What You Can Learn from These Three Startup Failures

By Scott Vollero

Startups come and startups go, but they all have lessons to teach new entrepreneurs. Most business failures can boil down to the same few factors:

  • Lack of capital
  • Market didn’t understand the product
  • Better product came along
  • Wrong team
  • Giving up

The reasons why these happen are quite varied, and that’s where the value of studying startup failures lies. Here are three startup failures where you can see some of these principles demonstrated.

Friendster

Friendster was the great great grandfather of social media—the original, now long forgotten by most people. How did such a revolutionary idea leave its founders behind? It was founded a year before MySpace and Google offered to buy it for $30 million. Did it fail because that offer was turned down? Perhaps, but there could be another reason, and it shows how many reasons can lead to a failure.

Friendster had the right idea about social media, but the implementation was wrong. Prior to social media, individuals polished up personal web pages and tried to get people to come visit (remember Geocities?) Friendster made communication between people about pages easier, but it was still about creating vanity pages. It was too much media and not enough social. MySpace did the same thing, and for a time in the early 2000s there was a strong fight between the two platforms.

Then Facebook turned the model on its ear by introducing the news feed and turning away from vanity pages. Despite initial protests from Facebook users, now the feed is the most dominant part of the service. This left Friendster (and MySpace) flailing. Valuation went down, and changes in CEOs didn’t help. Now, Friendster is no more.

Pay By Touch

Here’s a company that had all the valuation in the world (over $300 million), but vision and problems with the founder caused a huge downfall. Pay By Touch was a company in the early 2000s that sought to combine the emerging field of biometric recognition with electronic financial transactions. The idea was that you’d swipe a finger over a sensor that would uniquely identify you for transactions. This concept is still being researched today by companies like Apple and Samsung, and we can see shades of it with the various methods of using smartphones as payment devices on the market today.

Why did it fail? Here are the three main reasons: First, because this sort of system would use ACH transactions, the fees Pay By Touch could charge were much lower than other transaction methods. But with so much investment income, that wasn’t an immediate concern. Another was the technological hurdles.

The vision was bold but there were problems with false rejections and misidentifications with the system. There was too much emphasis on developing the system and not enough promoting it. But the real hurdle was the founder. John P. Rogers, the CEO, was, by all accounts, a man of vision but had terrible personal problems. He misspent investor money and was charged with drug abuse and domestic violence. All of this scared investors away and left a promising idea spinning in the wind.

HomeJoy

HomeJoy was like the Uber of cleaning services. It offered low-cost cleaning services to anyone who had access to the app. Independent contractors would sign up on the platform to clean the homes. It was a darling of the gig economy, but it ended up shuttering last year. Why?

First, HomeJoy was the target of many worker classification lawsuits by angry contractors who felt that HomeJoy was treating them like employees rather than ICs. Second, many customers felt wronged when HomeJoy offered an initial low price for their service and then raised it for subsequent ones. Third, homeowners didn’t quite know who they were going to get to come into their homes for cleaning. Many of the pros stayed away due to the high platform costs of using HomeJoy, which left middle and low-skilled cleaners to fill the gap. This led to customer dissatisfaction and a drop in usage.