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5 Important Small Business Lessons from Recent Startup Failures

June 19, 2017

As many as 90 percent of all startups will ultimately fail. Even business owners with excellent ideas, financing and drive can be unsuccessful. As a business owner, one of the best things you can do is learn from the mistakes of other entrepreneurs. Take a closer look at five tech startups that failed, see where they went wrong and avoid making the same mistakes for your own business.

 

Code Spaces

One of the scariest stories of startup failure belongs to Code Spaces. This company focused on application development. Although small, the company experienced rapid growth and was largely considered a success in the field. Code Spaces relied on cloud computing for storage. In 2014, that was not unheard of, but it was a relatively new concept for businesses with a substantial amount of data.

A hacker was able to access this collection of data and resources stored on the cloud. These hackers tried to extract money from Code Spaces, threatening to destroy data if they weren’t paid a significant amount. This is known as cyberextortion or ransom. Code Spaces decided not to give in to the demands, and the hackers carried out their threats. Everything was lost, including all historical data, accounting and customer information. Code Spaces closed shortly thereafter since there was no financially viable way to recover.

Lesson learned: Knowing how to start an online business is not the same as knowing how to be successful. Guarding against cyberthreats like hacking and breaching is a serious and ongoing risk that can’t be ignored. If Code Spaces had secured its data or perhaps invested in business insurance, then it might have been able to avoid this data disaster. According to Hiscox’s Cyber Readiness Report 2017, the financial impact of cyberattacks is disproportionately high for small businesses with fewer than 250 employees. The average cost of the largest cyber security incident experienced by these businesses was $41,000.

 

Wesabe

Wesabe was a startup that offered a way to manage personal finance. Users could input their budgets, see where they were spending money and track their personal savings from one location. A decade ago, this was a relatively new concept, and it quickly became the leader in personal finance applications. However, other companies with similar objectives launched right around the same time. Mint, now a staple and the clear leader in the field, overtook Wesabe and ultimately drove them out of business.

Lesson Learned: Wesabe functioned well, had a streamlined design and was growing at a decent speed. The biggest mistake, however, was not automating more of the process. Mint, and other competitors, spent more money developing ways to make input easier and faster for users. In the end, the convenience and speed of using Mint meant that Wesabe failed. The lesson for entrepreneurs today is that being an industry leader isn’t a permanent position. You may need to continually work on improving a product in order to stay relevant in a rapidly evolving marketplace.

 

TinyOwl

Unless you live in India, the name TinyOwl may not be something you recognize. In India, however, TinyOwl was a briefly successful food-ordering tech firm. Like similar companies now popular around the world, TinyOwl served as the central way that individual customers could order restaurant food for pickup or delivery. In May of 2016, TinyOwl essentially closed its doors for its nationwide services.

In India, like around the world, there are a number of companies that fight for a share for the restaurant and delivery market. TinyOwl enjoyed name recognition in 11 major cities, but cash flow proved to be a problem. Hundreds of employees were fired, and some were given post-dated checks that couldn’t be cashed. That negative attention was likely the final straw in the saga of TinyOwl. Today’s entrepreneurs can pay attention to this example.

Lesson learned: Employees have to be treated well. Failure to pay or respect employees can be what ultimately sinks even the best of businesses.

 

Homejoy

Homejoy is a cleaning service that, like Uber, operates within the gig economy. The gig economy is a labor market where short-term and freelance positions are the norm. Homejoy offered cleaning services on demand. The whole booking process was automated, and freelance cleaning professionals meant that Homejoy had few overhead costs.

However, Homejoy ultimately had to close in 2015. Although it was able to successfully raise more than $40 million in capital and received plenty of press, many customers were unhappy with the pricing model. Introductory prices were inexpensive, but later cleaning visits became significantly more expensive. Customer retention, as a result, was low. Entrepreneurs should remember this model and its failures when pricing their own services.

Lesson learned: Low or free introductory offers can bring in new customers, but a staggering jump in cost could end up being a disappointment that deters repeat customers.

 

Powa Technologies

The e-commerce company Powa Technologies was founded in 2007, and by 2014, it boasted a valuation of more than $2.6 billion. Today, it has been sold and owes nearly $20 million dollars to creditors and former employees.

A lot has to go wrong in order for a company of that size to fail. Some of the company’s problems included lying about investor involvement and amplifying actual valuation amounts. Although billionaires, celebrities and politicians alike expressed interest in Powa Technologies, not all actually invested, a fact that Powa was happy to skip over when discussing the issue with other potential investors.

Lesson learned: The lesson here is twofold. Entrepreneurs have to be honest with both their customers and their investors. Eventually, the lack of cash will catch up to even the best of companies. In addition, exaggerating value and assets is a dangerous game. Business owners who are honest will have a much better chance of long-term success. Although Powa Technologies may have looked like the epitome of success in 2014, it was just two short years later that bankruptcy was on the table.

 

Not all startups succeed. In fact, most won’t. While there are no guarantees in business, learning from these lessons and protecting your startup with a small business insurance policy may help you go further as a successful entrepreneur.