Sunday, May 4, 2008

Startup Exits

Andrew Hyde of Startup Weekend wrote about three Boulder startups that shutdown last week.
Good people, strong business models, and brilliant marketing, and still, no tomorrow for them. Nau, Organica and Falling Fruit.
A clothing line, coffee shop and audio production company. Seems like startups are bellying up at a rapid pace this week.
It is not fun to see people with so much passion start something only to shut these down to cut losses. It is better to shutdown when the prospects are dim than be hung up on the sunk costs.

Andrew asks what did these do wrong? Let us look a quick look at these three.

Nau: It placed corporate social responsibility above profitability, "We Believe that companies have a broader responsibility than simply generating profit". I disagree. It is not a corporation role to engage in CSR activities. As Robert Reich said in his book Supercapitalism, this rests with the Government. For a startup wanting to attract customers and capital this non-profit motive is not a viable business model. To quote Milton Friedman, "The business of business is business". Their product still has to serve the purpose it is designed for and every unit they sell must contribute to amortize the total cost. It is a case of optimistic predictions of product uptake and sales projections.

Organica: It is a coffee shop. It entered a crowded market that has no barriers to entry, little differentiation, fickle customers and high operational costs. By staying small they limited their volume, an essential component to amortize the high fixed costs. It is indeed hard to see investors lose their money but they should have seen the cash flow problem.

Falling Fruit: Another content creator distributor with Ad based business model. There is limited market, people have limited hours and can only read or listen only a few media sources. They tried to position themselves against TV, that is trying to change people's behavior. Their value proposition is "connect people who understand the importance of making positive changes in their lives and in the world". There are already big competitors in this arena, a big one is Religion. They had no unique offering and a very narrow customer segment. This is once again not a surprise.

No comments: