Even the most promising ecommerce businesses might shut down a couple of years after the launch. In this article, we’ll list the most common reasons for ecommerce startup failure and back them up with real-life examples.
Top reasons why ecommerce startups fail
The Marketing Signals agency investigated 1,253 failed e-commerce projects in the UK. Here are the most common reasons why they closed.
- Low-quality online marketing — 37%
- Insufficient visibility in online search engines — 35%
- No market niche for their products/services — 35%
- Lack of funds — 32%
- Problems with pricing — 29%
- Fierce competition — 23%
- No opportunity to outperform industry leaders — 19%
- Poor client service — 16%
- Inexperienced and/or unmotivated team — 14%
- Bad timing — 11%
Note. If you sum up these numbers, the result will exceed 100%. That’s not a mistake because, during the interviews, founders were allowed to indicate more than one issue that led to their companies’ closure.
CB Insights carried out another research that was focused on failed startups in general, not only from the ecommerce niche. Their findings were a bit different from the information provided by Marketing Signals.
- Lack of funds — 38%
- No market niche for the product — 35%
- Fierce competition — 20%
- Weak business model — 19%
- Legal and regulatory challenges — 18%
- Problems with pricing — 15%
- Inexperienced and/or unmotivated team — 14%
- Bad timing — 10%
- Low-quality product — 8%
- Disharmony among team and investors — 7%
- Pivot gone bad — 6%
- Burnout — 5%
Only around 80% of small businesses manage to survive after one year. To boost your odds to stay alive and generate revenue, you need to commit to your startup. Just being passionate about what you do is not enough, although we should not underestimate how important it is to never give up.
Based on research by Marketing Signals and CB Insights, an ecommerce startup will be more likely to avoid failure if it manages to
- build a strong online marketing and SEO optimization strategy,
- verify the market demand for its products/services,
- complete a thorough competition research and find a way to stand out,
- attract investors to support and sponsor startup operations.
11 real-life examples of failed ecommerce startups
Below, you can find the descriptions of ecommerce startups that were forced to close. These case studies are a cautionary tale intended to inspire entrepreneurs to learn from other people’s mistakes. The e-commerce startups were taken from different sectors: design, food and beverage, analytics, retail, etc.
Alikolo
This business was started in Indonesia in 2014 and shut in around a year. Alikolo provided an online marketplace where vendors would list their products for consumers to make purchases. Orders were delivered even to the most remote destinations.
At the beginning, shipping was free for all buyers. But once the free shipping incentive was over, sales dropped dramatically — it turned out that consumers were not ready to pay for the delivery.
However, that was not the only reason for the platform’s collapse. Alikolo distributed too large a part of its stake among speculators. The founder kept too little control over the project and became a minority investor. By the second round, the startup couldn’t attract new investors. So the fundamental reason for this failure was the lack of expertise of the founding team.
Auctionata
This German startup was launched in 2012 and went bankrupt in five years. Auctionata was an ecommerce and online sales management company. It specialized in online auctions of artistic items and extravagant collectibles. They were organized in a TV studio and streamed online in real-time. An authorized salesperson took care of the closeouts.
This startup could have become a serious competitor for Sotheby’s and Christie’s. It revolutionized the industry by eliminating the necessity of being physically present at the auction.
However, Auctionata’s CEO used to tell too many lies. The startup’s operations lacked transparency as it heavily overstated its profit/sales. Customers complained about late deliveries and items disappearing from sale. So in the end, Auctionata was accused of unethical behavior, and its ruined reputation made it shut down.
ArsDigita
Founded in the US in 1997, this web development company managed to last for only four years. It employed over 50 professionals. 3 investors supported it with $35 million in its single funding round.
This business came up with the product called ArsDigita Community System. This open-source toolbox was designed to support group sites of online entrepreneurs with the ArsDigita database. It facilitated data exchange and guaranteed smooth operation.
For the first three years, the business was developing well. Then, it hired a CEO who was not experienced enough. Plus, investors didn’t approve of the ArsDigita Community System, even though it had proved to be highly efficient and gave the company a unique competitive edge.
As soon as investors got more power in decision-making, they replaced ArsDigita Community System with a programming bundle that was not user-friendly, suffered from execution issues, and failed to meet most of the company’s business needs.
Besides, the new leaders declined a Microsoft offer that could have helped the startup reach new heights. They opened too many official positions that were not absolutely necessary and that cost the company too much. In the end, the budget was misused and ArsDigita had to close down.
Fab
This US startup was founded in 2009 as a dating project. In 2 years, it switched to design and ecommerce. Fab managed to stay afloat until 2013. It had a team of over 500 members and attracted $336.3 million in 11 funding rounds from 34 investors.
Within the first six months of operation, Fab attracted over 1 million subscribers. It was growing quicker than Facebook. To leverage the social aspect, Fab introduced an Inspiration Wall where users could share their purchases. That was a brilliant start — but then, the founding team found out that various entrepreneurs from abroad were trying to copy their concept.
To combat competition, Fab began its expansion to Europe by acquiring 3 startups in the region, but these efforts were premature. Instead, Fab should have solidified its position in its home country.
Another crucial mistake was purchasing a warehouse in New Jersey to accelerate the delivery process. The delivery time was reduced from 16.5 to 5.5 days. Sales skyrocketed, and as a result, Fab’s product inventory increased. However, since the company used to provide custom designs, it lost its primary competitive benefit. Customers realized that they could buy similar items on Amazon, at a cheaper price, and with faster delivery. They left and never came back.
In 2014, the founder sold Fab to PCH Innovations. He only got $15 million for the startup that was once estimated to cost $1 billion.
HitMeUp
This UK company was launched in 2011 and shut down in 4 years. HitMeUp opened a web-based business commercial center in London. Its product was available in three formats:
- Web app
- Mobile app
- Mobile app that supported the web version
When businesses in the area experienced periods of low sales, they could announce flash sales through HitMeUp. Consumers would open a map and see the best deals close to them. Companies got a chance to connect to clients who were ready to buy their goods immediately.
At first, this concept didn’t deliver impressive results.
- Local businesses were not eager to announce sales to their already-existing clients since they were ready to pay the full price. Instead, they wanted HitMeUp to find new customers.
- Vendors didn’t bother to create engaging text content for their sales announcements.
- Product photos that they attached to their announcements were not visually appealing enough to motivate people for the purchase.
HitMeUp solved the problem of finding new buyers by building a customer-oriented app. But that was not enough to make the startup profitable and sustainable.
HitMeUp used to place a lot of ads on Facebook, yet they didn’t convert into sales. Users perceive this social platform as a place to stay in touch with their friends, not discover new products. If they see a compelling product ad on Facebook, they’d rather order it from a source that they’re used to, not from a website/app that is new to them.
When the HitMeUp mobile-only app saw light, businesses were eager to sign up for it. But the audience was too scarce, so vendors stopped publishing coupons because no one used them.
The founder of the startup confessed he lacked technical expertise. He hoped he could rely on his management skills and ability to attract funds. The fact that he was fully dependent on someone else’s technical vision slowed down many business processes, increased costs, and incurred excessive risks.
Juicero
This one was founded in the US in 2013 and went bankrupt in 4 years. As its name suggests, the company specialized in making and selling organic juices. Its product range featured packets of diced fruits and vegetables. They washed the food, cut it, and put it in single-serve packets. When buyers wanted to drink juice, they needed to turn a Wi-Fi-connected Juicero press on, and it would squeeze the contents of a packet into a glass.
The startup’s mission was to give people a chance to eat and drink healthy and with maximum comfort. The founding team raised a substantial amount of money because they convinced investors that their product was disruptive and innovative. However, when the juice press hit the market, it turned out to be useless.
- The initial price tag of $699 was too high.
- The fact that the machine required Wi-Fi limited its audience.
- The press would only work after scanning the QR code printed on each packet serving.
- The average price of a Juicero packet was $6.
- Bloomberg News made a video where a person squeezed the juice from the packet with their own hands, without using the press.
The company reduced the price of the press to $400 and promised to release a more affordable version. These measures didn’t help. So Juicero went down in history as one of those absurd startups that didn’t fix any of their audience’s pain points.
Laurel & Wolf
Registered in the US in 2014, Laurel & Wolf was an online marketplace that would sell furniture and decor items as well as connect consumers with interior designers. For a flat fee, the client would get in touch with a professional who would share recommendations on refurbishing their houses, apartments, etc. with reasonable expenses.
The company went to great lengths to create a positive image. Nevertheless, most of the reviews that customers left online were negative. Clients rated Laurel & Wolf with one star because
- some of them never received their orders,
- others received their purchases but the items were damaged,
- customer service left much to be desired,
- people who claimed refunds never got them.
Most designers quit the company because of bad publicity and small payouts that could be reduced further without explanation. Staff members were unhappy with leadership style as well. Even though the startup regularly organized team building and entertainment activities, the founder was only ready to accept her own opinion and refused to listen to her employees.
The internal operations of the company were in chaos. For many months, there was no clear management structure, dedicated HR, or internal accounting. Staffers had to spend over 12 hours per day at work because the way the workflows were organized was too messed up.
Last but not least, the startup’s office was a disaster. There was just one bathroom there and the space was cramped up. After the company moved to a new location, things didn’t get any better. Their second building suffered from structural issues. Sewage would seep into the ground floor, posing health risks.
Laurel & Wolf shut down in 2019. However, in a few months, a new management team revived the brand.
Move Loot
This American-based startup existed from 2013 until 2016. It was an online marketplace where users could resell furniture. The fundamental concept of this business is modern and highly compelling: second-hand items shouldn’t be thrown away and deserve a chance to get a new life.
Move Loot didn’t only help vendors connect with customers but also took care of inventory and delivery. It primarily targeted people who were refurbishing their houses or apartments as well as those who were moving to new locations.
The Move Loot team made three major mistakes.
- They didn’t think about the expenses of running a substantial furniture stockroom, which led to high spend and limited benefits.
- Their expansion from San Francisco to Los Angeles and New York started too early. This resulted in a mass layoff because the company couldn’t pay employee wages.
- The company was switching from one business model to another too quickly without giving them enough time to prove efficient.
Customer reviews about Move Loot were becoming more negative. Rumors were circulating about possible acquisitions or partnerships but none of these ever came true.
Reach.ly
This startup was established in Latvia in 2011 and only survived for 4 years.
Reach.ly offered an analytics tool for e-commerce websites. Businesses got access to consumer behavior patterns that they could use to make data-driven decisions. A special machine was deployed to recognize these patterns in real time and keep continuously learning from new data.
Reach.ly enabled ecommerce websites to send customized messages to their clients. Business owners could conveniently compare sales and conversion rates between various channels.
In addition to behavioral analytics for ecommerce, Reach.ly had a second goal: to provide Twitter data mining solutions. It was a mistake to split efforts between such contrasting objectives because the company couldn’t attract new investors and only survived on the CEO’s shares.
The second weak spot was technology. Instead of starting with a simple MVP to test the idea, Reach.ly began with the bigger version of the product and struggled to scale later. Moreover, the team of the startup didn’t know how to work with market feedback. There were loopholes in their data sets, and they lacked an appropriate tracking solution even though all the team members had a solid background in technology.
Unexpectedly, Reach.ly switched to Shopify without consulting with anyone in advance. At first, it seemed like a reasonable choice because Shopify had a standardized API and app marketplace. But its users did not match Reach.ly’s buyer persona because their stores were too small.
Over time, a large part of the team quit. Too many resources were spent on replacing these professionals, and too much time was lost. The founders lacked teamwork, passion, and business vision, which eventually led their company to failure.
Shipbeat
Shipbeat was launched in Denmark in 2014 and went bankrupt in 2 years. The mission of this location-based platform was to facilitate the logistics for small to medium-sized ecommerce businesses.
The company strived to make delivery more flexible and transparent while preserving a sustainable margin profit for itself. Thanks to Shipbeat, companies were supposed to improve their customer services, cut down shipping expenses, and boost their revenues.
Nevertheless, the main shipping carriers in Denmark were reluctant to collaborate with the startup:
- The Shipbeat team didn’t have enough influence in the industry.
- Their user base was small and insufficient.
- It was difficult to explain the new model of operations to companies that were happy with the conventional ways of doing things.
Most importantly, there was no guarantee of success. Any logistic or technological changes would require a lot of effort from all the parties involved. But it was not clear whether the innovative approach would lead to increased profit or losses — that’s why the carriers preferred to avoid risks.
SpoonRocket
This American startup was launched in 2013 and only survived for 3 years.
SpoonRocket aimed to deliver warm food. Every day, chefs would prepare sets of healthy affordable meals. Clients would order these meals through the SpoonRocket app. Drivers would pick up the orders, put them inside specifically-designed warming cases, and deliver them to clients within 15 minutes.
This business had 4 major flaws:
- Drivers were late too often.
- Customers left negative reviews because they had to wait for too long.
- The company failed to attract more funding due to a lack of customers’ trust.
- The brand was too focused on low prices and quick delivery but the taste was not their top priority.
Final thoughts
The primary reasons why ecommerce startups fail are mediocre marketing efforts, poorly formulated unique selling points, insufficient financial support, and poor management. Fierce competition and inability to outperform industry leaders might cause a promising startup to close down too. Besides, it’s vital to get a highly motivated and experienced team that has all the necessary skills to develop a startup.
