There is a feeling that getting VC funding – an injection of capital to help grow the company in return for a slice of the business – is a sign of success for a start-up. After all, it’s a sign that someone believes in the business idea and thinks there’s a viable market for it. Why else would a funding company throw millions, sometimes hundreds of millions, at a young business?
And the numbers connected with VC funding are huge, particularly when it comes to investments in technology companies. According to the FT, in the UK alone around £900 million ($1.4 billion, €1.2 billion) was invested in technology start-ups during 2014, 20 times the amount of just four years ago. But that’s nothing compared to the US, where VC firms invested $22 billion in technology companies during the same period.
All this investment may point to a rosy future for the companies receiving the cash, but that’s not always the case. In fact, according to the Wall Street Journal, around three-quarters of tech firms don’t return the original investment.
Let’s look at some of the industry’s most high profile failures:
One of the most famous dotcom failures. As the name suggests, pets.com sold pet food and supplies. The company only existed for just over two years but in that time managed to burn through hundreds of millions of dollars of funding, spend over $1 million on a Super Bowl commercial, take part in the Macy’s Day Parade, expand its infrastructure and warehousing capabilities, go public and realise its business model wasn’t sustainable (it lost money on every transaction). It closed its cyber doors for good in November 2000.
A similar story to the one above, Webvan was an early online grocery store that attracted nearly $400 million of investment. The plan was for rapid expansion across the United States and the company placed a $1 billion order for warehouses and delivery trucks. A March 2000 IPO valued Webvan at nearly $5 billion, but it didn’t last. While the company rapidly expanded, the demand simply wasn’t there and they declared bankruptcy in 2001 … just five years after its founding.
An early version on an online currency (doesn’t that sound familiar…), Flooz were acquired or bought online and could be spent at participating online retailers. However the scheme struggled to attract users and retailers and the service suffered when organised criminal gangs started to use it for money laundering. After burning through nearly $50 million in funding, Flooz shut up shop in August 2001.
Other honourable mentions
eToys.com, an online toy store.
DrKoop.com, a health information website.
Kozmo.com, a store offering free, one-hour delivery of items ranging from snacks to electronics. It raised about $250 million but shut down in April 2001.
It’s interesting to note that we have to go back to the dotcom bubble burst around the turn of the Millennium for these examples; clearly a time of reckless investment!
But over-valuation was just one of the issues
Most of these companies spent a lot of investor money on expanding their operations while massively overestimating the level of demand for the service. Remember, back in 2000 or so the internet was still a relatively new phenomenon, particularly for home users. If someone needed more food for their pet, for example, ordering online was definitely not their first thought.
One of the things I find most interesting about these failures is that they all have modern day equivalents doing incredibly well. For pets.com there’s Petsmart.com; for Webvan.com there’s Ocado or any one of the UK supermarkets; for Kozmo.com there is, again, Amazon.
The ideas, then, weren’t lacklustre… perhaps the timing and execution were the tipping factors?
Of course, this doesn’t mean that all startups attracting quick, early investment aren’t business savvy. Some of the world’s biggest and most successful companies wouldn’t exist today if it wasn’t for investors’ money. Apple, remember, had to take a $150 million investment from Microsoft to stop it running out of cash.
U2 frontman Bono’s Elevation Partners investment group pumped $210 million into Facebook, which turned into $1.5 billion when the social network floated on the stock market in May 2012.
Some of the hottest tech companies around at the moment – Snapchat and Uber, for example – are pulling in hundreds of millions of dollars in funding. To me it’s clearly too early to declare those investments a hit or miss. But while we can and do argue about current valuations, the ubiquitousness of smartphones and internet access means demand for these services should not be an issue. Now the pressure is on to avoid being just another entry in a list of big tech failures…