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5 Big Startup Failures in 2020: Not Only Pandemic Is to Blame

The past year has become extremely painful for many projects. Many went bankrupt without receiving additional investment or never making it to IPO. Let us recall which international startups in 2020 can be considered the most disastrous and why the pandemic was not always to blame.

IfOnly ($51.4 million)

In early 2020, the travel business was one of the first to experience the challenges of travel restrictions around the world. It seemed that with border closures, the traveling possibilities were closed as well.

In such conditions, the IfOnly marketplace for unusual meetings and tours was doomed. The Night of Luxury in New York or private training with the star of American football Joe Montana are now beyond the means of most users of the platform.

In 2016, Business Insider included one of the project’s tours in the list of must-have Christmas gifts for billionaires. IfOnly even offered to spend a family weekend in Florence for €62,851. But the platform got famous not only for expensive tours since group goat yoga sessions for only $33 per participant also became very popular.

But even M&A by one of its investors, Mastercard, did not help the business survive. In early 2020, the service was suspended, and in July the company announced its shutdown

What killed the project

According to TechCrunch, the main reason for the company’s fall was the lack of a plan B. While IfOnly’s closest competitors were rapidly changing their business model (for example, Airbnb launched the virtual tour platform Airbnb Online Experiences), the startup’s management decided to wait for better times. This is where they lost in their predictions. 

Atrium ($75.5 million)

In early March 2020, the CEO of the American legal-tech startup Atriumannounced the shutdown. Over the three years of its existence, the small company consisting of just over a hundred employees managed to raise $75.5 million from VC firms, including Andreessen Horowitz and Y Combinator. Prior to Atrium, the portfolio of its founder Justin Kan included Twitch -- the streaming service sold by Amazon for $970 million.

With his new project, Kan relied on software in the niche of legal matters. Atrium was developing products to provide legal services to other startups. With its help, it was possible to solve problems with hiring, contracting, or processing transactions. For example, you could send letters and documents and then track if they were signed. It saved plenty of time for users and their clients.

Most of consulting work was still laying on the shoulders of Atrium’s in-house attorneys. According to Justin Kan’s idea, automation was supposed to make their work easier and more efficient. By reducing their own time expenditures, they also saved the client’s time. This is exactly what should have distinguished the company from traditional law firms. Startups need speed, and Atrium was ready to deliver.

However, when re-evaluating the software and the subscription package, it turned out that it was expensive to maintain a staff of consultants for such a startup. The additional fees for closing deals did not cover the costs. Then, in January 2020, the management decided to pivot and fired in-house lawyers to focus solely on software. But attempts to implement it in other companies did not take root. Most law firms were not ready for changes in the long-established work processes, so there was no demand for the new product.

As TechCrunch noted, Atrium employees tried to attract former customers, but a series of dismissals have shaken their faith in the startup’s viability. Therefore, Kan decided to shut down the marketing campaign and leave Atrium to his business partners as an autonomous law firm. He also returned some of the funds to investors. 

What killed the project

The execs of Atrium invested all funds in maintaining staff, so the original goal of developing software took a back seat. Rethinking the business model failed to return clients since the startup split into several legal agencies. Users also considered the software to be imperfect and complex.

ScaleFactor ($104 million)

Kurt Rathmann’s project can be ranked among the most scandalous failures of startups in 2020 if not the biggest. For several years, the founder of ScaleFactor managed to pass off his accounting product as artificial intelligence software while instead of AI, all the work was done by a team of real accountants.

But the reveal of a years-long scam did not end the startup’s existence. As Kurt Rathmann said in an interview with Forbes, compared to 2019, the company’s profit almost halved because of the pandemic and the natural lack of demand. Angry comments from former users flooded the Internet, complaining about numerous errors in calculations ordered from the company. It was big news: until that moment, ScaleFactor dropped dissatisfied customers quickly and by mutual agreement so that negative reviews would not appear on social media. 

According to former employees of the company, the service quickly gained momentum thanks to aggressive marketing. Since the first consultation, clients were convinced that the startup’s softwarewould take care of their reporting and paying taxes. 

ScaleFactor employees kept bringing up the number of investments, implying it was a guarantee of their honesty and safety. Since its inception in 2017, the startup has raised several rounds. Its partners and contributors included Techstars Austin Business Incubator, Michael Gilroy (Canaan Partners), and Byron Deeter (Bessemer Venture Partners). 

If such reputable investors believed in the future of ScaleFactor, then it was almost disrespectful to doubt its decency. And new investments were attracted by inflated sales figures obtained from transactions that managers had to carry out strictly up to schedule.

What killed the project

The decrease in the number of clients was caused by gross errors in the calculations. There was a complete lack of feedback from entrepreneurs since complaints were moderated on social networks with no improvement whatsoever. Also, the ScaleFactor management simply refused to conduct business honestly. 

Only a pledge of secrecy held back the employees’ open voices of discontent regarding what was going on in the company. Over the years, managers had to forge lots of financial documents (both external and internal) and stage increased sales to appease investors.

At the same time, real customers refused to continue cooperation. In October 2019, the company calculated that it was at risk of losing about $600,000. In January of the following year, Kurt Rathmann decided to change the business model of the enterprise. 

However, because of the pandemic, ScaleFactor never stood a chance. Eventually, the last clients left with a scandal and took all the company’s income.

Essential ($330 million)

The death of Andy Rubin’s project was more than an incident. During the last round of funding, Essential raised $ 330 million and a plan to create a new smartphone. But after the failed launch of Essential Phone in 2018, reports appeared that the startup was being sold. Finally, the latest Project Gem smart home solution could only be seen in a commercial ad since it never entered the market.

Essential announced its shutdown on February 12, 2020. TechCrunch suggested it was the end for Newton Mail as well (it’s a user-oriented e-mail client made by Essential). The startup team assured that access to Newton Mail will remain until April 30, 2020. 

What killed the project

The investments allowed Essential to survive for three years. But a series of events happening both with the founder and business led to the startup’s collapse. Andy Rubin’s first product, the Essential Phone, was supposed to revolutionize the industry of smartphones, but it failed to impress users and become “a new iPhone”. Reviews on functionality and interface were average. Alas, the overestimated expectations did not come true. 

The second project, a smart home control system, was developed in secret and never brought to the final stage. The story of Essential ended with the COVID-19 outbreak and a series of controversies related to Andy Rubin himself. In such conditions, the creator of Android was no longer able to keep looking for success.

Quibi ($1.75 Billion)

In the contest of the worst startups in 2020, this project should take the crown. Quibi went down in business history not only as the most ambitious project, but also the most short-lived. It took only 6 months to go from launch to closure.

The story of Quibi begins when the former co-founder of DreamWorks AKG Jeffrey Katzenberg decided to create a new project. The original idea of using 3D technology in cartoons no longer paid off, so Katzenberg decided to switch to video content. In July 2017, the entrepreneur appeared in media promoting his project NewTV. To build his marketing campaign, Katzenberg hired Meg Whitman, a woman who transformed eBay from a small office into an $8 billion company.

However, to really implement the idea, such content was needed that users would want to pay for it. According to Jeffrey Katzenberg, by August 2018, he already had the first billion dollars and financial support from Hollywood studios. In cooperation, they managed to attract producers and famous directors to launch NewTV. However, the name had to be changed to Quibi: the initial option was already taken.

It was planned to launch Quibi as an online cinema for smartphones where each video was divided into ten-minute segments to help perceptibility, the so-called quick bites (that’s where the name of the service comes from). Users could watch TV shows and programs on the go, in a cafe or subway without missing the most exciting moments of the stream. According to Katzenberg, the platform could well compete with TikTok and YouTube

A month before launch, Quibi’s management announced the second round of funding. The startup investment made it to $1.75 billion. But six months later, an open letter from Katzenberg and Whitman appeared on Medium with a public acknowledgment of the streaming service shutdown. Lockdown and pandemic were not the only things to blame. 

What killed the project

There are several reasons for Quibi’s failure. Let’s revise them all.

  1. As the founders explained, the service concept was not strong enough, and the launch time wasn’t perfect either. Due to the coronavirus outbreak, people almost stopped commuting, so there was no need to watch TV series on the go. In addition, the service was only designed for smartphone screens, while COVID-19 made TVs great again. By the time streaming content from phone to TV was allowed, it was already too late, and Quibi failed to retain subscribers.
  2. The poor subscription model. After a 90-day free trial, viewers were asked to pay $4.99 for the version with ads and $8 for ad-free. Also, the team was not considering the common practice of combining commercials and free use. For the target audience of Quibi, such prices seemed high, and after three months, they were getting used to watching TV for free. 
  3. Disregarding the interests of the audience. The platform was originally targeted towards younger generations, but its TV series were starring Steven Spielberg and John Travolta. There were random reality shows coupled with news programs. In reality, young users are much closer to spontaneous short videos from TikTok than to premium Hollywood storytelling. 
  4. A messy advertising campaign. Quibi promo videos showed the benefits of the service but had no content announcements. By the way, one of the ads was broadcast at the Oscar ceremony. Its average viewers’ age is over 50 while Quibi’s target audience was from 25 to 35 years old. 
  5. Not being able to take a screenshot, watch a video with a friend remotely, or recommend a show using a link. This did not meet the interests of the youth and deprived Quibi of viral support in social networks. The platform also refused to cooperate with influencers of Instagram, TikTok, and YouTube.
  6. A fatal subscriber miscalculation in a startup business model. The profit needed to cover the company’s expenses for marketing and content licensing (choosing to license instead of creating original content also turned out to be very unprofitable). In order to do that, it needed 12 million subscribers. Bloomberg calculated that with such calculations, the platform would have used up its investment reserve by 2021. However, even among the 4.5 million users who downloaded the application, 92% did not continue with a paid subscription.

Unlike Katzenberg’s previous project, Quibi failed to sell. A potential buyer of this startup will be met with court proceedings on patent infringement on the technology of adaptive video which allows you to watch serials both horizontally and vertically. The Eko company has filed a lawsuit against executives of the platform, and the process will take place no earlier than 2022, as suggested by The Information

Conclusion

Back in March 2020, the International Monetary Fund announced an impending recession comparable to the period of the global financial crisis of 2008. However, according to entrepreneur Richard Lew, not all startups were destined to become a victim of the pandemic. 

The fall of companies like Quibi and Atrium would have taken place even without the intervention of third parties. Each model had its own shortcomings. After all, marketing problems, false data on sales, and high expectations are the curse of startups at any level of development, be it a multi-billion dollar company or a fresh project.

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