Startup with $17 million in funding collapses: Four lessons for your business

Earlier this week a US-based on-demand delivery service startup that had secured $US13.5 million in funding shut down suddenly.

SpoonRocket announced on its blog that due to an increasingly competitive market and an inability to raise the necessary funds to keep afloat, it would be closing operations immediately.

“We continued to face intense competitors like Sprig and an ever tightening funding environment,” the blog post says.

“We explored all strategic options till the very last minute but unfortunately they all fell through. Despite our efforts, unfortunately, the downturn of market and lack of interest in on-demand companies like SpoonRocket from the venture community has forced us to shut down prematurely before we are able to grow into a viable business.”

The startup offered home delivered low-cost meals in under 10 minutes, and had been funded through Y Combinator in 2013 and a Series A round in 2014.

The rapid demise of the highly funded startup offers many lessons for other budding entrepreneurs and founders, as Caroline Fairchild writes on LinkedIn.

Don’t lose track of basic finances

According to the founders, SpoonRocket had successfully reached a point where it was making money on each order made, but it still wasn’t enough to offset other costs.

Fairchild says that founders need to make sure they remember basic economics and not obsess over customer acquisition.

“In the race for market share and repeat customers too many on-demand startups have lost sight of the importance of solid unit economics,” she writes.

“On-demand founders can become obsessed with customer acquisition leading them to burn too much cash on new users to recover.

“SpoonRocket eventually reached a point where it could earn cash off every order but that achievement may have been too little too late.”

Tech Crunch writer John Constine adds that keeping track of finances closely is especially important for startups operating in the on-demand space.

“Other on-demand services should be scrutinising their finances and cutting costs however they can to give them a longer runway to hit milestones and secure their next round,” Constine writes.

“Otherwise we might see more startups suddenly vaporise.”

Take the money when you can

SpoonRocket successfully raised nearly $18 million, but with its last round coming in early 2014 the startup found it impossible to find the further funding in needed to keep it above water.

Fairchild says that startups shouldn’t wait until it’s a life or death situation to reach out to investors.

“Hoarding cash during good times has been stigmatised by some investors, but for others the strategy is smart if deployed correctly,” she writes.

The fact that the last round was back in 2014 was a “sign that they could have made a bigger push to close another round before the market turned cold”, Fairchild says.

Being just a cheaper alternative isn’t enough

While many startups think they can follow in the footsteps of Uber and completely disrupt their chosen industry, it takes much more than just a cheaper alternative.

While SpoonRocket was usually less expensive than its food delivery rivals, according to Constine, the food actually wasn’t very good.

“I and other customers I spoke to found the meats to be sketchy and the whole meals to be somewhat gross,” he writes.

“I ended up switching to SpoonRocket’s more expensive and slower, but much tastier, competitor Sprig.”

This points to a general trend of startups forgetting the “and” aspect of disruption, Sarah Tavel says.

“While Uber made way for tons of startups rushing into on-demand, too many forgot what went into the ridesharing company’s secret sauce,” Tavel writes.

“The magic of Uber is that it used mobile to create a 10 times better product than the incumbent and did so at a lower price. The ‘and’ is everything.”

While SpoonRocket is cheaper, its actual offering wasn’t enough to differentiate it from the pack, Fairchild says.

“It seems SpoonRocket forgot to deliver on the ‘and’,” she writes.

“They believed that they could figure out a way to quickly deliver hyper-low-cost meals to customers but the product itself didn’t hold up to the test.”

Don’t stall during market uncertainty

The natural tendency is to halt expansion plans during market upheavals, but as Fairchild writes, this isn’t always the best tactic.

“While in downtimes it may seem like the only successful strategy is to put on the brakes to hunker down for the storm, during market uncertainty things like customer acquisition and hiring talented employees get a lot easier,” Fairchild writes.

“Without knowing exactly what happened at SpoonRocket, pushing on the gas when the road got bumpy might have been best.”

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