The Myth of Funding: Lessons from Startup Failures

Does significant funding by the world’s best VCs guarantee a successful investment outcome?

Chris Wade, Isomer Capital

I recently read about VanMoof’s fall from European e-bike leader to bankruptcy, leaving many unfulfilled customer promises, double-clicking on this sad story.

In 2020, the company secured $40 million in funding from world-class investors, propelling it into the limelight. The media hailed this as a breakthrough, predicting a bright future. However, customer complaints about shipping delays and quality issues began to mount. Despite its financial prowess, VanMoof faced operational challenges that marred its image, ultimately leading to its demise.

It made me think that funding alone cannot resolve underlying business complexities or guarantee a successful trajectory. Was this a rare example, or is it a fact of life in venture capital?

Simply put, I want to explore whether there are other examples of significant funding by the great and good that have failed to build great companies or positive investor returns.

WeWork: Softbank’s Vision fund invested over $18Bn, and WeWork’s valuation skyrocketed, seemingly invincible. However, a lack of profitability and an overambitious expansion strategy led to its downfall. Ultimately, the company’s excessive funding acted as a smokescreen for its inherent flaws, resulting in a spectacular fall from grace.

Improbable: SoftBank’s investment in Improbable, a UK-based virtual simulation start-up, showcased the allure of substantial funding. 2017 SoftBank invested $502 million in the pre-revenue A round, catapulting the company into the unicorn club. The future seemed promising, but as time was unveiled, the company faced struggles translating its groundbreaking technology into viable products. The investment masked deeper issues in product-market fit and strategy execution. The undeniable truth remains that funding doesn’t replace the need for sound business strategies and tangible results. While the journey for Improbable is not over, most observers question if it can be a Unicorn again.

Other examples :

Quibi: (Quick bites) a short-form mobile video platform launched in 2020 with $1.75 billion in funding and high-profile content partnerships. Despite the substantial investment (Disney and Alibaba Group) and media attention, the platform failed to gain user traction. Its downfall was attributed to a combination of factors, including a crowded market, content that didn’t resonate with audiences, and a misunderstanding of user preferences. The company closed in Nov 2020.

Jawbone: Jawbone, a company known for its wearable fitness trackers and Bluetooth speakers, raised over $900 million in funding. Despite the substantial financial backing, the company struggled with production delays, legal disputes, and fierce competition from rivals like Fitbit and Apple. In 2017, Jawbone eventually shut down its consumer wearables business. Jawbone investors Included KPCB, Sequoia, Andreessen Horowitz, and Khosla Ventures.

Fair: Fair, a car leasing startup that aimed to disrupt the traditional car ownership model, raised over $1.5 billion in funding. SoftBank’s Vision Fund was a significant investor in Fair. The company faced difficulties in managing inventory and financial stability, going through multiple rounds of layoffs and restructuring. In 2020, Fair filed for bankruptcy.

And this is not a recent phenomenon

Solyndra: Solyndra was a solar panel manufacturer that raised over $1.6 billion in funding, including a substantial loan guarantee from the U.S. government. The company’s unique cylindrical solar panel design failed to compete with the falling prices of traditional flat solar panels. Solyndra filed for bankruptcy in 2011, leading to scrutiny of government-backed investments in clean energy startups

Fab.com: Fab.com started as a design-focused e-commerce platform and gained attention for its unique products and curated shopping experience. The company raised over $330 million in funding but faced challenges maintaining consistent revenue growth and profitability. Business strategy and leadership changes didn’t prevent Fab.com from ultimately shutting down its consumer-facing operations. Investors included. Menlo Ventures, Atomico and Andreesen Horowitz.

Webvan: Webvan was an early online grocery delivery service that raised over $800 million in funding during the dot-com boom. However, the company struggled with high operational costs, including building large fulfilment centres, and faced challenges in achieving profitability. Webvan filed for bankruptcy in 2001, becoming one of the most infamous failures of the era. Investors included  Sequoia, Benchmark

Conclusion: The narratives of startups securing monumental funding rounds can obscure the fact that capital is just one piece of the puzzle. As the above examples show, funding doesn’t guarantee success. Real success is rooted in visionary leadership, a clear value proposition, market understanding, adaptability, and disciplined execution, i.e. Hard Work and JFDI.

Around 2010, I was in a meeting in Cambridge (U.K.) talking about the value of Venture Capital in the startup ecosystem, I will never forget Hermann Hauser, a leading European  technology investor and co-founder of ARM Holdings, saying:

“ARM achieved global dominance without relying on significant venture capital. Its business model focused on licensing intellectual property rather than manufacturing physical products, enabling it to scale with agility. ARM’s trajectory highlights that innovation, strategic partnerships, and solid execution can lead to industry leadership without the need for astronomical funding rounds.”

Which I thought was topical given this week’s announcement by ARM that it will return to the public market with a Nasdaq listing in Q4 23 and probably at a valuation that will be another signal of technology success coming from Europe…