How to burn down +$170 million (I/III)

originally published: 30.06.18, LinkedIn

Every single year plenty of startups are closing down across industries. Let 2017 alone, 487 Startups with a then total funding of $3.7 billion confirmed shutting down operations according to Crunchbase. Their failure reasons as well their funding amount vary broadly and are dependent upon their industry, among others the transportation industry.

While we hear from new born unicorns like Revolut and come to admire them, light is only sparsely shed upon the many failures of courageous and smart entrepreneurs. To give you some insights about reasons for and dynamics of failing companies, here comes a series of the 3 costliest startup failures in the past 3 years within the transportation industrywith possible lessons to learn.

PART I

3rd Place: PepperTap | $51M | closed 2016

image source: vccircle

Key failure reason: too slim margins due to customer acquisition wars with competition + high operational capacity cost to deliver necessary customer service

Key learnings: perseverance is not always adequate, the business model can shift 180°, grocery delivery is a brutal industry

“PepperTap is India’s largest and fastest grocery delivery service. Currently present in more than 25 cities.”

…is the introduction you can still find about PepperTap on Crunchbase.

With a massive market in India to uncover, the two founders Milind Sharma and Navneet Singh set sail for building an online supermarket in one of the fastest emerging markets of the world in November 2014, with the promise to deliver within 2 hours.

They did so by building an app to order groceries online, based upon an inventory-less model, where groceries would come directly from supermarkets and convenience stores around. This approach was new in India and in contrast to competitors like behemoth Big Basket and Localbanya allowed for asset-light investments and high flexibilty. Core activities included the connection of new stores, managing orders and training drivers, which would use (by PepperTap subsidized) smartphones to deliver orders via bike or scooter.

The emergence of PepperTap makes sense, looking at Singh’s history. Beforehand he cofounded NuvoEx, a reverse logistics company helping e-commerce giants like Snapdealand Flipkart to manage their supply chain. NuvoEx meanwhile has been acquired (see below) for an undisclosed amount.

The company experienced extreme growth, as the team had grown to a count of 40 within 4 months and PepperTap had secured a Seed Investment of $1.2M by Sequoia Capital in March 2015. The Series A with $10M followed only a month later, also led by Sequoia. As found on their blog, by October 2015 they have been operating within 17 different cities already — with 20,000 orders daily. This super fast scale has been possible thanks to their inventory-less model, described above.

Contrary to other delivery services like Instacart, PepperTap passed delivery costs not on to the customer but the supplier, charging them a small fee, which in turn would generate greater revenue by accessing a broader audience of customers further away from their locations. During the whole of 2015, PepperTap received a total funding of $51.2M within 4 rounds from 7 different investors — an extremely fast and aggressive funding approach.

As Singh describes, several problems emerged during the way, of which however none was the death sentence until then. PepperTap experienced problems with the integration of new stores, as up-to-date data on inventory was initially difficult to retrieve, which led to disappointed customers when items were ordered that actually had been out of stock. By convincing small stores to adopt electronic inventory management and integrating data management with bigger chains those problems could be solved.

For this sole purpose PepperTap additionally built an inventory management app to help those small stores, for free.

While Instacart in America could charge surpluses on premium products, PepperTap faced the problem of having a cap on maximum retail prices by Indian law. This however did not defer PepperTap from growing either, as mentioned by TechCrunch.

“profitability was looking long (very long in fact) and arduous.”

Further problems emerged, as new customers had to be acquired through heavy discounting on prices, which were fed by funding money. It turned out that customers needed to be convinced of the good service through giving them time and interest (=discounts) to adopt the habit of ordering online and staying with PepperTap amidst heavy competition. As the delivery promise in under 2 hours became more challenging with a growing customer base and geographical expansion, additional buffer capacities had to be held, costing additional and ineffective money.

Those additional capacity costs coupled with price discount costs pushed PepperTap towards closing down operations in locations with few customers and forced it to refocus on its biggest markets. This led to higher retention rates and emerging customer loyalty, however still payed by funding money where “profitability was looking long (very long in fact) and arduous.”

Revisiting their current situation with slim margins and strong / heavily funded competition, PepperTap decided to stop driving the car before it went off the cliff. As a sustainable business was not in sight without continuous heavy funding and a price war among competitors, operations have been suspended in April 2016, before the entire funding had been burned.

Meanwhile, Big Basket went the way of heavy funding of close to $900M, post-IPO, and Localbanya closed operations in January 2016 (due to the same reasons as PepperTap — and there are many more startups).

Having learned about the difficulties in last-mile logistics and come up with solutions for those problems, Singh and his team experimented with those approaches at NuvoEx, with positive results.

Successfully pitching the new approach to its investors, PepperTap’s Team moved on to use the remaining funding to improve logistics at NuvoEx.

This was a remarkable move: the company PepperTap still had plenty of cash in the bank at closing time and could have kept on fighting and experimenting with approaches. Instead the team decided to leave the fight for good and step back from pride, before unethically ramping up burn rates and risking the entire funding. Here an Elon Musk would have instead gone the full way and die the way of a Samurai, as he has been quoted in his biography.

PepperTap had found the right pivot strategy, using its resources and knowledge about customer problems to improve delivery services to smaller cities under the cap of NuvoEx. And as mentioned earlier, NuvoEx had been acquired for an undisclosed amount in October 2017.

While for PepperTap the journey ended in 2016, other startups delivering groceries seem to prosper: Instacart meanwhile agglomerated a total funding of $1B and is aggressively expanding in the U.S., where it co-competes with massive players like AmazonFresh and WholeFoods (note: $1B is not the valuation, only the cash available). In Europe a favorable candidate is Picnic, spawn in the Netherlands and now effectively entering the German market. Not only is it led by tech and business savvy founders, it also seems to have skipped an external Seed Round and directly progressed towards a Series B funding round of $115M in March 2017.

Especially about Picnic I am curious how they develop, as they have geographically grown rapidly and are using technology in smart ways. But foremost because they’re the first online grocery player that addresses the mass market and not only the happy few willing and able to pay a delivery fee. Closely watching, I am counting the days until they arrive here in Munich.

Thanks for reading. Did you like what you have read? Say it and leave a comment. I bored you? Leave a message so I can do better. Got annoyed by my writing? Share it and complain to your colleagues about it.

I write these articles out of interest and the curiosity to learn about startup dynamics. Meanwhile I am working at Stryber, currently as a Business Analyst, which enabled me to do this research.

Besides I write my Master’s Thesis on using Machine Learning for forecasting purposes, where I could probably soon need help. If you know some good resources please let me know.