Every week we hear about a new unicorn, a new innovative and creative startup going for a billion-dollar IPO, or some successful exit. Apparently, it has never been easier to succeed by setting up a business: investments seem to be waiting for us, ready to be picked up with a shovel.
To put it in perspective: 26 startups made their stock market debut with IPOs in the United States this year (Coursera among them), with others opting for alternative means of going public, such as direct listing or SPACs. In Brazil, there are 34 now in the CVM queue.
This means that everything is fine and there is no more risk of anything going wrong, right?
Today I want to bring you the other side of success. I want to talk about startups that have closed, taking the opportunity to discuss two things: (1) what are the main Achilles’ heels of startups and (2) what it means when a startup closes.
Four cases of four failures
Joonko. Certainly, one of the advantages of the Internet is that buying something online, from almost any perspective, is easier than buying it in a physical store. And one of those advantages, besides convenience, is price comparison. Out there, one of the price comparison leaders is Check24, but another company, Joonko, estimated to break Check’s “monopoly”. As a trump card, besides showing cheaper alternatives for the products the customer wanted, Joonko wanted to show which product best suited the consumer’s needs even if it was more expensive. The company’s logic was to avoid the famous “cheap gets expensive”.
The startup operated for 12 months and in its last investment round it managed to raise $15 million. However, after one of the main investors opted out of the operation, continuing with the business became untenable, and the startup ceased its activities.
Lasso. Once every five years, Instagram and Facebook are threatened by some new app that attracts attention. Years ago it was Snapchat, which annoyed Mark Zuckerberg’s company a lot, until it could be cloned by Instagram with the Stories feature. Now it’s TikTok.
The first clone to combat the “Chinese threat” was Lasso, developed by one of Facebook’s many partner companies. The app — which worked within Instagram — was launched in 2018, but never managed to gain traction in the United States, the main target market: it managed only 600,000 downloads. (In Latin America, however, it was a hit, with 10 million.) In July 2020, Facebook announced it was ending the app’s availability to give another TikTok clone a chance: Reels.
According to experts, the reason for Lasso’s failure was its association with the Facebook brand — rejected by TikTok’s main users, Generation Z.
Periscope. Of the four stories I selected, I think Periscope’s is the most impressive. If Joonko went under because of a sudden lack of capital and Lasso went under because of public rejection, Periscope went under. The app was the first to show the impact and usability of the lives feature (a staple of many influencers and entrepreneurs during last year’s lockdown). After being acquired by Twitter, which integrated Periscope’s lives system into its platform — but as a standalone app, the service was discontinued in March.
Beepi. Beepi ended up serving as a typical example of team execution failure, one of the most common mistakes in the world of startups. In 2015, Beepi’s used car marketplace secured a $60 million investment round of Series B funding. The problem is that the company ended up becoming known for irresponsible spending that burned through its entire cash flow, including super-high salaries and even a $10,000 couch!
In addition, Beepi’s management was often accused of micromanaging, not giving employees a chance to act quickly and learn in the process. The founders raised too much money too early and forced a very high valuation with a very aggressive stance in negotiations. With the exit of an anonymous Chinese investor, the company was forced to lay off its 180 employees.
Why? (And why is “why” important?)
As we have seen, nothing is guaranteed in the startup market. Granted, many have thrived, but there are several factors that can contribute to a startup not getting “there.” In the case of Periscope, its product had simply reached the end of its lifetime value (LTV), and other alternatives, more functional and more attractive, emerged, such as Instagram’s Live feature. A different situation, of course, from the case of Lasso, which was simply rejected by apps that do the same thing — TikTok and Reels.
In the case of Joonko, on the other hand, there was apparently an acceleration problem. It is not that the money ran out before they could consolidate the business model (when Joonka shut down, it was already a Series A company for investments). They simply took too long to take the next step, that is, they did not know how to blitzscale, and one of the investors saw fit to take the money out. Beepi, on the other hand, has the classic problem of poor execution, with money wasted on things that are not of fundamental importance for the growth of the company, mistakes in personnel management, and too much ambition at a delicate moment.
Perhaps this may all seem unfair. Periscope was a pioneering app, Lasso didn’t have a chance to consolidate, Joonko can barely operate, and Beepi had a very interesting marketplace because the money ran out. Why does the marketplace work this way?
The reality is that execution is one of the most important and relevant aspects at any stage of startups, but especially at the beginning. The “learn fast, fail fast” mentality exists exactly because of this kind of situation: there is always, in developed markets, the chance to try again, applying the learned error. Failure is to mature, but it must be done quickly, incorporating the improvements and learnings at the right time.
However, in the case of Brazil, we are not yet in a developed market. To make mistakes and failures cost a lot. We don’t have an integrated market or financing structure, and 99% of our companies, in a well-known fact, are informal. In other words: to undertake, in Brazil, is often the last option. It is success or failure. In many cases, the window for making mistakes, learning, and trying again is narrower. And this makes growth more risky and difficult.
Still, failure stories can contribute to the strengthening of the ecosystem as a whole, as long as entrepreneurs are mature enough to understand the reasons behind failures that could have been avoided. This process not only implies the strengthening of each organization individually through learning, but also the construction of a more detailed understanding of each market niche, about what actually works and what doesn’t, what is just a start-up idea and what is in fact a consistent thesis, worth investing in and risking.
In my entrepreneurial journey I have had more failures than successes, and fortunately, I have always tried to learn the best from each situation and avoid making the same mistakes in the following challenges. A rather expensive, but at the same time, rewarding MBA.