Jul18
Lessons to Learn from Failed Internet Startups

Lessons to Learn from Failed Internet Startups

Posted by Neil Cumins

The internet has only been an established part of our lives since the late 1990s, yet it’s already claimed innumerable corporate failures. The demise of high-profile brands like Webvan, Overto and eToys is often attributed to a recurring handful of reasons. As a result, the back stories of these failed creations can help today’s online startups and web-based entrepreneurs to avoid similar fates…

According to a 2015 report by Fortune, over 40 per cent of new companies fail because there’s insufficient demand for their services or product ranges. That was certainly the case for Californian e-grocer Webvan, once backed by blue chip investors like Goldman Sachs. Despite raising over $650 million in funding, Webvan collapsed because its hugely expensive infrastructure didn’t improve the lives of consumers. One survey has suggested that 90%of online businesses fail within four months, so Webvan arguably did well to manage three years of trading without a USP or market-leading proposition to entice and retain customers.

As well as overestimating demand for online groceries, Webvan’s founders plowed far too much money into back-office functionalities. This may be necessary for online businesses to meet their business plan objectives, but heavy investment has to be justified by realistic revenue streams. Pay By Touch spent a small fortune on biometric fingerprint payment portals, yet its refusal to publish transaction figures reflected a disappointing lack of consumer take-up. Pay By Touch installed its hardware in 3,000 stores, eventually going bust as a direct consequence of this hasty hardware rollout.

The opposite approach can be equally unsuccessful. Auction site Overto’s swift demise can be partly attributed to staff already having full-time employment elsewhere. Their evenings-and-weekends approach to Overto created a snowballing backlog of IT and customer service issues that destroyed the brand’s reputation. If staff aren’t wholly invested in a business venture, nobody else will want to step up.

Another triumph of marketing over reality was Boo.com, whose glossy literature belied its shoddy ecommerce infrastructure. One customer spent 80 minutes purchasing an item on sale more cheaply in a local store, with interminable glitches in checkout functionality accelerating the decline of this one-time internet darling. Had Boo.com prioritized UX over PR, it might still be trading today.

Boo.com was championed by investors and the media, but most online businesses are less fortunate. The PX Houses platform was launched in 2012 to provide British housebuilders with a dedicated website for marketing traded-in resale properties, which were historically sold at tempting discounts. Half-hearted marketing failed to generate web traffic among the house buying public, while a temporary decision to let builders list their stocks for free torpedoed the only available income stream. By deviating from the only business plan with potential for profit, and not singing its own praises from the rooftops, PX Houses sank without trace.

The failure of PX Houses to turn a profit despite its low startup costs reflects the fiscal challenges larger organizations face. A lack of accessible finance proved fatal for SavaJe – the developer of a Java OS for mobile phones. Ironically, SavaJe’s lavish groundwork heavily influenced today’s market-leading Android OS, yet with more realistic budgeting and better project management, SavaJe could have been a market leader today. It failed not because of the product, but because its founders hadn’t set up a robust and long-term financial model.

The importance of long-term cash flow forecasts and realistic budgeting is also epitomized by the demise of another Icarus-like ecommerce venture. Despite owning one of the internet’s best domain names, pets.com failed to offset the high shipping costs of food tins and litter sacks by selling more profitable lines like toys and treats. More informed competitor analysis and realistic unit pricing would have prevented pets.com selling items below cost throughout its short life.

A recurring theme among failed online businesses is misplaced conviction in a new venture’s profitability. Yet the internet’s greatest ecommerce brand didn’t make a net profit for almost twenty years. Amazon’s relentless focus on reinvestment rather than returns has enabled it to crush wannabe rivals like Value America and Drugstore.com.

While a rigid business plan and honest marketing campaigns remain vital, the best advice for today’s web-savvy entrepreneurs is to start small, think big and play the long game.

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