What startups can learn from 11 failed ventures
For every meteoric startup success story, there are dozens of cautionary tales of companies and products that failed so spectacularly they ended up in bankruptcy court. We take a look at what went wrong for 11 startups that filed for Chapter 11.
Although many entrepreneurs are keenly aware that the odds are stacked against them, few founders expect to find themselves explaining their actions in bankruptcy court — yet that’s the precise situation the founders of these 11 companies found themselves in when their ventures failed.
On one end, you have Solyndra, a controversial company that fell apart after raising $1.2B (including more than $500M from the federal government) when the price of polysilicon — a solar panel component to which they were building a cheaper alternative — entered a steep decline.
On the other, you have companies like Earth Class Mail, which despite its large user base went bankrupt during the 2007-08 financial crisis, only to reinvent itself and flourish under new ownership more than a decade later.
The circumstances leading to the bankruptcies of the 11 companies below are as diverse as the companies themselves. Although the reasons behind the bankruptcies of these startups vary widely, there are commonalities. From chronic mismanagement and fraudulent financials to poor timing and the perils of ambition, these companies all learned that success is far from guaranteed, even for the most disruptive of ideas.
TABLE OF CONTENTS
- Coda Automotive
- Nasty Gal
- Dart Music
- Earth Class Mail
1. Solyndra: A fragile business model leaves you vulnerable to competition
Declared Bankruptcy: 2011
Total Funding: $1.2B
When Solyndra folded, it was not just one of the biggest solar company failures of all time — it was one of the biggest VC-backed failures of all time.
Solyndra manufactured a unique type of solar cell made of copper indium gallium selenide (CIGS). At the time, CIGS was a far cheaper alternative to polysilicon, the main component in most solar panels — a fact that helped the company raise a total of $1.2B.
Notably, Solyndra’s rise coincided with the passing of 2009’s American Reinvestment and Recovery Act, which contained various subsidies and promises of investment for sustainable US energy initiatives. In March 2009, the US government announced it planned to award Solyndra a guaranteed loan of $535M as part of that initiative. Solyndra intended to use the funding to dramatically expand its manufacturing facilities in Fremont, California, in a move that the company said would create approximately 3,000 new jobs.
But what Solyndra’s investors and the government didn’t see — or didn’t understand the importance of — was that the price of polysilicon was on the decline as early as 2008.
By the time the Department of Energy was setting up the parameters of this loan, the price of polysilicon was already starting to plummet, from $475/kg in February 2008 to as low as $73/kg in May 2009. By December 2011, it was under $30/kg.
The price collapse of competitor material polysilicon destroyed Solyndra’s value proposition. When it couldn’t sell its systems for any cheaper and still make a profit, the company had to file for bankruptcy.
By September 2011, Solyndra’s business model had fallen apart. The company announced it was effectively ceasing operations immediately and filing for Chapter 11 bankruptcy, putting more than 1,100 people out of work overnight.
Accusations of fraud and mismanagement, and criticisms of the government’s decision to invest in Solyndra, were rampant in the days following news of Solyndra’s impending bankruptcy proceedings — but the core mistake here involved ignorance of a key aspect of Solyndra’s business.
Solar is a difficult industry, heavily reliant on expensive and technically challenging R&D. It’s also one where traditional lenders, because of the uncertain returns, are less likely to extend credit. But Solyndra compounded these negative conditions with an additional one that proved fatal: a business model fragile to changes in the price of polysilicon.
2. Coda Automotive: Being partially right doesn’t save you from also being wrong
Declared Bankruptcy: 2013
Total Funding: $612M
Coda Automotive was an early player in the electric vehicle market, an early failure, and a great example of why being early is not always an advantage — even if the future your company envisions is probably the right one.
Coda’s main product was The Coda, a four-door electric sedan. Rather than designing a new vehicle entirely from scratch, Coda modified the design of an existing gasoline-driven vehicle, the Hafei Saibao III, which was designed and manufactured by Chinese automotive company Hafei for China’s domestic market.
The Coda relied on a battery system that offered fuel economy and battery life that was significantly better than comparable electric vehicles at the time. After evaluating the vehicle, the EPA gave The Coda a fuel economy equivalence of 73 miles per gallon, the highest of any electric vehicle on the market in 2012.
But this early on in the electric car market, battery life mattered less than building a car that people actually want to use.
The Coda got plenty of flack from industry publications for its lack of powered windows, cruise control, and general aesthetic sense.
The death knell for Coda Automotive, however, may have been its safety issues.
In tests conducted by the National Highway Traffic Safety Administration (NHTSA), The Coda was awarded a rating of 5 stars out of 5 for its side-impact and rollover tests. However, it performed poorly on frontal impact tests, receiving just 2 stars for driver safety. The NHTSA issued a recall of the car due to additional problems with the vehicle’s side and window airbags shortly afterward.
In December 2012, Coda was forced to lay off 15% of its total workforce. Shortly afterward, the company reduced the car’s price to $25K, but the damage had been done. Coda Automotive sought Chapter 11 bankruptcy protections in May 2013, and announced it was restructuring its business as a battery technology company. Coda’s unsold vehicles were later acquired by Mullen Technologies, an electric vehicle company based in California.
With battery technology and fuel economy superior to the Toyota Prius, Coda had the potential, on paper, to give Toyota a run for its money. The problem, in part, was the car itself: with a body design that resembled a cheap sedan more than a futuristic driving machine, the Coda was always going to be at a disadvantage next to sleeker offerings.
Another, larger problem was that the market for electric cars did not take off the way that Coda expected.
Owning an electric car is still generally pricier than owning a regular gas-powered vehicle. Owning an EV requires an EV-compatible place to store, park, and recharge it — as well as finding places to recharge it along your route (which is why Tesla has rolled out more than a thousand charging stations around the world).
At the end of the day, the drawbacks of an impractical, unsafe, and ugly vehicle were too big a hurdle for even the most advanced EV tech to overcome.
3. Quirky: Enthusiasm is no substitute for quality control
Declared Bankruptcy: 2015
Total Funding: $185M
“We were promised a future of jetpacks and flying cars — and it’s 2014. Shouldn’t we all be living with a robot butler?” — Ben Kaufman, founder, Quirky
Ben Kaufman founded Quirky in 2009 to help inventors create and sell their gadgets more easily. The marketplace blended crowdsourcing and social media to create hype around new inventions; help inventors find partners, funding, and manufacturing resources; and sell their gadgets to major nationwide retailers such as Home Depot and Target.
Quirky was under a relentless amount of time pressure to bring all its different product concepts to market so rapidly. To meet production quotas, Quirky’s team of moderators often didn’t have sufficient time to thoroughly evaluate products’ commercial potential or optimize their development.
A key main problem, as one anonymous Quirky designer told Business Insider, was that Kaufman lacked an understanding of product development fundamentals — and did not seem concerned about the potential dangers of Quirky’s rapid-fire prototyping culture.
“There were mistakes that easily could have been prevented. An overarching theme at Quirky is the showmanship of it. It was very P.T. Barnum-esque, focusing on being ‘The Greatest Show on Earth’ instead of on attention to detail.” — Anonymous former Quirky employee
Kaufman is far from the only founder with boundless enthusiasm for his ideas and an apparent disdain for the business side of running his company. Quirky’s struggles do, however, highlight the dangers of aggressively pursuing ideas — even those with significant commercial potential — without an adequate understanding of the processes necessary to realize those ideas.
Kaufman’s indifference to the business side of things was an active liability that jeopardized the survival of Quirky as a company.
Quirky had attracted significant investment by a range of prominent funds, including a $68M Series C led by Andreessen Horowitz and Kleiner Perkins in September 2012.
However, Quirky’s approach to product development resulted in heavy losses for the company. Quality assurance was virtually nonexistent, and Quirky’s reputation began to suffer. Reviews of Quirky’s Wink smart home products were strongly negative. The company spent almost $400,000 developing a Bluetooth-enabled portable speaker called the Beat Booster that ultimately sold fewer than 30 units.
By February 2014, Quirky had just $50M left in the bank and was burning through almost $6M per month. Faced with mounting losses and no clear way out, the company laid off a significant portion of its workforce and attempted to restructure, letting one-third of its employees go between October 2014 and February 2015. The company also halted development of almost all of its products.
In September 2015, Quirky finally filed for Chapter 11 bankruptcy protections. The company’s assets were acquired by Q Holdings in 2015, and the firm quietly relaunched the Quirky brand in 2017.
In the end, the skill that Quirky had for attracting and incentivizing investors did not translate into the creation of a successful and sustainable business. While the company could generate new ideas, a lack of expertise in taking products to market meant that the company failed to scale.
4. Munchery: Too much money can be a bad thing
Declared Bankruptcy: 2018
Total Funding: $117M
Startup survival often depends on the size of a potential market. However, even growing, profitable markets with strong consumer demand are no guarantee of future success, as defunct food delivery service Munchery discovered after filing for Chapter 11 in 2019.
The San Francisco-based food startup was founded on a unique premise: custom, constantly changing menus of high-end dishes prepared by professional chefs and delivered directly to members’ homes.
However, even a unique, compelling value proposition can’t save a company that pursues overly ambitious growth plans without a clearly defined sense of how it will compete in a crowded market.
By 2015, Munchery had raised $117M in venture financing, giving it a valuation of $240M. The company struggled with several aspects of its business, including managing the cost of individual meals and ongoing problems with food waste — but it used the money it raised to pursue an aggressive expansion strategy nonetheless.
This would be Munchery’s downfall.
Operating on the belief that the on-demand food delivery market would be owned by the one or two brands that moved the fastest to consolidate control, Munchery spent more than $100M building out food production facilities, hiring staff in new markets, signing expensive leases, and otherwise expanding its business across the country. The goal was to become the main company in this space.
A few obstacles emerged along the way. First, customer acquisition got more and more expensive. Diminished organic reach through Facebook and competition from other on-demand meal delivery startups made it harder and pricier to acquire new customers and keep revenue coming in.
Second, the thesis that one or two brands would quickly go on to own on-demand food turned out to be either wrong or too early. Munchery’s Chapter 11 filings cite Grub Hub, Seamless, Door Dash, Postmates, Caviar, and Uber Eats as competitors — making it harder for Munchery to get customers, hire employees, find restaurants to work with, and differentiate its services.
Finally, poor uptake of other on-demand food startups soured Munchery’s investors on putting more money into the company. For example, Blue Apron went public in June 2017 and subsequently lost 70% in share price over its first year as a publicly traded company.
Munchery’s CEO James Beriker expressed in the company’s Chapter 11 filing that “making and delivering freshly prepared food directly to consumers proved not to be a sustainable business model.”
“The company expanded too aggressively in its early years. The access to significant amounts of capital from leading Silicon Valley venture capital firms at high valuations and low-cost debt from banks and venture debt firms, combined with the perception that the on-demand food delivery market was expanding quickly and would be dominated by one or two brands — as Uber had dominated the ridesharing market — drove the company to aggressively invest in its business ahead of having a well-established and scalable business model.” — James Beriker, former CEO, Munchery
In May 2018, Munchery ceased all operations in Los Angeles, New York, and Seattle, three of the company’s most valuable markets, leaving only its San Francisco business operational. In total, approximately one-third of Munchery’s workforce was terminated. In January 2019, Munchery abruptly ceased all operations, as it informed customers via email. When Munchery filed for Chapter 11 protection in March 2019, the company owed its former customers more than $3M in unfulfilled gift cards and an additional $3M to vendors and manufacturing partners.
Adding insult to injury, Munchery not only failed to notify its creditors that it was ceasing operations, but had also continued to market its gift cards to customers as recently as December 2018, just weeks before the company abruptly shuttered for good.
Ultimately, Munchery’s problem was not that it made and delivered freshly prepared food. Its problem was that it raised $125M to build a business that wound up being unsustainable. As the company’s war chest dwindled toward the end of 2018, it could not secure extra capital to continue financing operation — largely because investors had tired on the structural and competitive problems outlined above.
5. Julep: M&A doesn’t guarantee ‘synergies’
Declared Bankruptcy: 2018
Total Funding: $60M
Founded by Jane Park in Seattle in 2007, beauty brand Julep quickly grew from a scrappy startup to a major omnichannel retail operation.
Julep started out as a single nail salon in Seattle. Park wanted to offer her customers more than just gels and acrylics; she wanted to give them a bespoke beauty experience. Park’s novel approach to individualized beauty quickly took off.
Julep grew rapidly, introducing a range of private-label beauty products like nail polishes and expanding to additional retail locations. One of Julep’s most popular products was its Maven subscription service, which offered subscribers a monthly package of beauty products curated by Julep staff.
By 2013, Julep was generating more than $20M in annual revenues. The following year, the company raised $30M from several high-profile investors including Andreessen Horowitz and Azure Capital, in addition to private investments by actor Will Smith and rapper Jay Z.
But problems were brewing beneath the startup’s surface — starting with the lawsuits.
Between 2012 and 2015, several customers filed lawsuits against Julep for engaging in what the Washington State Attorney General described as “deceptive” business practices. The customers alleged that they were misled about the nature of the Maven subscription box product and reported difficulty canceling their Maven subscriptions.
The lawsuit hinged on Julep’s promotional free Welcome Box of Julep products, available for just the cost of taxes and shipping. The report claimed Julep did not “adequately disclose” the fact that ordering the “free” box opted customers into Julep’s recurring monthly subscription product, Maven.
In a statement, Julep dismissed the suit as “unethical and deceptive,” but agreed to pay $3M to settle.
In 2016, private equity firm Warburg Pincus acquired Julep and two other beauty brands, Clark’s Botanicals and Laura Geller. It merged all three of its newly acquired brands into a single umbrella brand known as Glansaol, which means “pure life” in Gaelic.
For Warburg Pincus, the point of the acquisition was to consolidate most of the administrative and other back-office functions for these three brands.
Shortly after its formation, Glansaol invested a significant sum into the development of a shared back-end enterprise resource planning (ERP) system that would integrate the supply chain, personnel, administration, and clerical management of all three subsidiary brands. However, key differences between the three brands — such as Laura Geller’s primary focus on older demographics and televised ads, compared to Julep’s younger target market and online ads — made this practically impossible.
The building of this ERP system (and the unlocking of so-called “synergies” from the consolidation of the three brands) ended up being prioritized above the individual needs of the three subsidiary brands.
Less than two years after being acquired by Pincus, Glansaol — and, by extension, Julep — filed for Chapter 11. Julep closed its Seattle locations and headquarters in December 2018, laying off more than 100 staff in the process.
Acquisition is a popular exit strategy for many startups. However, as Julep’s misfortunes aptly demonstrate, even well-funded acquisitions made by experienced firms offer few guarantees of success. For all the M&A firms that make acquisitions in the pursuit of “synergies,” Julep provides a good counter-point: even if you have multiple brands in similar industries, those savings won’t always pan out.
6. Nasty Gal: Applying the hyper-growth model to physical retail is hard
Declared Bankruptcy: 2016
Total Funding: $65M
The downfall of fashion retailer Nasty Gal is a cautionary tale that should remind entrepreneurs that while taking VC money can help you grow your business, it won’t automatically make it successful — especially in a cutthroat industry like fashion retailing, where successful brands are usually built over decades.
Nasty Gal, today under the ownership of the UK-based BooHoo Group, was founded in 2006 by Sophia Amoruso. Originally an eBay store selling secondhand, vintage clothes that Amoruso picked up at estate sales, Nasty Gal morphed over the years to become an edgy online clothing store for young women, and from 2009 to 2012, grew quickly.
In 2012, Nasty Gal was named “Fastest Growing Retailer” by Inc. Magazine, and the company picked up $40M in VC capital from Index Ventures. The company went from $1M in sales to almost $100M in just a few years.
Then the company’s customer acquisition model began to show its cracks. Sales dipped to $85M in 2014, falling even further $77M in 2015.
The company had been spending millions to acquire customers and counter churn, but now capital was dwindling. Nasty Gal was being forced to compete with more affordable fast fashion alternatives, and was grappling with an inability to purchase new inventory and pay expenses. (And it wasn’t the only fashion retailer struggling — American Apparel, Aeropostale, Delia’s, and Quiksilver all filed for bankruptcy around the same time, while Forever 21 and Gap faced severe troubles of their own.)
Despite slowing sales and burning cash, Nasty Gal continued to spend money. (The company moved into a 50,000+ square foot warehouse, in a space far larger than needed, according to the LA Times.) The intense pressure Nasty Gal faced to expand, combined with high investor expectations, had created a culture in which rapid, short-term growth was pursued at any costs.
More problems emerged when several designers sued Nasty Gal, accusing the company of infringing on their copyright, and four former employees sued, accusing Nasty Gal of firing them because they were pregnant.
Amoruso left the CEO role in early 2015, after which about 10% of the staff of Nasty Gal was laid off in an effort to cut costs amidst newly falling revenues.
It all culminated in Nasty Gal’s 2017 bankruptcy filing and purchase by the Boohoo Group, which today operates the brand.
“I think Index Ventures handing that $40M to someone that naive who didn’t know how to build a deck — I didn’t even know how to build a presentation — was possibly irresponsible on my behalf,” Amoruso told the Observer in late 2018.
Nasty Gal’s growth-at-all-costs focus played a major role in its downfall. The company tried to scale an online marketplace while opening multiple brick and mortar locations. It tried to start manufacturing its own clothes. It hired a large volume of senior staff from more traditional retail businesses. And it tried to raise prices — all at the same time.
If Nasty Gal had pursued these objectives individually, it may have succeeded in scaling revenues at a pace that would have appeased its demanding investors. Attempting to accomplish all four goals simultaneously, especially during a time of significant financial uncertainty at a company already grappling with major organizational changes, practically guaranteed failure.
7. Unlockd: Why competing on someone else’s platform is dangerous
Declared Bankruptcy: 2018
Total Funding: $46M
Founded in 2014, Unlockd’s product was a novel kind of loyalty program that rewarded users with points for viewing customized ads when unlocking their mobile devices. When unlocking their devices, users were shown targeted ads based on their personal interests and awarded loyalty points that could be redeemed for special offers such as access to premium content and discounts on their cellphone bills.
Investors were excited by Unlockd’s potential. The startup raised over $40M from a range of venture capital funds, including the Axiata Digital Innovation Fund and PLC Ventures. However, in 2018, Unlockd’s fortunes took a turn for the worse when Google threatened to pull Unlockd’s app from the Google Play Store and terminate the company’s access to its AdMob service.
“Ads associated with your app must not interfere with other apps, ads, or the operation of the device, including system or device buttons and ports. This includes overlays, companion functionality, and widgetized ad units. Ads must only be displayed within the app serving them.” — Google Play Developer Policy Center
Google claimed that Unlockd’s usage of AdMob data violated at least four regulations set forth in its terms of service. Unlockd contended that Google was acting maliciously, and attempting to sabotage Unlockd’s service due to fears over competition. Unlockd also alleged that there had been no substantive changes made to the Unlockd app since Google had approved its listing in the Play Store, and that Google must have been aware of the service’s reliance on AdMob data and how that data was used by the app.
Google countered that Unlockd had been given ample warning of its violation of the AdMob terms of service.
The dispute revealed the risks of building products that are dependent on other companies’ platforms and technologies. In the case of Unlockd, the entire premise of its product rested solely on Google’s AdMob service. No AdMob, no product. There was little Unlockd could have done beyond the measures the company alleged it took to rectify the situation, but that likely came as little comfort to Unlockd’s founders, investors, prospective advertisers, and users.
Unlockd fought Google in the courts in both Australia’s Federal Court and England’s High Court, securing preliminary injunctions against the removal of the Unlockd app in both courts. Ultimately, however, these temporary victories were not enough to save Unlockd as a company, and the business went into voluntary administration in Australia and filed for Chapter 11 protections in the US.
With digital advertising revenues in the US achieving 23% year-over-year growth to $49.5B in the first six months of 2018 alone, Unlockd certainly won’t be the last startup hoping to disrupt this immensely valuable market. However, great opportunity often comes at great risk. Unlockd’s demise should serve as warning to other online advertising startups of the perils of relying solely on Google, and a reminder that third-party ad mediation platforms may be worth considering to mitigate some of the potential risk of relying on a single provider.
8. Wisewear: The wearable startup ‘killed’ by an Apple software update
Declared Bankruptcy: 2018
Total Funding: $6.5M
APIs and native integrations have made it easier than ever to build products using other companies’ technologies — but doing so can create problems that sink even the most promising companies.
This was the situation that wearables brand Wisewear found itself in early 2018, when the company was forced to suspend operations indefinitely following a critical software update to the Apple Watch.
Wisewear aimed to combine the fitness tracking functionality of a wearable device with the style and opulence of designer jewelry. The company’s line of smart jewelry featured a range of functionalities, including panic buttons, notifications from paired smartphone apps, and the step- and calorie-tracking functions pioneered by FitBit and similar brands.
In summer 2017, Wisewear acquired Reserve Strap, a company that owned a patent for “a battery band that charges Apple watches through a service port on the watch.” The battery band used a charging port located inside the groove of the Apple Watch’s lower band connector. Reserve Strap stated that its new battery band product could extend the Apple Watch’s battery life by as much as 150%.
Wisewear’s acquisition of Reserve Strap was based entirely on this discovery and the company’s battery band product. Although Wisewear’s range of designer smart jewelry was aesthetically distinct from competing wearables brands, the devices themselves functioned identically to other fitness trackers. Reserve Strap’s battery band would have created additional value for Wisewear’s customers, further distinguishing its products from competing brands on the market.
“We’ve developed and tested a completely rethought design that takes advantage of the 6-pin port underneath the band slide of the Apple Watch. This port hadn’t been deciphered by anyone until now but we’ve been able to make significant enough observations so far to warrant shifting our development focus to this new method.” — Reserve Strap
Shortly after the announcement of the discovery, however, Apple disabled the functionality of the port in a software update.
This was the beginning of the end for Wisewear. Apple’s software update had rendered Reserve Strap’s battery band effectively useless. As a result, Wisewear was unable to secure the $2M it had hoped to raise as part of its Series A financing due to investor concerns about the viability of several Wisewear products (specifically, the products that would have relied on Reserve Strap’s technology).
“This Reserve Strap product couldn’t be brought to market because of the fact that Apple changed [its operating system]. When Apple turns that off … well now that patent, at least in its current state, loses its value. So it’s harder to get Series A [financing] because there’s questions about the viability of your products, at least a couple of main ones.” — Ron Smeberg, Wisewear’s bankruptcy lawyer
In its bankruptcy filings, Wisewear described Apple’s actions as an “illegal restraint of trade,” and claimed the company had grounds to pursue legal recourse against Apple for patent infringement. Ultimately, Wisewear chose not to pursue the matter further in court.
In hindsight, it’s all too easy to see the flaw in acquiring a business that had banked its whole future on a previously undiscovered hardware feature of a popular consumer electronics product. At the time, however, it seems that Wisewear had no such reservations about its new acquisition or the likelihood of its survival.
And as easy as it is to point out Wisewear’s error of judgment now, the rationale behind the company’s decision to acquire Reserve Strap isn’t hard to understand. Reserve Strap gained a valuable head start over other wearables companies by discovering the port on the Apple Watch. Had Apple not disabled the port, it’s likely that Reserve Strap (and, by extension, Wisewear) could have beaten competing products to market, giving the brand a significant advantage.
9. Altrec: Outdoor gear retailer left in the cold after security breach
Declared Bankruptcy: 2014
Total Funding: $5.3M
More than 4.5B data records were compromised in the first half of 2018 alone, according to the Breach Level Index, highlighting the importance of adequate digital security measures.
This was a lesson that outdoor equipment retailer Altrec learned all too well in 2011, following a disastrous security breach during that year’s holiday shopping season.
Founded in 1997, Altrec was among the first outdoor equipment e-commerce retailers. The company sold a broad range of outdoor products, from backpacks and hiking gear to apparel and accessories. Altrec was also one of the first major retailers to utilize content marketing as a growth strategy: the company published aspirational how-to articles on everything from mountaineering safety tips to navigating white water rapids, highlighting the lifestyle aspects of outdoor recreation in a way few other retailers were at that time.
Altrec grew quickly. At the height of its popularity in the early 2010s, Altrec had more than 2.8M customers and around 40 employees. However, the company’s upward trajectory was abruptly halted in 2011, when Altrec suffered two major data security breaches.
In 2011, Altrec’s site was targeted in a distributed denial of service (DDoS) attack during the crucial holiday shopping period. The attack prevented Altrec’s site from being displayed on Google search engine results pages for more than a week, profoundly disrupting sales.
After conducting forensic analysis of the DDoS attack, Altrec discovered more bad news. At some point between June 2010 and March 2012, the personal information of an unknown number of Altrec’s American Express cardholder customers was compromised in a malicious attack on the company’s servers. Altrec was first made aware of the vulnerability in May 2012, and the company publicized information about the breach shortly afterward. Although the precise number of AmEx cardholders affected was never determined, Altrec notified approximately 100,000 of its customers as a precaution.
The Secret Service informed Altrec that the attackers had exploited a vulnerability in the payments processing system of a third-party vendor. The source of the attack was identified as originating outside the United States, but neither the country of origin nor the identities of the attackers were ever confirmed.
By former Altrec CEO Mike Morford’s own admission, Altrec did not take adequate precautions to secure its customers’ financial information. While it appears that Altrec did have at least rudimentary cybersecurity measures in place prior to the catastrophic attack in 2011, they were insufficient to repel the attack that ultimately led to Altrec’s downfall. The company had ample opportunity to implement suitable data security measures, but failed to do so. Had Altrec managed to upgrade its inventory management system prior to the breach, the company may have survived.
“The cyberattack, that part of the story is worthy of a book. We were told that we hit the highest rail of cyberwarfare. … Clearly, what they were trying to do was weaken our systems and steal our customer information. We made mistakes for sure. Had we built up security to the level needed, that [attack] may or may not have happened.” — Mike Morford, former CEO, Altrec
While the attack on Altrec’s systems was significant, it wasn’t the sole cause of Altrec’s downfall. Shortly before the company was made aware of the breach, Altrec had approached a bank to secure a loan of approximately $7.5M that the company intended to use to upgrade its ailing online inventory system. Rather than approve the loan as planned, the bank stalled as reports of the attack spread. The subsequent delay left Altrec unable to effectively replenish the website’s most popular items.
By the time the new inventory system eventually went online in spring 2013, the damage had been done. Altrec was unable to mitigate the combined losses caused by the breach and the company’s outdated inventory management system, and ultimately never recovered.
Altrec declared bankruptcy in January 2014, and listed more than $1M in debts to a range of outdoor equipment manufacturers, including The Burton Corporation, Columbia Sportswear, and The North Face.
Given the number of high-profile data breaches in recent years, and the sheer number of consumers involved in many of them, cybersecurity is an even more pressing concern today than it was at the height of Altrec’s popularity. Regardless, Altrec’s failure should serve as a cautionary tale to any company that fails to prioritize data security.
10. Dart Music: Metadata service fails to impress investors
Declared Bankruptcy: 2016
Total Funding: $1.5M
Some startups fail because they develop solutions in search of problems. But this wasn’t the case with Tennessee-based music metadata service Dart Music, which aimed to solve an urgent problem for classical musicians hoping to earn an income from their performances.
The rise of music streaming services such as Spotify has revolutionized how musicians and performers find new audiences and earn revenue from their work. Metadata (data about data) has become crucial to ensure that musicians are paid fairly for their performances, as royalty payments are partly based on how frequently a credited artist’s music is played by listeners.
Classical musicians, however, face unique challenges when it comes to streaming and royalties. Many classical compositions available on music streaming services feature between 80 and 100 individual metadata fields. Arrangers, conductors, musicians, and even entire orchestras can be omitted from track listings, which adversely affects performers’ earnings.
This was the problem that Nashville-based music metadata service Dart Music aimed to solve. But while there was a need for a service like Dart, projections of the potential value of that service did not align with the realities of the razor-thin margins of music royalties or the expectations of the company’s investors.
Dart Music hoped to become the world’s leading musical metadata management service. Initially, Dart focused solely on classical music, but soon pivoted to provide metadata management services for artists and performers working in any genre. The company raised a venture round of $1.5M in 2015, and the future looked bright for the growing company as investors speculated about Dart’s potential beyond the classical and domestic American markets.
However, despite the potential of Dart’s technology, the company’s services were not as profitable as founder Chris McMurtry hoped. The company amassed debts of almost $2.6M, including $600,000 to a Tennessee-based consulting firm. It also listed more than $33,000 in overdue royalty payments for artists in its debts.
Dart tried to secure additional funding to weather the financial storm, but ultimately failed to secure the liquidity the company needed to remain operational.
“Despite being presented with a number of attractive scenarios to restructure outside of Chapter 11, certain of those note holders have refused to reach an agreement with the company that would allow it to reach new heights by providing it with the short-term liquidity necessary to achieve its objectives.” — Chris McMurty, cofounder, Dart Music
Dart Music filed for Chapter 11 bankruptcy in summer 2016. Shortly afterward, the company’s technologies and patents were sold off to rights management and content monetization company HAAWK and Core Rights, an intellectual property rights firm based in Nashville.
The demise of Dart Music highlights the often significant disparities between the necessity of a product or service, and the perceived value (and potential return) of that product or service.
While the financial feasibility of Dart’s service and historically thin margins of music royalties appear to be easy explanations for the company’s failure, there is little evidence to support the idea that Dart based its revenue projections on overly optimistic revenue forecasts or failed to provide investors with a realistic roadmap for growth.
Instead, it’s plausible that Dart’s investors simply underestimated the time necessary for the company to realize its potential — and that the company could have done so with sufficient runway.
Given the vast sums of money spent by music streaming services such as Spotify to secure vital licensing agreements with major record labels, it’s hardly a stretch to say that Dart Music may have survived, and even thrived, if the company’s investors had given the company the liquidity it needed to refine its service and business model.
11. Earth Class Mail: When pivoting through bankruptcy can bring your startup redemption
Declared Bankruptcy: 2015
Total Funding: $22M
For many entrepreneurs and founders, bankruptcy is the end of the line. To others, however, it’s a valuable opportunity to examine previous mistakes, evaluate the industry landscape, and reposition a company to succeed in spite of its past failures.
For Earth Class Mail (ECM), Chapter 11 wasn’t the end, but rather the beginning of a new chapter in the company’s history.
The idea of digitizing people’s mail by hand might not seem particularly practical or efficient, but it was Earth Class Mail’s core value proposition. The company had a bold mission: ”taking over the post office of the world.”
The company began life as Document Command in 2004. Document Command’s primary service was Remote Control Mail. The company offered members a physical mailbox where their mail would be directed. Upon receiving members’ mail, Remote Control Mail would then scan the envelope and notify users of its arrival. Users could pay an additional fee to have the contents of the letter scanned and digitized, and could also request that physical letters be forwarded to another address or securely destroyed.
The service was initially priced at just $2.50 per month, with an additional 10-cent charge for every letter received and a 95-cent charge for every package. The company charged between 10 and 20 cents per page to scan documents, and would shred documents at a rate of one cent per ounce.
However, it didn’t take long before the realities of digitizing thousands of daily pieces of physical mail became untenable. The company’s funding dried up shortly after the global financial crisis of 2008. Unable to overcome its losses, ECM filed for bankruptcy in 2015.
For most companies, this would be the end of the road. ECM, however, rose from the ashes when technology investment firm Xenon Ventures acquired the company in 2015.
Xenon appointed Doug Breaker as the ECM’s new CEO, who wasted little time in setting out his priorities for the company.
Shortly after its acquisition, ECM pivoted away from expats and students to focus solely on the B2B market. The company invested in its customer support teams, overhauled its internal reporting procedures, and simplified the product’s pricing.
ECM also began investing in new technologies and features that aligned with the expectations of business customers, including cloud storage and integrations with Box, Dropbox, and Google Drive. The company also announced forthcoming support for optical character recognition systems to provide users with full-text search support.
Xenon’s expertise and Breaker’s leadership paid off, and the company gradually inched toward profitability. During the first six months of 2018, ECM’s top-line revenues had increased by 20%. Today, the company has more than 25,000 users — showing that a Chapter 11 is not always the end of the road.