In the tech world, startups and failures are often uttered in the same, celebratory breath.
While the rest of the working world still squirms at the thought of launching a business only to crash and burn, failing fast and often is invoked as a mantra for success everywhere from social media to the aptly-named global failure conference FailCon.
While company communications can spin missteps and poor decisions as opportunities and founders can attempt wrap themselves in as much silver lining as their bodies will hold, sometimes choices turns out to be mistakes. A technology startup’s failure rate is estimated as high as 70%, according to CB Insights, a venture capital and angel investment database.
When someone at a high-growth startup miscalculates, it results in the loss of a job, an entire company, or millions–if not billions–of dollars. The good news for those playing along at home is that it doesn’t cost a penny to digest their cautionary tales.
One’s loss is another’s massive gain. Back in 2009, Internet entrepreneur Brian Acton was looking to shed Yahoo’s exclamatory mantle for one splashed with a Twitter bird, or Facebook blue. He was rejected by both companies, according to his tweets. Acton eventually left Yahoo to build WhatsApp with another veteran of the company. Their instant messaging service proved so popular, it grew to 190 million active monthly users in five years.
Facebook came knocking. This time, the social network was interested in partnering with Acton and company to the tune of that also “provides for an additional $3 billion in restricted stock units to be granted to WhatsApp’s founders and employees that will vest over four years subsequent to closing.” Even if he pulled a six-figure salary and benefits, hiring Acton would have been less costly than Facebook’s acquisition–it’s the largest behind Instagram, which it purchased for $1 billion.
New York Times reporters David Gelles and Vindu Goel took Facebook to task on this buyout. “By any measure, Facebook is paying a steep price for a service that is widely used internationally but is less known in the United States,” they wrote in February 2014. “WhatsApp does not sell advertising and has very little revenue.”
Andrew Mason cofounded the daily deals site in 2008, when the recession spurred consumption via discounted offers on everything from meals to massages. With sales topping $1 billion in 2010, Google came courting, offering an unprecedented $6 billion to acquire Groupon, and the potential to turn it into an even bigger e-commerce machine.
Here’s the problem. Google couldn’t guarantee the deal would pass the antitrust smell test. Even so, Mason hesitated because he believed YouTube–an earlier Google acquisition–sold out too early. To back up his gut instinct, Mason enlisted Groupon’s data scientist Nitin Sharma, who projected that if the company optimized its data processes, it then could be a much larger operation without Google.
Mason pursued independence briefly before steering the company toward an initial public offering the following year. Raising $700 million, Groupon’s would become the largest initial public offering by a tech company since Google in 2004. Critics weighed in immediately.
“Groupon is expensive,” Rob Romero, head of technology-focused hedge fund firm Connective Capital Management, told Reuters. “The $12.8 billion valuation is only achievable because of the low float.”
In the early days of trading, Groupon’s stock rose to just over $26. It was an historic high that’s not been repeated since. Three months later, Mason was out of a job, while Groupon’s still struggling. Its stock is now $6.58 per share after eight straight quarters of losses. “We are not yet convinced that Groupon is on a consistent path towards growth and profitability,” said Edward Woo, an analyst at Ascendiant Capital Markets.
In 2012, Viddy, the social media app for creating and sharing 15-second videos, was on track to become the next big thing. It quickly grew with more than 500,000 downloads and snagged two stellar rounds of funding led by luminaries such as Battery Ventures, Bessemer Ventures, and celebrity investors such as Jay-Z and Will Smith. Competition in the space was heated, but Viddy appeared to be sailing through with cofounder Brett O’Brien at the helm.
O’Brien told Fast Company two years ago: “It 110% starts with product and experience that people really care about and engage around.” However, he was also quick to point out that sprinkled among its 39 million users were A-listers like Justin Bieber, Taylor Swift, Snoop Dogg, and even Mark Zuckerberg’s dog, Beast.
Then, just like that, user interest started to wane. Shortly after securing its $30 million funding round, the company saw users drop from 5 million a day to 1 million a month later, according to AppData. In February 2013, that number had plummeted to 10,000. O’Brien was ousted, rumored to have turned down a $100 million buyout from Twitter. Viddy later denied the offer was ever made and a board member contended that its network still got between 4 million and 5 million unique views per month.
Whether or not he turned down Twitter–which later launched heavy competition with Vine–O’Brien’s mistake may have been miscalculating celebrities’ commitment to Viddy’s community, and to engaging Viddy’s entire community after they signed up.
The Los Angeles Times reported that while Justin Bieber talked up Viddy on the Today show, he later abandoned the site. John Egan, growth engineer at Pinterest, explained Viddy and its competitors “spammed Facebook through various mechanisms to acquire hordes of users, but were not able to get them hooked once they were in the service.”
Egan wrote in his blog: “This myopic focus on simply driving as many new users as possible to the app leads to a flash in a pan style growth rather than sustainable long- term growth. User acquisition is only one aspect of driving growth.”