7 Expensive And Unexpected Startup Failures In 2020

A brief overview of the 7 most heavily funded startups in the U.S. and Asia-Pacific that shuttered operations this year.

The global startup economy, which is growing more than 10% every year, was valued at nearly US$3 trillion last year, almost equivalent to the gross domestic product (GDP) of India in 2019, according to a recent report by Startup Genome. Startups around the world raised approximately $294.8 billion in venture capital investments in 2019.

However, despite the phenomenal growth and the immense amount of capital floating in the startup ecosystem, 9 out of every 10 startups fail to survive, and 2019 data from the U.S. Bureau of Labour suggests that 20% of startups go out of business within their first year of operations.

The success of a startup depends on a wide range of factors, which includes more than just offering innovative business solutions to existing problems. While lack of product-market fit is one of the biggest reasons for startup failures, some other common problems include lack of technical and marketing knowledge of startup teams, insufficient funding or other financial problems, technical, legal and operational problems, and lack of growth potential and scalability, among others.

This year, however, the COVID-19 crisis led to the implementation of unprecedented global lockdowns that forced thousands of startups to partially or fully halt operations for months and a major contraction in VC investments. The ‘black swan’ event has compounded and exacerbated the challenges to survival that startups battle on an everyday basis.

While the ‘startup mortality rate’ for 2020 isn’t clear yet, Jumpstart brings you a list of the top seven biggest and most heavily funded startups that have failed so far, in the U.S. and Asia Pacific (APAC) region.

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The Top 3 Heavily Funded U.S. Startups That Closed Down This Year

1. Essential Products

Established: 2015

Headquartered: California, U.S.

Shut down: April 2020

Total Disclosed Funding: $330 million

Investors: Tencent Holdings, Altimeter Capital, Vy Capital, Amazon Alexa Fund, Redpoint Ventures, among others

What happened: Founded by former Google executive and creator of Android Andy Rubin, consumer electronics startup Essential Products had reached unicorn status even before it launched a single product. However, the Essential Phone, the company’s first smartphone, launched in August 2017 and failed to gain traction, garnering mixed reviews.

The startup’s reputation began going downhill in 2018 after a New York Times report revealed that Rubin had been accused of sexual misconduct by a Google employee during his tenure at the company, a fact that Google had chosen not to disclose at the time of Rubin’s departure in 2014.

Moreover, the startup’s promises of an intelligent assistant, similar to Amazon Echo, and an operating system (OS) named Ambient OS, were never delivered. The startup also failed to launch a long list of promised Essential Phone accessories.

Essential was developing its second smartphone named ‘Project Gem,’ when the startup abruptly announced in a blog post in February this year that it would shutter operations on April 30, citing the lack of any “clear path to deliver” its new product to customers.

What was deemed as one of the most promising Silicon Valley startups at one point, thus turned out to be one of the most expensive startup failures of this year, with no notable achievements to its name despite its generous investors.

2. Brandless

Established: 2016

Headquartered: California, U.S.

Shut down: Confirmed in February 2020

Total Disclosed Funding: The startup had reported total funding of $292.5 million. However, according to a report by Axios, for its $240 million Series C financing round, which had valued the startup at over $500 million, Brandless received only $100 million up front from SoftBank.

The remaining pledged $120 million, which was contingent on the achievement of certain milestones, never came. Therefore, the startup had secured only $152.5 million in actual funding, as per Jumpstart’s estimate.

Investors: SoftBank Vision Fund, Google Ventures, Sherpa Capital, Redpoint Ventures, Cherry Tree Investments, among others

What happened: Brandless, an ecommerce startup that offered private-label alternatives to branded household, personal care, baby, and pet products at a fixed price of $3, announced a shut down of operations in early February, citing overcrowding and heavy competition in the direct-to-consumer ecommerce sector.

According to reports by The Information and Protocol, intense pressure from SoftBank to achieve profitability at breakneck speed, coupled with a faulty business model, spelled the death sentence for Brandless.

The startup was struggling with high shipping costs and quality problems, and had even tried to increase the prices of certain products to $9 to achieve SoftBank targets, but in vain, the reports said.

In the face of a severe cash crunch, Brandless resorted to laying off 13% of its staff in March last year, while the startup’s Co-founder and CEO Tina Sharkey was forced to resign in the same month. Sharkey remained on the company’s Board, but SoftBank pushed for the startup to have someone with more retail experience at the helm – a move that was common among SoftBank-backed startups including WeWork, the Protocol report said.

In May 2019, former Walmart COO John Rittenhouse assumed the CEO role, and announced his plans to pivot the startup to big-ticket items and to steer the company to an online-offline model by leveraging his experience in the sector. He aimed to achieve profitability by 2021, according to a Forbes report.

However, these promises and goals proved near-impossible to achieve, and Rittenhouse stepped down in December last year, with Sharkey following on his heels. Protocol reported that the Brandless Board decided to shutter operations while the company could still afford to pay severance packages.

At the time of the closure announcement, the startup had laid off nearly 90% of its employees. The limited remaining staff were working to deliver pending customer orders and wind up operations, and evaluating acquisition offers, the report added.

3. Atrium

Established: 2017

Headquartered: California, U.S.

Shut down: March 4, 2020

Total Disclosed Funding: $75.5 million

Investors: Y Combinator, Andreessen Horowitz, Ashton Kutcher’s Sound Ventures, among others

What happened: Founded by Justin Kan, Co-founder of live video streaming platform Twitch, legal tech startup Atrium shuttered operations after it failed to reckon with the legacy systems of traditional law firms.

The startup laid off all its employees, totaling a little over 100 people, and promised to return some of its funding to its investors, including to Andreessen Horowitz, which had led the startup’s Series B round of financing in September 2018.

Atrium leveraged machine learning to automate the digitization of legal documents, and offered applications that sped up fundraising, commercial contracts, equity distribution and employment issues, acquisition deals, and more.

Additionally, it also offered in-house lawyers that provided counsel and best practices in the above areas, although it soon discovered the unfeasibility and high costs of retaining such lawyers and attempted to pivot to a pure software startup in January.

The pivot not only proved disconcerting for Atrium’s customers, but the startup also came to understand the difficulty of building softwares for third-party law firms, many of which have well-established processes of their own, and older leadership who are not open to overturning their existing systems to adopt new technology, Kan told TechCrunch.

Moreover, the startup provided its services through subscriptions, leading to low margins, instead of charging hourly rates for legal counsel like traditional law firms. This revenue model also contributed to Atrium’s ultimate failure.

Since it proved more and more difficult to keep the business running, let alone achieve profitability, Kan decided to cease operations and announced the startup’s closure in a Tweet.

4. Stay Alfred

Established: 2010

Headquartered: Washington, U.S.

Shut down: May 2020

Total Disclosed Funding: $62 million

Investors: Proptech fund Nine Four Ventures, and an unnamed Private Equity (PE) group

What happened: Short-term apartment rentals startup Stay Alfred is the most heavily-funded startup casualty caused directly by the global pandemic, which has created unprecedented challenges for the travel industry worldwide.

The implementation of travel restrictions abruptly dried up Stay Alfred’s revenue streams from short-term rentals, and the inability to secure additional funding forced the startup to permanently shut down in May, a month after it had stopped trading and closed its social media accounts, according to a report by Short Term Rentalz.

Stay Alfred, which managed over 2,500 rental units across 33 U.S. cities by the end of 2019, struggled to stay afloat within a few months of the pandemic reaching the country. According to a report by Spokane Journal, the startup, which generated $100 million in revenue last year, was trying to raise as much as $30 million in March, but flagging investor interest in the travel industry rendered the attempt futile.

The company had initially hoped to continue operations with reduced staff and property units, had furloughed an undisclosed number of employees, and was attempting to sell off assets, but could not find sufficient buyers.

Ultimately, when the company ran out of money with no emergency financing in sight, the once-beloved company shuttered operations.

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The Top 3 Heavily Funded APAC Startups That Closed Down This Year

1. Meili Jinrong

Established: 2014

Headquartered: Shanghai, China

Shut down: March 16, 2020

Total Disclosed Funding: $194.9 million

Investors: JD Digits, the fintech arm of JD.com, GX Capital, Bertelsmann Asia Investments, Delta Capital, among others

What happened: Consumer automotive financial services platform Meili Auto Holdings Limited, which offered used car loans through its online platform and offline sales channels, was a subsidiary of Meili Finance until the company underwent a restructuring to spin off in 2017.

In March, the startup announced that it had terminated all employee contracts and shut down operations, as it struggled to resume normalcy and battled a severe cash crunch in the wake of the global pandemic, TechInAsia reported.

China’s automotive sector experienced record low sales that dipped 42% in the first quarter of 2020, which likely contributed to Meili’s precipitous downfall.

However, after filing for a $100 million IPO on the New York Stock Exchange last October, the startup was also likely impacted by an investigation into predatory lending practices, which led to a police raid on Meili Auto’s offices and affected Founder Liu Yunnan and several other senior executives.

The probe was launched after the startup failed to address numerous consumer complaints that alleged Meili Auto employees deceived customers into applying for loan amounts that were bigger than necessary, were often unaware of the fine print, and even lacked copies of contracts.

Moreover, other complaints painted a grim picture of the company’s debt collection tactics, one of which was intimidating close friends and relatives of the borrowers, according to a KrAsia report.

According to the startup’s IPO prospectus, Meili Auto had facilitated over 200,000 used car loan transactions in 2018 and generated $143.4 million in revenue in the first half of 2019.

2. Wujiang Hotels

Established: 2019

Headquartered: China

Shut down: Announced in March, 2020

Total Disclosed Funding: $30 million

Investor: China’s largest online travel agency Trip.com

What happened: Wujiang Hotels, a Chinese hotel chain startup, failed to survive the onslaught of the COVID-19 pandemic, rendered unable to sustain operations in light of travel bans.

In late March, the startup’s Chairman Ma Xiaodong announced in an internal letter that the startup was suspending all operations and said that it would terminate all employee contracts by the end of April, since the global pandemic had severely impacted its future development plans and ability to continue operations.

The startup used to operate five mid-level and premium hotel brands across eight cities in China including Shanghai, Shenzhen, Chongqing, and Guilin, with room prices ranging between $28 and $141 per night.

3. Sorabel

Established: 2014

Headquartered: Jakarta, Indonesia

Shut down: July 2020

Total Disclosed Funding: $27 million

Investors: InnoVen Capital, Openspace Ventures, NCore Ventures, Gobi Partners, Meranti ASEAN Growth Fund, among others

What happened: Another major victim of the COVID-19 induced cash crunch, fashion ecommerce startup Sorabel was forced to liquidate in July after it ran out of cash and was unable to continue operations.

In an internal letter to its employees, the startup explained that despite its best efforts to save the organization, it had to resort to liquidation. It had earlier shut down its business unit in the Philippines in February, which operated under the brand name Yabel.

Sorabel, which was founded as Sale Stock, claimed to have the healthiest business model among ecommerce contenders in Indonesia, with unit economics comparable to global fashion ecommerce players Asos and Revolve.

In 2018, the startup claimed to be breaking even and was ready to earn profits, nine months after raising Series B+ funding in a round led by Gobi Partners and Golden Equator Capital, according to a report by DailySocial.

In early 2019, the startup rebranded as ‘Sorabel’ and began expanding to countries in Southeast Asia (SEA), with plans to expand to the Middle East and United Arab Emirates this year, in an effort to realize its aim of serving one billion customers.

However, Sorabel’s plans were quickly derailed by the global pandemic. Although the startup managed to grow 22% in February-March against January’s numbers, between April and June its website visits plunged by 65%, from 1,150,000 to 410,000 visits per month, according to a report by e27.

The report also highlighted Sorabel’s payment defaults to suppliers, where one fabric supplier had to wait six months for payment for an order delivered in September last year. The supplier also said in the report that Sorabel lacked expertise in apparel and fabrics, and lagged behind traditional wholesalers due to inefficient and slow decision making.

The report further added that Sorabel’s offline-based customer acquisition strategy resulted in unsustainable business costs and a high cash burn rate that was impossible to maintain during the COVID-19 crisis. Moreover, its inadequate online advertising presence, with practically non-existent paid search traffic, compounded the problems.

As the debt ratio worsened and the startup did not have the cash reserves to survive the COVID-19 crisis, it shut its doors permanently, while the management promised to help its staff secure new employment through its investors’ network of over 100 companies.

The pandemic has highlighted the pitfalls of pursuing growth over profitability, and brought into question the practicality of aggressive expansion strategies and the practice of operating without much regard for cash reserves. Moreover, as the crisis continues, we are likely to see more startups shut down, since only the most adaptable startups with the strongest business models are likely to emerge as the winners.

With no end in sight for the crisis that has dominated 2020, and the year coming to a close soon, these cases are a warning sign to VCs and founders to scrutinize existing business models, examine potential vulnerabilities, and use the famed agile startup mindset to prepare for any contingencies possible.

Photo by Vital Sinkevich, Annie Spratt, and zhang kaiyv on Unsplash

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