4 Startup Funding Horror Stories
Innovative startups are an amazing thing, full of promise and excitement, and often leading to full-fledged, highly profitable businesses. Equally exciting are the people behind them; the thousands of creative minds behind this year’s most successful startups represent men, women, and even children from all walks of life and geographic locations. According to cashprior.com, less than one percent of businesses raise funding by venture capitals but those businesses are all we hear about over the web.
Unfortunately, not every startup gets the chance it deserves to shine.
Sometimes even the most promising startups fall flat on their proverbial face, and it’s often due to troubles with funding. In the name of giving your big idea the best chance at success, here are four startup funding horror stories that you may want to digest:
1. Cuil: Stretch that Funding
Launching a startup that aims to compete with a giant like Google, in the search engine field, no less, was seen as pure madness by some of the people associated with search engine startup Cuil in 2008, but $33 million in capital venture funding suggested otherwise on the whole.
With big names behind it, including former executives and engineers associated with both Google and IBM, Cuil took its massive capital and began spending for the future, building a database of more than 120 billion web pages indexed within, all presented in a format that investors thought would one-up Google in a very profitable way.
Unfortunately, even the best funding will run dry eventually if a startup isn’t able to make money, and Cuil learned that the hard way when they went under only two years later, after having never established as even a blip on the search engine landscape radar.
2. Pay by Touch: Money Mismanagement Equals Failure
While funding issues can often be laid at the feet of investors, sometimes it is the in-house management that is the blame. In the case of Pay by Touch, a startup launched in 2002 with investments to the tune of $340 million, that is exactly what happened.
Pay by Touch was masterminded by John Rogers, a charismatic businessman known equally for his personal flaws as for his corporate talents. The company itself aimed to provide a mobile payment solution via biometric readers, allowing consumers to pay for everything from a coffee to the latest electronics with a swipe of a finger.
Unfortunately, after making a big splash with the acquisition of competing firm BioPay in 2006, things started to go downhill for Rogers. Later accused of domestic assault, drug possession and fraud in the illegal use of investment funds, Rogers’ behavior lead to Pay by Touch suddenly closing up shop in 2008, leaving 800 employees and more than 2 million customers stranded.
3. Reactrix Systems: When the Economy Outruns Investment
While you can likely pinpoint a number or two that you think would sufficiently bring your product from the idea stage to market, it is the economy that determines just how effective funding is, and sometimes no amount of precautions taken can save a startup in the midst of an economic downturn.
Exemplifying this is Reactrix Systems, an innovative company that began producing and distributing interactive advertisements to shopping malls and other retail outlets in 2001, during a time when unique advertising was being clamored for by businesses looking to take advantage of technology in their marketing efforts.
Well-funded and with an in-demand product to push, things went swimmingly for Reactrix until the sudden financial troubles faced by the United States in 2008. With consumers holding onto their extra cash, marketing budgets around the world dried up, leaving Reactrix Systems, with high overhead and a dwindling customer base, to dry up, as well.
4. Friendster: Know the Limits of Funding
Remember Friendster? You probably don’t, but it was one of the first social networks in existence, paving the way for today’s giants like Facebook and Twitter. Launched in 2002, before even MySpace hit the scene, Friendster had the necessary capital to be successful, and the company’s CEOs weren’t the only ones to think so; after only a few years in business, Google offered to purchase the company for $30 million.
A surprising refusal to sell was followed by a sudden realization that the growth that Friendster required to honor its debts to initial investors simply wasn’t achievable. CEOs came and went, and the company crashed before being picked up by Asian internet company MOL Global, who gutted Friendster entirely and converted it from a social networking platform into an entertainment website, wiping the legacy of a social media pioneer clear off of the business map.