7 Of The Worst VC Investments Of All Time
Every venture capitalist wants to fund the next Google. What could be better than investing a paltry few million, walking away and pocketing a cool one or two hundred after the IPO? Indeed, such dreams are exactly what propels the entire VC industry forward. Yet, succeeding as a venture capitalist usually much harder than that. If spotting the Next Big Thing were something that anyone with a quick wit and some business savvy could effortlessly do, such stories would be the rule instead of the exception.Instead, we find that for every titanic tale of venture-backed startup success, there are dozens of colossal failures. Today, Focus remembers seven startups that turned out to be gigantic wastes of VC money:
Webvan
Of all the late 1990's startups that held initial public offerings, few lost more investor capital than Webvan. As BusinessPundit.com explains in its article 25 Startups That Bombed Miserably, the home grocery delivery company focused more on growing its infrastructure (which included $1 billion worth of high-tech warehouses across the country) than on overcoming the razor-thin profit margins of the grocery business. Calling Webvan an "oversized dot-com" and one of the "most spectacular" busts of its era, CNet noted that the company spent excessively on things like hardwood oval tables, Herman Miller Aeron chairs, basketball hoops and a fleet of delivery trucks. All told, Webvan flushed the $375 million it raised at IPO straight down the toilet and went bankrupt in 2001, leaving its staff of 2,000 abruptly unemployed and its investors (including Sequoia Capital) up the proverbial creek.
Amp'd Mobile
From a venture capitalist's perspective, the downfall of Amp'd Mobile would be more accurately described as a debacle. Characterized by Venture Beat as a "hard-charging mobile content company that raised $360 million only to burn through it all and crash into bankruptcy", Amp'd Mobile engaged in what can be thought of as a startup's version of the subprime crisis. Rather than keeping its policy of running credit checks to verify its customers had enough cash to pay their bills within 30 days, Amp'd CEO Peter Adderton thought better of it and relaxed the requirement to 90 days in order to bring more customers aboard in less time. Predictably, roughly half of the new, riskier customers had trouble making their payments 90 later, with many of them heading into collections. When all was said and done, Amp'd investors (including Highland Capital Partners, Columbia Capital Equity Partners Vivendi/Universal Music Group and MTV Networks) lost every dime they put in.
Flooz
Flooz was advertised so heavily during the late 1990's that few believed it would ever fail as miserably as it did. The basic idea "seemed" novel and interesting enough: an online-only currency that web shoppers could use in lieu of cash or credit cards. The company signed on an impressive roster of retailers who agreed to accept Flooz in exchange for their goods and services, and all appeared to be well. But as BusinessPundit noted:
"There was only one problem. No one bothered to ask why someone would use a totally new and unproven currency instead of credit or gift cards, which were backed by trusted merchants. No one asking didn't stop customers from answering, however, as lack of demand for Flooz plunged the company into bankruptcy in 2001."
All told, an eye-popping $35 million in venture capital was lost as when Flooz threw in the towel.
Pets.com
Pets.com was another startup idea for which there was virtually no demand. Despite raising $50 million from investors like Hummer Winblad Venture Partners and Bowman Capital (and another $82.5 million from a February 2000 IPO), Pets.com produced little more than some cute Super Bowl commercials and the lovable mascot shown above. Sadly, this was nowhere near enough to overcome the fact that online pet supply ordering was a silly and unprofitable business model.
In a November 2000 article, CNet called Pets.com "the latest high-profile dot-com disaster" and reported that its stock bottomed out at a paltry 19 cents per share - from a high of $14.
Kozmo
Unlike some of the startups discussed so far, Kozmo did not flame out for lack of a good, in-demand idea. As NationMaster explains, Kozmo "promised free one-hour delivery of anything from DVDs to Starbucks coffee" to residents of major cities and metro areas. Founded by New York City investment bankers Joseph Park and Yong Kang in March 1998, the company found itself unable to profitably serve the customers it attracted. While scores of people lined up to use the service, Kozmo's insistence on never charging delivery fees for tiny orders doomed the company to unprofitability.
In April 2001, Kozmo laid off its staff of 1,100 and shut down, rendering the $280 million it had raised (including $60 million from Amazon) as dead capital.
Boo.com
Not all high-profile startup failures occur in the United States, of course. The UK-based Boo.com, described by PrenHall.com as the "poster-child for dot.com failure", squandered upwards of $160 million in venture capital. Where did the online fashion retailer go wrong? According to BusinessPundit, Boo succombed to:
"...another startup-killing habit: using JavaScript doo-dads and quirky Flash-based navigation in order to dazzle and impress instead of fulfilling genuine consumer needs. These tactics make for slow-loading sites today, but they were downright fatal during the dial-up days of 1998-2000."
PrenHall.com concurs, noting that "...99 percent of European and 98 percent of U.S. homes [lacked] the high-capacity Internet connections required to easily access the graphics and animation on the Boo.com site." As if that weren't enough, Boo also failed to adequately perform as a "global company", struggling to deal with "the many different languages and tax structures of the various countries it attempted to do business in."
CueCat
In its May 2006 article The Best Of The Worst, the Wall Street Journal remembered CueCat as "another favorite target for mockery among dot-com critics." The idea was to produce and sell pen-sized devices (like that shown above) shaped like cats, which connected to the user's keyboard port and allowed them to scan bar codes on ads that they saw. This, in turn, would automatically call up relevant web pages with further details. Anonymous data concerning the products being looked at were sent back to CueCat for marketing purposes.
Big-name investors like Coca-Cola and General Electric ponied up $185 million for the venture. Regrettably for them, this money did not negate the fact that "the device that generated so much excitement with marketers failed to catch on with consumers." One reviewer, who no doubt spoke for most consumers, panned the CueCat as "unnatural and ridiculous."
