The horror stories every startup needs to know
Juicero is perhaps peak startup. The web-connected cold-press juicer takes a bag of chopped fruits and veg, scans its barcode for instructions, and then squeezes it into your glass for a fresh glass of healthy juice. The machine itself cost $400, while the bags of chopped bits ranged from $5 for ‘Beta Glow’ (carrots, orange, lemon and ginger) to $7 for the special edition ‘Summer Bliss’ (watermelon, citrus, beets and more carrots).
That’s a hefty sum for a glass of cold-press juice, given you can pick up a half litre of the stuff at Waitrose for £2.80, but that questionable business model allowed Juicero to raise $120m in venture capital investment.
Everything was ticking along nicely – until a pair of Bloomberg reporters decided to try squishing Juicero’s bags by hand, and it worked as well as the $400, Wi-Fi-enabled Press. Whoops. Juicero shut down all operations just 18 months after launch, after managing to shift over a million Produce Packs.
Such is the world of startups, where insane amounts of money are thrown at silly, untested businesses run by founders with no experience. How much money are we talking? The UK saw £6.7bn in private equity and venture capital tech deals in 2016, with startups in Silicon Valley raising $25bn (£19.06bn) in equity funding last year.
Of course, plenty of genius ideas come out through the startup world: without it, we wouldn’t have Spotify, Netflix or PayPal – all companies we’re more than happy to have around. But the payback on such successful firms inspires plenty of investors to throw money at less clever ideas in the hopes of winning big, and drives anyone with an idea to dream they could be the next tech billionaire.
We don’t begrudge anyone with a dream in their heart or an idea in their head, but it’s hard not to roll your eyes or snort with laughter at some of the startups that have been handed more cash than most of us will see in a lifetime.
Odd ideas or genius innovations?
“The market decides which idea is silly or not”
Silicon Valley – and the entrepreneurs that dream of its rolling hills and stacks of cash – loves a bonkers idea. There was once an app that let you send the word ‘yo!’ to your friends, and another called Washboard that charged $26 (£19) to deliver $20 (£15) worth of coins for use in laundromats. Matt Kuppers, CEO of consultancy Startup Manufactory, says of the Yo app: “There was zero purpose, and yet it got really good traction. People just liked it. It’s all down to the market – the market decides which idea is silly or not.”
It’s not always amusing apps or overpriced juicers, however. Theranos was the talk of the town in 2015, with its promise of fast and cheap pin-prick blood tests that would reinvent lab work. It was valued at $9bn (£6.8bn) off the back of $700m (£533m) in investment, winning founder Elizabeth Holmes the accolade of youngest female billionaire ever.
Except the technology didn’t work, a fact uncovered by Pulitzer Prize-winning Wall Street Journal reporter John Carreyrou; not investors or the board of directors. The company’s main product, dubbed Edison, was banned by the US Food and Drug Administration (FDA), which barred Holmes from owning or running a medical lab. The company has had to pay settlements of $4.6m to the state of Arizona over inaccurate blood testing, among others. Despite all that, Theranos continues to be in business, developing a new lab platform.
Benedict Evans is an analyst who works at Andreessen Horowitz, one of the most famous of the venture capital firms investing in startups. In a blog post, he suggested that silly-looking ideas often prove important or valuable. Evans writes: “It is unquestionably true that many of the most important technology advances looked like toys at first – the web, mobile phones, PCs, aircraft, cars, and even hot and cold running water at one stage looked like faddish toys for the rich or the young. Even video games, which literally are toys, are also largely responsible for the GPUs that now power the take-off of machine learning.”
He notes that plenty of ideas are silly and never amount to anything. Evans advises considering whether something doesn’t work, or won’t matter “even if it does work”. Juicero, as our own example, certainly made cold-press juice, but it’s hardly a society-transforming product even if it does a good job squishing carrots into liquid. On the other hand, teen-messaging app Snapchat is worth $25bn after its IPO, proving long-term impact isn’t so easy to judge.
Spending millions before you have cash in the bank
It’s amazing how much it can cost to develop an app. There are the staff costs, of course – and those in-demand developers don’t come cheap – as well as office space, marketing efforts and other standard business expenses, but few plan for the charges that seem common to many failed startups, such as swanky offices or bonkers parties.
Music social network Crowdmix is one such example. It moved into the old offices of gaming startup Mind Candy – which was tightening its metaphorical belt – and paid to remove the slide (yes, really) that staffers took to descend between floors. Crowdmix later installed a reception desk that looked like a ghetto blaster, commissioning ‘graffiti’-style artwork for the walls in the London office, and a chandelier for its Venice Beach, California headquarters – all before a product had launched.
“You don’t serve champagne all night for a startup”
The founders stood in front of the street-art style walls when they laid off staff last year, telling them they may not get a redundancy payout. The company reportedly burned through £14m in funding before it was bought up by one of its main investors.
And then there are the parties. Powa Technologies was one of the first British ‘unicorns’, jargon for a company valued at more than a billion dollars, and it was seen to be worth $2.7bn (£2.05bn) after various investments for its PowaTags, which made it easier to shop with a smartphone by scanning barcodes and QR codes.
The business went into administration in 2016, amid stories of Mayfair Christmas parties with free champagne and topless dancers with neon body paint, with administrators Deloitte noting losses of £30m a year on sales of less than a sixth of that. Powa’s CEO Dan Wagner disputes the stories.
If true, it’s not how many investors want their money spent. As Tony Craddock, director general of the Emerging Payments Association, told Business Insider: “You don’t serve champagne all night for a startup. You just don’t.”
Business Insider also has a grand story of the co-founder of Fling – a social media app we hadn’t heard of either – chucking a prosciutto ham Pret a Manger baguette at the head of his 80-year-old father, who just happened to be his lead investor and one contributing £5m of the total £17m or so raised.
Flinging sandwiches wasn’t their idea of a party, to be clear: instead, founder Marco Nardone apparently brought girls into his office for a ‘frolic’ while staff worked 19 days straight to fix problems with the app that saw it booted off Apple, eventually decamping to Ibiza, that well-known business hub.
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The report also suggested Nardone spent company money at posh restaurants and on first-class flights, as well as a marketing tour around the US, while paying himself £204,000 a year. The company eventually went bankrupt.
Party costs didn’t drag the companies into the ground – that can usually be pinned on management issues, market failures or products that simply didn’t take off. But such companies splashed around in champagne while their ideas foundered.
The problems of “bro culture”
Chucking baguettes at your biggest investor (and your own father) isn’t the only bad behaviour at startups. This year has seen many a meltdown among various founders and their investors.
Perhaps the most infamous example is Uber. The cab-hailing-cum-ride-sharing app may not seem a startup to most of its millions of users, but it’s yet to make a profit, leaving it chewing through investor cash. The past several months have been marked with a #deleteUber campaign after the company misjudged a taxi strike connected to the US travel ban; a ban across London after Transport for London took umbrage at its operating methods; a blog post by former employee Susan Fowler, accusing the firm of sexism; a lawsuit from Google over self-driving car tech; reports of a software tool called Greyball that Uber used to avoid authorities; accusations that a staffer in India accessed private data on a woman accusing a customer of rape; former CEO Travis Kalanick caught on video aggressively arguing with one of his own drivers; and said former CEO eventually losing his job after a letter surfaced that he wrote to employees advising them of sex rules for a company party.
Many of the complaints have been pinned on the ‘bro culture’ at the company, common across many Silicon Valley startups and tech giants alike. He’s not the only one departing a company after cultural issues. Dave McClure, founder of angel investor 500 Startups, ended 2016 with an expletive-filled rant on stage at the Web Summit conference, angry that Hillary Clinton lost the US election. Months later, he was forced to step down from the company he created after he was outed as a serial sexual harasser. Similar incidents happened with investor Chris Sacca and Justin Caldbeck, co-founder of venture capital fund Binary Capital.
Startup Manufactory’s Kuppers says, “It goes without saying that the majority of these tech companies are run by white, middle-class, educated people – and male, usually. These are the people who can afford to acquire the skills and have the right background.”
That’s starting to change, according to Kuppers, particularly as innovation shifts away from just Silicon Valley to countries all over the world, and as more women make their way up the chain of command. “There’s a huge change coming,” he says.
Are startups pointless?
“What makes a good startup? Depends how you look at it”
After reading this list of failures of sense, frugality and decency, it may sound as though startups are an exercise in ridiculousness. Some certainly are, but plenty of useful products started life in this way, such as Spotify, Netflix and Facebook – most tech companies began with founders and funders, just better ones than those discussed here.
PayPal is another, and when it was acquired by eBay for $1.5bn (£1.1bn) back in 2002, it dumped $165m (£125m) into Elon Musk’s hands. He’s since set up Tesla, SpaceX and much more – surely a sign there’s something to these startups, if it gets us to electric cars, driverless cars and Mars. Those are better goals than not paying for your own champagne, after all.
Kuppers asks, “What makes a good startup? Depends how you look at it. If it makes revenue or profit, the business idea is being accepted by the market… I think everything that creates money and value is a good thing.” And investors clearly agree.