Large VC early investments gone awry

It seems hard to spend more than 10 minutes on Twitter without seeing how some startup raised an obscene amount of money in a Series A, or even a seed round. While there are so many success stories out there, I thought it might be helpful to dig up some cautionary tales. I believe that success stories should inspire us, but learn from the failed ones.

When a company launches, often, they need money to expand or grow or build. That money commonly comes from “angels” (high net worth individuals) or Venture Capitalists (companies with the sole purpose of investing in other companies hoping to earn a healthy return). Most of the big companies that we know and use daily were funding by VCs earlier on: Google, Apple, Facebook, and more. When companies raise a “seed” round, it’s usually the first outside investment and (typically) a small amount to help them get started. After that, companies raise “Series A,” round.

So let’s peek in graveyard, shall we?

Clinkle

The year was 2012, and people said that the Mayans predicted the end of the world (remember that?). Lucas Duplan, a computer science student at Stanford, had an idea for the next big payments startup with a goal:

Clinkle’s goal is to modernize the way people transact, by creating a next generation payment platform that will change the way people pay for things.

Pretty neat, right? Except, no one was sure how it would accomplish that. There was some vague reference to “ultrasound payments and loyalty debit card products,” but that never materialized. They then pivoted to gamify payments (somehow) within a year of raising a monster Seed round ($25 million) and had laid off 25% of its staff. Pictures of Lucas Duplan and Richard Branson started to make the rounds. The funding round was filled with celebrity investors, and it couldn’t possibly lose, right?

But then, like a fart in the wind, it was gone. This has become the classic story of when VC frenzy ends with FOMO leading the round instead of a solid idea.

Total Funding: $30,000,000

Color

Back in 2011, a new social mobile photo-sharing app hit the scene. It had a great founding team (of 7, that’s right…7) led by Bill Nguyen, who had sold his previous startup, Lala, to Apple. They had a spin on the typical photo app and social network. Instead of following friends, influencers, or the like, the steam of photos would be dynamically created based on your location. At the time, it was the most that the famed Sequoia Capital has invested in a startup that hadn’t launched. The round amounted to a gargantuan Series A of $41,000,000. With an initial launch in March 2011, the app rapidly failed to gain any traction. By October of 2012, they shut down (except for that tiny blip where TechCrunch reported that they aren’t shutting down?)

I think Color was slightly ahead of its time. A few years Meerkat and Periscope would launch, which validated the idea. The founders didn’t have enough love for the product, I think. Seven founders make it easy not to have accountability. And they spent $350,000 on the domain name.

Total Funding: $41,000,000

Starsky Robotics

With self-driving cars being the darling investment of the last decade, Stefan Seltz-Axmacher went a slightly different route: trucks. Launched in 2017, Starsky has set out to create autonomous and remotely operated trucks to help with freight. Pretty valiant effort and I was hesitant to even put it on this list because I sincerely do applaud their effort and vision. They raised a YC round of $5 million and then went on to raise a Series A of $16.5 million in 2018.

They had several significant milestones that history will remember them for, including:

• A 7-mile fully driverless trip in Florida without a person in the vehicle
• Operating a fully unmanned truck on public highways at 55MPH without a driver in the cab

Stefan wrote a fantastic blog post about the challenges of Starsky. I think he nails it with:

The biggest limiter of autonomous deployments isn’t sales, it’s safety. No One Really Likes Safety, they like Features

I wish Stefan and the team well and thank them for their contributions to humanity.

Total Funding: $21,700,000

Rdio

In 2009, the world was coming to terms with the collapse of 2008. The cofounders from Skype and Kazaa set their sights on a new startup. They had wanted to build a music streaming and downloading service and who better to do it than the folks who practically invented P2P audio. The original app description read:

Rdio is like carrying a giant MP3 player in your pocket — you have unlimited and unrestricted access to all the music, and you get to select exactly the song, album or artist you want to hear. And you can skip, pause fast forward as much as you want.

At this time, there was no clear winner in the music streaming space. Spotify was finding its footing, Pandora was doing okay, and Howard Stern has just agreed to be on SiriusXM.

Rdio has a Series A of $17.5 million and total funding of $125 million. It was well capitalized with all the right connections. It had a stellar team that had a solid track record, yet by 2015 Rdio was filing for bankruptcy.

So what went wrong?

I think it’s precisely because it was so well capitalized that it couldn’t succeed. When the answer to problems is typically money, the innovation dries up. Or maybe the mechanics weren’t quite right: Spotify had an ad-supported free tier, whereas Rdio (initially) required a paid subscription. Either way, if things had worked out a bit differently, I’d be listening to my coding playlist on Rdio instead of Spotify.

Conclusion

Sometimes startups work — most times, they don’t. VCs earn outsized returns when they make the right bets and are willing to make a lot of wrong ones waiting for the big one. An early enough investment in a company like Facebook will afford a VC the ability to make significant Series A investments for years to come.
To the founders out there: keep building. Companies with (1) bad ideas, (2) bad teams, (3) lousy timing (4) horrible market fit, have all raise considerable money in early rounds.

If you want to keep the conversation going, you can find me on Twitter.