberg felt free to spend it. Part of that capital went towards building a fabulous public image. The business moved into a 50,000 square foot space in New York’s posh West Village. Abroad, it acquired like minded startups in London and Berlin, and opened a European hub in the latter city. Goldberg spent like a king, but ultimately what he bought was a recipe for disaster. For other startups, the cautionary tale is in, perhaps, fooling yourself into thinking that investor money can solve all of your problems. With too much free capital, Fab.com didn’t get much of a chance to learn how to make all of that money on its own.
Quirky: When good ideas never get a chance to become great.
In an article for The New York Observer, venture capitalist Ben Einstein explained that Quirky’s biggest misstep was its failure to iterate on existing products. That would have made good ideas great. With $180 million in funding, the business ambitiously took on the mission to launch more than 50 different products each year, which they happily built and promoted but never improved. For that reason, many would-be hallmark inventions fell to the wayside as attention was turned towards the next big thing for the company. Einstein asserted, “Quirky systematically broke the cardinal rule of startups: iterate rapidly to build a product people love.” Instead of focusing on improving items customers wanted, the business became an idea factory that regularly churned out high-potential products they treated as disposable.
Unwilling to change its business model or admit fault, Grooveshark found itself committed to fighting a never-ending war against its foes when, in hindsight, the business should have embraced them as allies. Grooveshark could have thrived if it agreed to pay artists and record labels royalties. Instead, it will be remembered as the catalyst which paved the way for competing services like Pandora and Spotify to broker fair deals with music companies to ethically provide audiences with the content they clearly demanded in a format they were already familiar with.