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At its peak, WeWork was once the most valuable startup in America. With top-tier backing from the likes of SoftBank, Benchmark and JPMorgan Chase, WeWork was running around Silicon Valley with a $47B price tag and the investors to boot.

But, on November 6th, just 4 years later, the company that built a real estate business around lease arbitrage failed—filing for bankruptcy.

The story of this make-believe tech startup is well covered. And typically if you have Jared Leto and Anne Hathaway staring in your Apple TV show, you’d expect the failure to be total and swift. Like with SBF and his story of bringing FTX, the second biggest crypto exchange in the world, to dust overnight. Or Bernie Madoff. Or Elizabeth Holmes and Theranos. All these examples bring us tales of charlatan founders who eroded something “valuable” at breakneck speed, sending their companies into death spirals.

While WeWork’s founder/CEO Adam Neumann was deeply problematic, and in my opinion, a root cause problem, the story of WeWork—despite Leto portraying him in Apple’s WeCrashed—is a different tale. Perhaps that’s because Adam’s fraudulence wasn’t the kind that has the DOJ or FBI cuffing you. Rather, it’s the more subtle kind. The kind hidden behind the smoke and mirrors of being “a visionary” and having a level of charisma that allowed him to convince some very rich and smart people to let him light their money on fire—making him incredible rich while, excuse my French, fucking over everybody else.

And part of that ability to convince investors to rally behind his vision of “elevating the worlds’ consciousness” (yuck)— a farfetched rhetoric about their ability to change the world even in startup-land standards— is that WeWork was a product of a boom, and during booms and times of frenzy, investors ignore all the red flags and do stupid things.

WeWork was a short-term landlord trying to make a buck on the delta between the cheaper long-term leases they paid, and the more pricy short term leases they charged. But, they masqueraded as a tech startup and commanded ludicrous multiples because, basically, they had a cool app to book spaces and used some analytics.

They’re not the only example of regular businesses who played dress up as a startup and paraded down the valley for Halloween. Greensill Capital claimed to be a FinTech disruptor, but were really just a glorified lending shop. Peloton, the “tech company that merges the physical and digital worlds”, is really just a spin bike with live-streamed videos.

To be clear, I’m not shitting on those business models, but I am saying they should not be seen/valued as actual startups who have things like solid margins, affordable scalability thanks to growth loops and network effects, etc.

Investments in these type of mislabeled products have cost funds billions.

Of course, being overvalued isn’t why they failed. In today’s startup business autopsy, we’ll unpack some of the big drivers that led to WeWork’s tumble from $47B down to $97M. 🤭

Sometimes the best lessons come from studying what not to do. So, let today’s post, the 4th installment in our failure series, be a summary of an exceptionally expensive lesson. One paid for mostly by SoftBank.

Shall WeBegin?

⚠️ p.s As always, my posts get cropped in emails. To read the full thing and not have your experience cut short (like WeWork did), click here for the full post.

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WeClimbed: The startup delusion

We won’t spend too long here—the rise of WeWork is well covered. But, incase you’re not up to speed, here’s a quick primer: Their rise is a story of tech-bro mysticism, intense hours, overpromises along with detached-from-reality dreams, and Don Julio tequila mixed with sexual harassment.

Founded in 2010 by Adam Neumann and his wife Rebekah, WeWork’s goal was to “revolutionize” the office market by popularizing co-working.

The co-working model suits building owners very well. Landlords don’t need to go fill their buildings or floors with a handful of large tenants with long leases. Instead, landlords master lease their buildings and floors at a wholesale price to a co-working operator like WeWork. With some renovations, these operators can fit more people into spaces than conventional tenants, and because of their readymade interiors and flexible terms, they can charge higher rates than large tenants on a square foot basis. The WeWork’s of the world make/made money on the difference between their wholesale master lease price and the combined membership rent roll.

Basic arbitrage. But thanks to some trendy office upgrades with Kombucha on tap and a compelling founder, it was seen as a disruptor with a business model unhindered by property ownership.

Somehow, Adam— the barefoot Israeli Navy veteran known for his signature look of long unkempt hair, taste for Don Julio, expensive tech-bro partying, and obscure hippie wisdom—made people see something that wasn’t there.

But, in part, that was the world we were living in circa 2010. We were in a bubble, and that led people push aside critical thinking and logic in light of making big bucks on some new upshot.

As David Friedlader wrote:

WeWork was founded in the middle of the recession of 2008–2012, which is critical to understanding their growth and eventual collapse. The Fed’s strategy for reinvigorating the U.S. economy during the recession was to purchase and resell billions of dollars worth of distressed real estate, thereby saving banks from mass defaults on the dodgy loans those banks issued. The Fed also lowered interest rates to encourage investment and development in existing and new real estate — rates that remained low until early 2022. While rates were low, post-subprime lending criteria became stringent, so the main beneficiaries of the low rates were wealthy individuals and institutional borrowers, many of whom converted the loans into high yield real estate investment products like build-for-rent single family housing. It was during this period that real estate investment trusts (REIT) like Blackrock started to multiply.

One of the chief repositories for these low interest loans were the glass-clad commercial and multifamily high rises that dominate most urban vistas today. But there was a problem with these buildings: in their haste to gobble up cheap loans and attendant development fees, developers and investors weren’t entirely clear who’d be the tenants of these buildings.

This is where WeWork came in, promising to solve the problem by gobbling up space. And they did, very quickly. This then fed into Adams’ narrative of WeWork being the hot new thing—the co-working company that controlled supply, without owning it.

When WeWork launched, Silicon Valley was high on the rise of the sharing economy, powered by the exciting idea of being asset light on traditionally asset heavy businesses. The classic “The biggest taxi company (Uber) owns no cars!”, and “The biggest hotel (Airbnb) owns now property!” hyped up the idea of what WeWork positioned itself to be—the biggest office block that owned no property.

This all allowed them to expand at an insane speed, which increased revenue but also racked up steep losses. Sure, they didn’t “own” the buildings, but they signed 15 years leases, which is the next worst thing. Each lease = a liability. And those liabilities ate away at any shot at a profit.

Simply, WeWork grew, ironically, by digging itself into a bigger and bigger hole.

But that hole wasn’t so apparent at first. From 2012 up until COVID, office demand was high. This masked the problem enough. The same low interest rates that led to more square footage being built also resulted in the growth of finance, tech, and other commercial sectors, most of whom still saw offices as necessary tools for work. This demand later proved temporary, since it depended on access to historically low rates rather than functional needs.

While Adam was a bullshit artist, he wasn’t entirely wrong about the future of work. Collaboration tools were permitting the proliferation of more, smaller, nimbler organizations. Membership benefits like beer-on-tap and pizza Friday’s were a fit for the growing cultural zeitgeist for having a life outside of offices and working. And community is extremely powerful.

But, what WeWork was wildly wrong about was market size and demand. This led them down a path of creating as many spaces as building inventory permitted. Supply quickly outgrew demand. As the debt kept flowing and building inventory increased, so too did WeWork’s leases. By 2018, WeWork was the largest office tenant in New York City.

And unlike Uber and Airbnb, when demand decreased and revenue shot down, WeWork wasn’t able to scale down their supply in response. They were locked in and obligated to cough up.

A nice segue into the reasons behind their failure. 👇

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WeCrashed: Lessons from the reckoning

Things went to shit for WeWork in 2019.

It’s not that that’s when their problems started, rather, it was when everybody saw them.

It was August 14, 2019, and WeWork had just filed Form S-1 to go public at a $47B valuation. In short, the filing revealed crazy losses despite growing revenue, expensive lease agreements and long term obligations, and an at best “complex” relationship with founder Adam Neumann.

Almost immediately, WeWork was in the dog box. Investors, analysts, and journalists had a field day with their 359 page doc, and headlines swarmed the internet calling WeWork, and Adam, out for their many issues.

Triton Research's Rett Wallace would later call the prospectus a "masterpiece of obfuscation", and Scott Galloway wrote a takedown of the company titled "WeWTF.”

It truly was a reckoning, where at last pundits were calling WeWork on their shit. Something their investors seemingly were incapable doing. In just a month, they canned the idea of going public for a while, and their valuation took a nose dive of more than 70%. Adam who had high hopes of being the first person to enter the 4 comma club, was given the boot as CEO (an ousting made easier with a $445M exit package). As Dakin Campbell wrote for Business Insider.

Two things had changed in the nine years since Neumann began constructing the myth of WeWork with the help of starry-eyed tech journalists and hungry investors: Theranos and Uber. In the fall of Theranos, the blood-testing company that imploded under accusations of fraud, the investing public saw how a multibillion-dollar valuation could be spun up from Silicon Valley bromides and the image of an idiosyncratic, enigmatic founder who inspired cult-like devotion. In Uber, whose stock has trended downward since it went public, they saw how machismo, hubris, and accounting tricks could obscure fundamental business challenges.

Unfortunately for Neumann, it was precisely the wrong time to be the visionary leader of a company with imperial dreams and obscure finances. Patience had run out.

Post Adam’s departure, the company went through various rounds of executive leadership changeovers. WeLive and WeGrow were shut down, and The We Company went back to WeWork. Then in October 21, 2021, they went public.

So, let’s unpack the biggest reasons behind this sad chart. Reasons that started long before their IPO, and reasons outside of the obvious pandemic that shook up their business.

There are three main ones:

1. Unsustainable business model: Don’t buy what you can’t afford

2. Overvaluation and rapid expansion: A vision misaligned with reality

3. Hubristic and dishonest leadership: Failure to switch from a zealot to a pragmatist

Let’s run through each and see how we can avoid similar mishaps.

1. Unsustainable business model: Don’t buy what you can’t afford

A huge underlying issue was WeWork’s over-reliance on long-term leases with short-term subleases.

It’s very easy to see how this is a problem. Hypothetically…

• WeWork pay the building master lease rent of $10M/year

• WeWork require 70% occupancy in said building to cover lease obligation

• But if they have, say, 60% occupancy…shame, tough cookies. WeWork is committed to paying for 15 years regardless, and WeWork’s whole pitch to their tenants is that they can cancel easily. It’s very easy for them to be underwater.

AKA, they’re extremely exposed to the short-term fluctuations in demand for office space and need strong occupancy levels to just break even. This isn’t just something that was obviously impacted by Covid, but also just the general fact that most leases in WeWork were for ~2 years. So, naturally, their clients were short term and WeWork always needed to be filling those desks with new people.

And being anywhere below break even is insanely costly…we’re talking big buildings takeovers in some of the most coveted and expensive cities in the world. Their operational costs outside of the lease were also wild. The bills piled up quickly. Like, $219,000 an hour quickly.

In a sense, they made the classic mistake that brought down Lehman Brothers and more recently Silicon Valley Bank: their sources of capital could flee before their financial obligations came due.

At one point, they were on the hook for $47 billion in future lease payments to building owners while having committed revenue of just $4 billion. And while Adam always pitched WeWork in the context of the Airbnbs and the Ubers of the world—the scale ups that owned no assets and promised great returns on capital—and commanded a similar type of valuation for it, so obviously that was total crap. 🤦‍♂️

The whole idea of “the sharing economy” and not owning assets is simple: those startups use other people’s assets which makes the company more resilient since they can scale down as inexpensively and fast, during bad times, as they scaled up.

But WeWork didn’t really use other peoples assets. Sure, they didn’t own the buildings, but they mind as well have been the owner with long-term financing that gave them responsibly for these massively expensive assets. WeWork could not just scale down their buildings without breaking their terms with owners.

So, WeWork was very much asset/capital heavy. And after reading this piece by Reuters, it seems they were able to hide behind some smoke and mirrors thanks to “creative” accounting. As Steve Clayton, Head of Equity funds at Hargreaves Lansdown said, "Innovative financial metrics are rarely truly innovative, instead being a way of disguising a lack of cash profits, and WeWork played that game for all it was worth."

From here, they grappled with expensive leases and clients cancelling agreements as vast numbers of people started to work from home after the pandemic. As much as they tried to amend their leases and restructure their debts, it just wasn’t enough to fend off bankruptcy.

But, this problematic business model is something that could have been managed IMO if it wasn’t for a vision misaligned with reality, leading to an aggressive expansion strategy.

How to avoid this 🛠️

Rigorously evaluate the risks inherent in your business models, and make sure you they are not overly reliant on high-risk strategies, especially those that involve significant financial commitments or uncertain revenue streams.

Always know what your true operating costs are (the obvious and the phantom ones), and have an honest assessment of things like CAC, payback period, LTV, and at what point you’re going to be turning a profit. It’s not okay to say “We’ll figure our the $ money later…it’s fine, that’s what Facebook did and look at them now!”. Those days are gone, and you need to have a clear business model that allows you to grow in a healthy way.

Oh, and if you enjoy sleep, don’t buy what you can’t afford.

But, for just $7/m, you might be able to afford upgrading to paid. Why? 👇

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2. Overvaluation and rapid expansion: A vision misaligned with reality

In the the glut of post-2008 debt, where investors were looking for any semi-plausible place to invest their money, WeWork became a symbol of Silicon Valley's boundless audacity and self-professed exemption from the laws of economics.

Some say—like I have already a few times—that investors should have seen the writing on the wall. The insane financial obligations and the burn rate paint a clear picture of an asset heavy company with an unsustainable business model. But, again, people do silly things and miss the signs during booms.

So call it rose-colored glasses x Adam’s hubristic leadership combo—but here’s the bottom line: WeWork is a textbook example of how a misjudgment of market demand and competition can lead to an inflated valuation, leading to unrealistic growth expectations, leading to aggressive expansion without proven profitability models.

With their plans to transform “human consciousness” with flexible working spaces and more all around the world, Adam’s ego set them on a path of relentless expansion. This shotgun approach led them to acquiring far too many master leases, which not only racked up their liabilities, but also led them to overlook the importance of understanding local dynamics, cultural nuances, and varying demands. This led WeWork to simply have too many spaces available in any given market, in turn, resulting in unoccupied desks and strained resources.

And that’s an important lesson worth repeating for operators: success in one market/location is by no means a guarantee for success everywhere. A one-size-fits-all approach is, by and large, fundamentally flawed especially in an industry where location is crucial.

This all led to exorbitant costs, requiring WeWork to keep raising money to (1) pay their bills, and (2) keep expanding with more leases. And with more raises came higher and higher valuations that were increasingly drifting further away from WeWork’s somber financial reality.

By 2019, Softbank had already pumped $18.5B into Adam’s dream. And billions more were raised from institutional investors like Goldman Sachs, JP Morgan, and real estate giants like Brookfield and Cushman & Wakefield which allowed them to sign more and more leases, giving them the impression of legitimate market demand and revenue growth. Adam played into this impression, using the personal money he siphoned from investment rounds to invest in buildings that he leased to WeWork.

The whole Fugazi was built on the assumption of perpetual growth, and ignored the important variable of market fluctuations and economic downturns—which of course came.

As Warren Buffet famously said, “Only when the tide goes out do you learn who has been swimming naked.” And the demand did indeed pull back, and only then did investors start to see how exposed they really were.

Speaking of investors…

As Matt Levine pointed out, at the peak valuation, WeWork was worth almost half the entire value of publicly traded US real estate investment trusts: “Nobody gets into venture capital because the best-case scenario is doubling their money. For WeWork, maximal office-landlording success would be kind of disappointing”. The returns would just not be juicy enough.

Thus, to keep raising more cash and painting a pretty picture of the 100X ROI VCs look for, more ambitious schemes were required to flavor up the story.

Overdiversification and the subsequent loss of focus on the core business

WeWork’s shtick to show how such an ROI was possible was to show that WeWork was so much more than a short-term leasing play.

This is where “The We Company” was created, the parent organization for what was to be a suite of products that “elevated human consciousness”. WeWork was just part of it. Two big diversifications away from the core were a company that included micro-apartments (WeLive), as well as WeWork-style and elementary schools (WeGrow).

In part, WeWork needed to do this because they needed to keep raising, but it was also the overcapitalization that permitted ambitious side businesses like this in the first place. WeLive was a failed attempt at translating their office strategy to residential living. Same idea as WeWork, except with one big oversight: residential space conversions are way more expensive and regulated than office spaces.

This obviously went nowhere—I think just 2 buildings were opened and then closed.

Outside of creating new businesses before turning a profit with their main one, WeWork also made a ton of investments and acquisitions. For example, like their $13 million investment in a wave pool company. Or they soiree into gyms and coding camps.

Like, what is your product guys??

And the more they made investments elsewhere, the faster they burned through capital and lost focus on actually growing the core product in a sustainable way. All that money could have been invested in fixing the bread and butter business model. Plus, that was of course all made far worse by the fact that they couldn’t deliver on any of new ideas effectively—throwing even more fuel on the dumpster fire and at the same time hurting their “We” brand reputation.

How to avoid this 🛠️

Always balance the need for expansion and growth with the realities of your operational capabilities and market conditions. This means avoiding overcommitment to long-term expenses without a reliable and stable revenue stream. You never want to be spread too thin, especially without a cash cow to fall back on.

And when you do expand, push into categories that are clearly adjacent—categories where you have clear advantages from your core product. Those could be expertise, data, relationships, distribution advantages, economies of scale, or any other advantage that can help you win. It’s not about investing and building in areas that you think are cool (Adam…), but areas where it makes sense for you to go for long-term success.

Expansion (M&A or R&D) should always be viewed in a 1+1=3 fashion.

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3. Hubristic and dishonest leadership: Failure to switch from a zealot to a pragmatist.

In a sense, all of the above boils down to a root cause problem: Adam Neaumann.

Adam oversold the dream to investors. Adam charmed their checkbooks. Adam drove the decision to take on too many leases. Adam invested the capital unwisely. Adam always put himself and his pockets before that of WeWork.

And while most companies are structured to have checks and balances, the WeWork structure was confusing and protected Adam and his family to a large degree. Corporate governance was less than an afterthought.

Adam had near total control as it was outlined in their IPO prospectus. WeWork would have three classes of stock, including two that awarded him 20 votes for each share. If he died, his wife would have the power to name a new CEO, independently of the board— Game of Thrones style.

While he was still there, his board supremacy allowed him to enact a number of sketchy financial practices that were obviously a conflict of interest.

Looking back to FTX and Theranos, like WeWork, all of these companies could have been interesting (and perhaps still around) if they had the right leaderships—honest leadership—and actual systems in place.

While Adam isn’t a criminal like SBF and Holmes, he made some very poor decisions at the top. While the company was hemorrhaging money, he was living it up and lining his own pockets. He was cashing out stock options, taking out loans from WeWork at essentially 0 interest, buying over 10 of his own buildings and renting them to WeWork at a premium, buying the IP for the “WE” name and charging WeWork millions to use it, flying the jet wherever he wanted, and generally just behaving like the company was his personal piggy bank.

Some say that Adam was simply in over his head. He was a young CEO, and he didn't have the experience to navigate a company through tough times. Others say that Adam was well aware of the problems at WeWork, but he was more concerned with making money than with running a successful business.

I’m unequivocally in the latter camp. I think Adam is an incredibly smart guy. He knew exactly what was up—he saw the opportunity in 2010 and identified WeWork as a vehicle that could make him a billionaire. And he pulled it off in a way that skirted on the lines of what could actually get him in trouble. He played the game, and truthfully, he won it.

Despite his stock now being worthless, he got paid hundreds of millions in cash. He’s a very well off man. He’s not in jail. He’s not being investigated. And while his reputation has taken a knock, seemingly it ain’t so bad: he’s raised $350M already from a16z for his new real estate company Flow…another one with a tech valuation….focusing on community. Um, what? 🤷‍♂️

You can’t make this shit up.

A zealot for the village, a pragmatist for the state

Scott Galloway wrote a piece about Adam and WeWork, and he does an excellent job at describing an important transition that startups need to go through to find long-term success. He writes:

Founding a business that achieves any level of success requires ambition, talent, an irrational belief that “this” makes sense, and most important the ability to attract a flock of investors who consent to engage in your hallucination. The best founders are Zealots.

Zealots are high-talent, high-energy people — but they also tend to be narcissistic and divisive assholes. If you’re thinking “Takes one to know one,” trust your instincts. Zealots make good founders, but as companies mature, the ratio of their passion relative to the cost incurred by their difficult personalities erodes. Maturity calls for sober leaders who are better at managing risk and serving the market’s desire for predictable, if not remarkable, growth: Pragmatists.

He then adds:

Uber and WeWork had the blessing/curse to be founded by Zealots, men so irrationally committed to their vision that they ignored naysayers, business issues, laws, ethics, and math. Though, to date, a disregard for laws or morality has been a feature not a bug across the innovation economy. Math proves to be the arbiter of who survives/thrives. WeWork was the ultimate expression of a Zealot-founded company, exhibiting hypergrowth, a proliferation of side projects, and a company culture based on a cult of personality bordering on a (wait for it) cult. Founder Adam Neumann inspired devotion and elicited hard work from his team, but he created a workplace that felt more like a movie of the week than a public company. It likely could have survived this, as Uber did, but profligate spending ($60 million Gulfstream G650) and self-dealing transactions — (personally licensing the “We” brand to the company for $5.9 million) triggered the market’s gag reflex.

Neumann’s flaws were evident to insiders long before the company’s 2019 aborted IPO afforded investors a peek inside the circus tent and required the board to finally address the Neumann issue. However, it swapped in one Zealot for another — in this case business history’s greatest enabler: SoftBank’s Masayoshi Son. The Japanese billionaire was the largest backer of WeWork, having invested $6.4 billion by the time of the failed IPO, and he’d once told Neumann he needed to be “crazier.” Masa doubled down on his investment (literally, with a $9.5 billion “rescue package”) and took over the company himself.

A decent definition of “crazy” is doing the same thing while expecting a different outcome. So Son followed his own advice and became fucking insane, shoveling good money after bad. After a legal fight with Neumann, and the world’s largest blink by Masa (paying Neumann a billion for his shares), there was a SPAC, and more hemorrhaging of capital.

Adam was clearly a zealot. And that can work during what Reid Hoffman calls “the town and the village stages” of company building. But, when you transition to the “city and state stages”, either the founding CEOs need to evolve into pragmatists, or they need to hand the keys over to someone who is.

But, unlike Uber who exiled Travis in favor of Dara (the pragmatist) WeWork enabled Adam, even after they fired him. A fact, as Scott pointed out, made far worse by the fact that WeWork’s biggest investor—Masayoshi Son—was also a huge zealot. With that, I guess it’s not so crazy then when you think about it: one crazy asking another crazy for crazy amounts of money for crazy things.

How to avoid this 🛠️

Oof, maybe don’t siphon company money for yourself—putting investors, employees, and customers in second place? JK, I know you wouldn’t.

But more broadly, always be transparent in your decisions and dealings. Prioritize proper governance and measures of accountability. And also, if you’re a founder, consider which camp you fall in: are you a zealot or a pragmatist? Or, more importantly, consider how you can strike a balance between the two. Vision and ambition is how you sell a story and raise money, but be careful not don’t drift too far from reality. There’s a fine line between being a visionary and a liar.

When it comes to execution and being an operator, have one foot on the ground, one foot on the next step up, and your eyes wide open looking a good couple steps ahead.

Parting thoughts 🤔

While WeWork has filed for bankruptcy, it’s not all over yet. There are possibilities:

1. One option would be to use bankruptcy (a capitalist tool designed for companies with lease commitments) to look over its office portfolio, get out of the leases of underperforming locations, and get better deals on the good ones. AKA, strip back to the core. Kill the costly buildings, focus on a few prime locations, and gradually with a ton of caution, grow. They need to come to terms with and take ownership of the fact that they are not a startup. They need to be profitable, and they don’t deserve to trade at tech company multiples. This option still involves taking on long-term leases though and being capital heavy.

2. Another option would be to pivot away from master leases and long-term commitments and truly try become the asset-light operation they always wanted to be. In practice, this would be akin to “Real Estate as a Service”. Basically WeWork could run their spaces through operating contracts with the building owners, earning them fees and a share of top-line revenue. In fact, this is how the Fours Seasons and the Ritz manage their hotels.

3. Finally, they could become a franchising shop. Each franchisee manages costs, growth, and local dealings, and WeWork provides the guidelines and the brand power. Because they do have the brand. As Scott says:

Both WeWork and Uber have an asset that is worth billions, brands that have reached Elysium — they are the generic term for their category. WeWork’s brand has been dinged by the business failures of the past few years, but the impact of corporate missteps on consumer brands is typically muted. Airlines, for example, can’t stay out of bankruptcy court (American, Delta, and United all being recent examples), but their brands keep flying. I expect more than a few potential buyers are fielding brand equity surveys right now, gauging the strength of WeWork’s potentially most valuable asset. My bet is Barry Sternlicht brings the firm out of bankruptcy. We’ll see.

— Scott Galloway via No Mercy/No Mallance

Of course none of this will work if there isn’t demand for shared office space. But, there definitely is. 75% of workers would “choose flexible working instead of a pay rise” to return to the office.

This means WeWork is in a position to do a turnaround with the right pragmatic leadership. If there’s a market for what you’re selling, there’s opportunity. Now, will they ever be worth $47B again? No. There’s far more competition in the space (excuse the pun), and nobody will ever value them the same way again, but they may be able to skirt away from pure extinction and perhaps in a couple decades return some of the billions in capital to investors—investors who hopefully have learnt their lesson.

And that’s a wrap on our WeWork post-mortem…

Thanks for reading! If you learned anything new today, you can sign up here for more issues. Also consider sharing this post, perhaps becoming a paying subscriber to support my work, or if you are a paying subscriber already, giving a gift subscription to a friend, colleague, or family member.

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— Jaryd ✌️

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Hi, friends 🧟

Welcome back to our third installment of Why They Died, where we take the odd trip to the startup graveyard for a post-mortem on a once high-flying startup—unpacking important takeaways on what not to do with our products.

Today, we’re visiting the plot of Zume. 🪦 A startup that represents the excesses of pre-pandemic venture investing.

You’ve likely never heard of them, and that’s ok. It makes this analysis all the more interesting.

Long story short, if you can’t make a pizza with $445M in venture funding, you’ve earned yourself an unapologetic invite to become a cautionary-tale Hall of Famer.

Ok, that’s a little harsh. Zume wasn’t just making pizza—they were using robots to make pizza and cooking them in a food truck while en route to your door. Also, Zume tried to take a big-data approach to predicting pizza demand to efficiently place their trucks and manage ingredient supply.

However, as amazing as AI has become, it seems like if you’re a dough-flipping, marinara-spreading, and cheese-sprinkling human at Dominos, you’re good for now. The robots haven’t figured out how to deal with sliding cheese.

Apparently, hot mozzarella + R2D2 + moving pizza truck = closed $2.3B startup.

But, the issue of messy cheese and mediocre pizza quality is just one slice of Zume’s problem pie that led to their failure. Was that too cheesy? 🫣

As we’ll see, over-indexing on technology, creating a big value gap, drastic pivots away from the core vision, and ego over execution can be fatal moves. Their story also gives us an important reminder (an obvious one, but always worth repeating) that just because you have innovative tech and lots of money to fuel growth, it means nothing if you’re not aligning it with market needs.

Okay, without further waffling, I bring you…

Actionable insights 🧠 🛠️

If you only have a few minutes to spare, here are a few of the tactical takeaways from Zume’s failure — from a building perspective.

• Technology should enhance the core product, not replace it. Always prioritize the primary value proposition, and always make sure your product genuinely addresses a market need. Hammers in search of nails seldom work out.

• Balance vision with reality: While having a big vision is great for inspiring stakeholders, Zume's story underscores the importance of aligning that vision with market realities and consistently delivering on promises. A significant "value gap" can emerge when there's a disconnect between the perceived value of a product and its actual market value. This gap can lead to customer churn, team dissatisfaction, investor pressure, and your own burnout.

• Be careful of raising too much money. Money comes with written, and unwritten, terms. The more you take on, the bigger the expectations, and the more you’ll have to do very quickly to show growth, even if it means failing to follow…👇

• Validation before scaling, never the other way around: Zume's aggressive expansion without thoroughly validating their business model in initial markets led to significant resource allocation without clear evidence of sustainability or profitability.

• Always have a clear monetization strategy, even from the get-go: To avoid crazy burn rates and short runways, never rely on a “build it, get users, and the money will come" approach. A product only really works if people will pay for it, so from the beginning have a clear understanding of your business model and unit economics, like CAC.

• Focus, and don’t juggle multiple objectives at once: Startups, especially those pre-product-market-fit, should prioritize solving one primary problem effectively. Spreading resources thinly across multiple fronts can lead to inefficiencies and a lack of clarity in direction.

• Pivot, but do it wisely: Big changes like company direction, while sometimes necessary, should be strategic, based on lessons from past mistakes and real data, and always align with a company's strengths rather than be reactive shifts due to challenges or new trends.

Quick slices over. Let’s get to the full pizza. 🍕

Obituary: Here lies Zume 🪦

May 2015 - June 2023

I eat a lot of pizza.
We eat a lot of pizza.

Enough to create a $140 billion global market, with more than a third of that coming from the US. And that demand in the states, roughly, is met by about 75K pizza restaurants across the country. Domino’s leads the industry in sales with ~6.5K locations nationwide.

As you can imagine, it takes an army of human workers to make all that dough and run the pizza-making engine across America. And with all that overhead, in 2015, Alex Garden and Julia Collins thought the pizza market was broken, and ripe for Bay Area disruption.

So, with the grand vision of automating the food supply chain as much as possible, they raised in total $445M from some serious investors, including SoftBank. Checks were written because Zume presented the market with innovation, including a neat goal of using robots in their kitchens to improve the consistency of pizzas, and the speed of getting them to the customer by cooking them in trucks during delivery. Plus, an interesting hook was how Zume aimed to improve sustainability by leveraging big data to control supply, allocate trucks, and minimize any food waste.

In that sense, Zume went to market with a tricky handicap: they were trying to be three things all at once. A technology company, a pizza shop, and a sustainability play. More on this soon.

However, the pizza shop part is interesting. In a Yahoo! finance interview with Alex Garden, after Zume Pizza failed and they pivoted to a focus on packaging, he said something like this:

Because bringing new and unproven technology to market to automate a supply can be so tricky, we created Zume Pizza with the purpose of creating our own reference customer. This allowed us to set out and solve the problems of pizza shop with our FoodTech hardware and software, and prove it to the market.

Besides the fact that it didn’t work, that was a smart move. Create a reference customer, be that reference customer, dogfood your unproven product to learn and iterate, and then show the reference customer’s success to the market so you can start selling your real product.

Except, I’m not quite sure that’s what Zume actually did. Given that’s how Alex explains Zume Pizza’s purpose prior to their pivot to single-use food packaging, it sounds like too good a story to tell everybody in retrospect.

Anyway, we’re jumping the gun slightly.

In 2016, they delivered their first pizzas with a partly-automated MVP. In the HQ, a robot arm spread the sauce. A human did the toppings, and the uncooked pies were loaded into food trucks. Pizzas were then cooked in these on-the-go trucks equipped with 56ﾠGPS-equipped automated ovens, timed to be ready shortly before arrival at the address, and then sliced by a self-cleaning robo cutter.

But, despite the fact that the pizzas got to the customer quickly, and Zume used higher-quality ingredients than the average chain, baking pizzas in the back of a truck proved an unsolvable challenge. The melted cheese just kept sliding off.

It turns out, hungry people don’t care much for technological innovation if the end product is worse than a classic human-run pizza joint. Shocking.

Faced with the melting cheese dilemma, Zume changed it up by parking their trucks in popular locations and using delivery drivers to pick up and drop off. Essentially, creating mini satellite operations around San Fransisco. But despite a massive war chest of cash, pizza troubles persisted. So, in 2018, Zume shifted away from pizza. Now, the aspiration was to reinvent large parts of the food value chain, aiming for a farm-to-fork transformation powered by their kitchen-tech hardware, automated food trucks, AI-enabled software, and numerous restaurant partnerships.

At first, the idea was to drive this through partnerships where Zume would function as a ghost kitchen of sorts. Then, the business model shifted to licensing their tech out for others to own and run. But it didn’t take long for that grand vision to implode. The storiesﾠfrom former employees revealed a classic case of Silicon Valley hubris where big money meets big egos, and someone forgot to execute.

So once again, with poor adoption, in 2019 they shifted focus to…boxes.

Zume was now solely in the business of automated production and the selling of sustainable, plant-based, food packaging for deliveries. In other words, after having wasted a ton of money trying to make pizza in the most complicated way possible, they decided that the best way forward was to try and sell boxes instead.

With this less sexy business—although, much more important given the lofty goal of replacing big plastic in the food industry—Alex and Julia touted big revenue projections to investors and raised more capital for their new pivot. Except, their packaging wasn’t legally allowed to hold food in some places, including San Francisco, because it contained PFAS.

So, not to pull the band-aid off slowly here, in June 2023 Zume officially laid off all the robots and humans and closed their doors.

A $2.3B (at its peak) darling of the FoodTech space had enjoyed a big climb and a gradual, hard-to-watch, demise.

While you might think that such an epic downfall would kill Silicon Valley’s faith in robot pizza as a profitable concept, it doesn’t seem like that’s the case. Though Zume may be gone, a different startup—this one founded by a former SpaceX engineer—is currently trying to succeed where Zume failed. Stellar Pizza Inc. recently enjoyed a $16. 5 million contribution from Marcy Venture Partners—Jay-Z’s venture capital firm—and, in March, the company rolled out its cheesy products at a college campus in Los Angeles. So, who knows? Maybe Stellar will succeed in finally bringing us the automated pizza nobody asked for. 🤷

Anyway, let’s go deeper into some of the main reasons Zume failed, with a key lesson from each. 👇

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Post-mortem: What we can learn from Zume’s 3 leading causes of death

Food supply chain automation was Zume’s category to lose…which they did…so let’s look at how they dropped the ball and burnt through half a billion in capital.

Our startup autopsy suggests 3 primary causes of death:

• Over-indexing on the technology at the expense of the customer and market needs

• Creating a big value gap by overpromising and underdelivering

• Failing to focus, and making big, internally disruptive, pivots

Outside of those, Zume also faced regulatory challenges and, like Quibi (read Why Quibi Died), suffered the consequences of overfunding and ungrounded valuations.

We’ll just focus on the big 3 today. So let’s start with the product, and the inability to Zume to ever find product-market fit.

1. Cool tech, but no problem solved

Let’s give Alex the benefit of the doubt, and let’s assume that from the beginning, the point of Zume Pizza was really to just serve as a reference customer for Zume Inc’s larger ambition of automating the food supply chain.

Doing so to prove to the market that your product works is smart. But, for that to work, the reference customer needs to be successful.

As you know, Zume Pizza was not, which got the team stuck in a cycle of trying to figure out this reference customer’s business first.

This created a problem of focusing on the micro vs the macro, and perhaps optimizing the wrong things. The technology side of what Zume was doing was interesting, and if this was the real play, their customer would have been other restaurants and kitchens. And with that as their ICP, Zume would have been trying to solve real problems in the food industry.

But, by making their go-to-market tied to the success of a robo pizza shop (regardless of whether this was a reference customer or the actual startup idea), Zume Pizza needed to compete in the very competitive pizza market from an end-consumer perspective.

And to compete, you need to solve a problem in a better way. Otherwise, why order from you vs Domino’s? The thing is, nobody on Earth cares if their pizza is made by a robot. The novelty of preparation is a non-factor. All people care about is a well-priced pizza that tastes good and arrives warm enough and on time.

Zume Pizza just didn’t compete because, simply put, they were spending money on the wrong things. They were investing in figuring out how and where to remove humans and use robots, instead of focusing on the core product, and how to make a 10x better pizza or 10x faster pizza…if that’s even possible. I don’t think it is.

What you can do with that: 🛠️

A clear lesson, especially in the world of AI: Don’t over-index on technology as a solution. The technology should enhance the core product, not replace it. Always prioritize the primary value proposition, and always make sure your product genuinely addresses a market need.

Rapid scaling without validation, or a proven path to profitability

Zume expanded aggressively, aiming to capture a significant market share. However, this expansion came without thorough validation of their business model in Zume’s initial markets. For instance, before fully establishing a successful and profitable model in the Bay Area, Zume announced plans to expand to other cities.

Given they were a robot restaurant operation with food trucks to boot, this rapid scaling led to significant resource allocation, both in terms of capital and manpower, without a clear indication that the model was sustainable or profitable. Let alone that they were even needed.

It’s somewhat surprising they were able to keep raking in more funding without the numbers to support it. But because they did, they saw a runway and believed they were well-capitalized enough to just push for growth.

This led to a substantial burn rate because the infrastructure was very expensive to develop, deploy, and maintain—and besides failing to create enough demand and stealing share from the other chains, pizzas are not exactly a high-ticket item, meaning Zume needed to sell a lot of pizzas.

Now, Zume isn’t exactly alone in raising money and taking on losses to grow with the promise of profitability later. This is classic Uber. Except, Uber had a real product-market fit, and always figured that if they invested in less rapid expansion, they could net a profit. Which was true.

But Zume just invested in expensive pursuits without showing clear revenue streams or a roadmap to profitability. Meaning, long-term sustainability was always an issue.

So, the money didn’t last. A prime example of venture capitalﾠexcess — an expensive, fruitless attempt to supplant an industry that no one really had a problem with in the first place.

What you can do with that: 🛠️

Validate in smaller markets before scaling, and always have a clear monetization strategy. Build it and the money will come is a risky bet. Know your business model, and know what you need to sell in order to have a long-term business that can sustain itself. Here’s some step-by-step advice:

1. Start with the problem: Before thinking about revenue, make sure you're addressing a real problem in the market. A genuine solution to a pressing issue is bound to make money if you attach the right price to it.

2. Research and understand your market:

   • Competitive analysis: Identify direct and indirect competitors, and understand their revenue models, strengths, and weaknesses.

   • Customer segmentation: Identify your target customers (ICP) and understand their willingness to pay for things like your product.

3. Choose the right business model: Whether subscription, freemium, affiliate, e-commerce, etc, you want to choose one that aligns with your product, market, and customer behavior.

4. Consider different pricing strategies:

   • Cost-Plus Pricing: Calculate the cost of delivering your product/service and add a margin.

   • Value-Based Pricing: Price based on the perceived value to the customer. The best IMO.

   • Competitive Pricing: Price based on what competitors are charging.

   • Tiered Pricing: Offer different pricing tiers with varying features.

5. Focus on unit economics: Understand the cost of acquiring a customer (CAC) and their lifetime value. This helps you figure out things like the payback period, and of course, what your price should be.

6. Diversify revenue streams: This can come later, but long-term you don't want to rely on a single source of income. Explore multiple channels like direct sales, partnerships, and other products/services you can cross-sell or upsell to.

7. Monitor and adjust: Regularly review your business model and financial metrics. Be prepared to pivot if certain aspects aren't working.

8. Bootstrap when possible: If you’ve ever watched Shark Tank, you know the value in using some of your own resources to build and test your model out before going to investors. This not only reduces dilution but also helps derisk the idea and demonstrates your commitment.

9. Plan for scalability: Ensure that your business model can scale. As your customer base grows, your costs per unit should decrease, leading to higher profitability.

10. Cash is king. Profitability isn't just about revenue, it’s about being cash flow positive. This is crucial for the sustainability of your business. Model out what your break-even is, and know what levers you can pull if you’re ever burning too much and need to get back to break even.

2. Creating a big value gap

It’s good to have a big vision. That gets people excited. But, Zume brings us an important lesson here: You need to have a good enough win rate of delivering on your promises—and that’s promises to your customers, your team, investors, and even yourself.

The less you do that, and the more you fail to meet people's expectations, the wider your value gap will be—which eventually creates a hard chasm to close back up once the cracks get too big.

What’s the value gap?

Simply, it’s the divide between what other people perceive the value of your product to be, and what you believe it to be (and the price you assign as a result).

The bigger the gap, the more likely your customer is to churn. Or the more your team will face poor retention, or the more push (or pull) you’ll get from existing investors, or the more likely you’ll be to burn out.

Just consider the case of the value gap with their VCs. Because they promised so much (including big revenue targets), and because they had been given so much capital, there could well have been extra pressure to show rapid growth and returns on investment. This could have driven the urgency to expand and dominate without a proven model—setting Zume on a hard path to recover from.

But from customers to investors, the biggest driver of Zume’s value gap was the founders’ grand vision in tension with the reality of the market.

They promised the world and missed the mark consistently.

And there lies the challenge: The balancing of a founder's passion and vision with the practical realities and demands of the market.

While vision is crucial, adaptability based on market feedback is equally important. Said differently: ego over execution is fatal.

What you can do with that: 🛠️

Obviously, minimize your value gap.

How though? 🤷‍♂️

First, figure out if you have one and how big of a problem it is. A few things to look out for that could indicate a big gap.

• Campaigns are not performing or underperforming.

• Conversion rates are low.

• Your churn rate is high.

• Problems growing user base.

As Aggelos Mouzakitis, Growth Product Manager at Growth Sandwich, says:

The value gap expresses itself in different ways. You can have both a value gap and a good product fit for a segment of the market. At times there can even be an antithesis in what's happening between the acquisition.

The biggest challenge most companies face is identifying the problem early enough to avoid burning cash on treating the symptom rather than the solution.

So, what’s one to do if you find that your user expectations don’t match the user experience? Start by identifying the problem with this two-part approach (credit to Aggelos for the framework).

1. Evaluate your strategy

   • Reflect on your product's positioning and the clarity of its copy. Misaligned positioning or unclear messaging can lead to mismatched user expectations.

   • Assess if you're underestimating or underselling your product. Startups often don't realize their product's true value compared to competitors.

   • Ensure your product delivers as promised. If there's a mismatch between your product's performance and customer expectations, it can lead to low conversions and high churn.

   • Consider if your product is being used differently than its original intent. The market evolves, and your product's value might differ from its current positioning.

2. Differentiate between fresh and power users

   • Understanding the difference in experience between fresh and power users can help you better identify and solve value gap problems.

     • A fresh user: Someone new to the product or has used it briefly (less than 10 minutes).

     • A power user: A loyal user who has fully adopted the product. Their usage might vary; some might find alternative uses for the product, while others might be brand ambassadors.

• Each user type has its perspective on the product. For instance, if Slack shifted from team communication to community-building, a Fresh User would likely still expect it to be a simple communication tool. Any deviation from this expectation can lead to churn and low conversion rates.

Now, once you know what the problem is, you can get to fixing it by:

• Collecting data: Gather feedback from both user groups. This can highlight discrepancies in expectations and experiences.

• Analyzing feedback: If Power Users expect one thing and Fresh Users expect another, there's a clear value gap. Use interviews, questionnaires, and data analysis to understand these expectations.

• Addressing subtle differences: Often, the differences between user expectations are not stark but subtle. Ensure your product's unique value is clear, and you're targeting the right demographic.

• Developing strategies: Based on research, devise go-to-market strategies and methods to bridge the identified value gap.

Onto the third big cause of death.

3. Big pivots, and a lack of focus

First, let’s talk about their GTM, where they were a technology, pizza shop, and sustainability play all in one. For a budding startup with plenty of unknowns, this lack of focus and the mistake of taking on too many bets was a real problem. Startups pre-PMF should be laser-focused on solving one problem well. All resources should be pointed at getting there. Nothing else matters before that.

Zume essentially opted into fighting 3 wars before ever winning a single battle. 🙅‍♂️

Here’s just one example of why trying to achieve three things at the same time was a problem. So, Zume was trying to be a tech company and a sustainability company. While it’s all good and well to aim for sustainability with their predictive analytics helping reduce food waste, the flip side meant that Zume had limited ability in managing surges in demand. Balancing sustainability goals with customer satisfaction and operational flexibility was a hard task.

Then, outside of their initial three-prong go-to-market (which failed), Zume pivoted a few times. The most notable one pivoting from their robotic pizza-making venture to a sustainable packaging operation.

The good old pivot.

Absolutely nothing wrong with it, and it’s what helped turn my startup around back in 2018. But, there’s a delicateness to pulling it off, where pivots should be data-driven and align with the company's core strengths. Zume's shift seemed more like a reaction to challenges in their original model rather than a strategic move. This drastic change could well have confused stakeholders and highlighted a lack of clear direction and focus for the company.

This pivot also bought Zume into a super competitive market of food packaging, where again, they didn’t have any real advantages inherited from the pizza operation. Then when Covid happened, they even dabbled in making Covid masks.

Sounds like a rushed move to try to make some money. And not to give them too hard of a time for doing that (because we all needed masks), but that hopping around of priorities sounds like a total dumpster fire.

Remember, focus on what you can be great at. Do one or two things extremely well vs trying to be all things to all people and ending up being average at them all.

This lack of it—along with that value gap—led to a related issue.

Poor team retention 🪣

A startup's success is pinned on building the right team. A team that’s skilled, fast, aligned, and cohesively working towards (1) product-market-fit, and (2) growth once PMF is reached.

Unfortunately, Zume underwent several leadership changes and faced challenges in retaining key operators. For a startup, especially one aiming to disrupt an established industry, having a stable team that shares the company's vision is crucial. Frequent changes in leadership or key positions are not only demoralizing, but can lead to strategic misalignments, loss of institutional knowledge, and just general disruptions in day-to-day operations.

Also, poor retention is prone to becoming a negative cycle—like a bank run. One or two key people leave, and others may soon follow.

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What you can do with that: 🛠️

For this takeaway, let’s just focus on pivoting in the least disruptive way possible. While pulling off a soft landing isn’t an easy feat, when done right, it can set you on a path to greater success. So let’s look at “what done right” generally looks like:

1. Make sure it’s needed: Before considering a pivot, really make sure that it's genuinely necessary. Are you facing insurmountable challenges with your current model? Is there a significant change in the market landscape? Pivoting should not be done lightly.

2. Stay mission-driven: While the strategy or product might change, your core mission should remain consistent. This helps in retaining brand identity and customer trust.

3. Gather data: Always base your decision to pivot on solid data and feedback, not just gut feelings. Really make sure you understand what's working, what's not, and where opportunities lie. You want to lean in where you have advantages already.

4. Engage your team: A pivot shouldn’t just be a top-down decision you announce in an all-hands. Aim to engage with your team, get their insights, and ensure they're onboard and motivated for the change. You’ll need them to pull it off.

5. Communicate with stakeholders: Keep investors, your team, and customers in the loop. Clear and over-communication can help manage expectations and reduce uncertainty.

6. Start small: Before making a full pivot, try to test the new direction on a smaller scale. Think of it like another MVP where you need to validate the idea and reduce risks. You don’t want to be like Zume where you’re pivoting regularly.

7. Have the runway to pull it off: Pivots can be resource-intensive. Make sure you have enough money in the bank to support the shift without running out of cash.

8. Stay flexible: Once you’ve made the call, it’s important to commit to the new direction. At the same time, you’re a startup and must remain adaptable. The pivot might require further adjustments as you learn more.

9. Learn from past mistakes: The worst thing you can do is make a pivot without a proper retrospective of why you’re pivoting in the first place. Analyze why the original model didn't work from multiple lenses, and make sure you don't repeat the same mistakes post-pivot. That’s called a blunder if you do.

10. Ask for advice: Sometimes, an outside perspective can provide clarity in an otherwise murky situation. If you have mentors, industry experts, or other entrepreneurs you know who've successfully pivoted—chat with them.

11. Rebrand if necessary: If the pivot is drastic, consider rebranding to better align with the new direction and signal the change to your customers. E.g., Slack.

12. Stay customer-centric: This should go without saying, but your pivot should be directed at solving a customer problem in a better or different way based on new learnings. The bedrock of that is engaging with your customers, gathering feedback, and iterating based on this discovery. Never at a whim.

13. Review and adjust: After the pivot, continuously review its success. Are you meeting your milestones? Is the new direction proving to be viable? A tweak is needed.

And that closes out our third edition of Why They Died.

If you learned something new, or just enjoyed the read, the best way to support this newsletter is to give this post a like or share. It helps other folks on Substack discover my writing.

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Or, if you’re a writer on Substack, enjoy my work, and think your own audience would find value in my various series (How They Grow, Why They Died, 5-Bit Fridays, The HTG Show), I’d love it if you would consider adding HTG to your recommendations.

Until next time.
— Jaryd✌️

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Hi, friends 🧟

Welcome to the second edition of our occasional series, Why They Died. I’ve only posted one of these before, but it seems like this little spinoff series is a fan favorite already.

For all the new folks who’ve joined recently and are unfamiliar with Why They Died…instead of analyzing the winners as we do with How They Grow, we unpack startup failures. For more details on this shorter series (~5K words), check out the intro to Why Vine Died.

Now, why are you not getting your usual HTG post today?

Unfortunately, I didn’t have enough time for a ~10K word deep dive. Last week I was in New Orleans Thursday through Sunday for my friend's bachelor party. As you can imagine, there wasn’t much room for writing. 🙃

So, I excitedly invite you on our second trip to the startup graveyard. On this cemetery tour, we’re visiting…Quibi.

Favor: If you enjoy today’s post, please click the little heart button to like it—it helps more people discover my writing—or share How They Grow with a friend or two.

Poised to be the mobile-first Netflix, this is one of the most spectacular failures in tech and entertainment. Quibi— short for "quick bites”—was touted by its extraordinarily veteran co-founders as a platform that would radically transform the way people, particularly younger viewers, consumed content on the go.

Except, the only thing that was quick about Quibi was how fast they burned $1.75B (yes, billion) of investor capital. From launch to shut down…Quibi was live for the same amount of time it takes a Granny Smith apple to ripen on a tree. 👀

That’s 6 months….Yikes.

Before we unpack the 7 Reasons Why Quibi failed, and of course, the practical takeaways from each, here’s a quote from Quibi co-founder, Jeffery Katzenberg, from a keynote at SXSW.

What we are setting out to do falls somewhere between impossible and improbable. That just happens to be our home address.

Alright, enough memes (for now). Let’s get to it.

Obituary: Here lies Quibi 🪦

The idea of Quibi was simple: a streaming platform designed exclusively for the phone, with original content broken up into 10-minute segments.

Think TikTok meets Netflix, for $5 with ads or $8 without per month.

Instead of committing to watching a full-length show or movie, you could fill moments in your day by watching Quibi. With this format of shows, the idea content-wise was to create a new way to tell stories. And their secret sauce as a product?

The “Turnstyle”, which allowed videos to work beautifully in portrait and landscape mode while in full-screen.

Whether this feature was a gimmick or a true innovation is hard to say given how little time Quibi was on the market. But what is clear, is that bringing to market (1) a new platform, and (2) original content at the same time was a poor choice of a go-to-market strategy. More on this soon.

Now you might be wondering, “How the hell did a company raise so much money before acquiring a single user?” Absurd, I agree.

And not just a lot of anyone's money…they raised from the top dogs in Hollywood and Wall Street. Including Disney, Alibaba, Goldman Sachs, JP Morgan, NBCUniversal, Sony Pictures, Time Warner, Lionsgate, and several others.

Arguably the only reason for this is because of Quibi’s co-founders, Jeffrey Katzenberg and Megan Whiteman.

Jeff was the former chairman of Disney (‘84 to ‘94) during the media giants animation renaissance — the period when Disney made some of their gigantic hits like The Little Mermaid, The Lion King, Aladdin, and Beauty and The Beast. After this successful tenure, he became co-founder and CEO at Dreamworks, another little animation company producing hits like Shrek and Madagascar. Then there was Meg, who was the former CEO at both eBay and Hewlett-Packard (HP). She’s also a board member at Dropbox and Procter & Gamble (P&G).

And with Jeff as a Hollywood heavyweight, these entertainment companies bought into Jeff’s thesis that (1) consumers wanted Netflix-level content on the go, and (2) that the existing streaming solutions were not convenient to watch on phones. Essentially, the vision was that TV was changing and people wanted a different type of media. This was the gap in the market Jeff pointed to.

So, Quibi raised $1.75B over two funding rounds ($1B first) based entirely on trust in the founding team and their vision. This massive cash war chest was used to build out their platform, hire executives from companies like Instagram, Hulu, Netflix, and Snapchat, as well as cast celebrities to build up an extensive pre-launch library of Quibi Originals. And these celebs—who were announced over time to build up hype—included names like Kevin Hart, Idris Elba, Zac Efron, Anna Kendrick, Jennifer Lopez, Justin Timberlake, Liam Hemsworth, and even Steven Spielberg.

Then, piggybacking on the momentum behind these A-listers, they were able to attract massive advertisers. Before launching, they announced that companies like Google, P&G, Pepsi, and Walmart had committed to spending $150M in ad spend for the first year. They also announced a partnership with T-Mobile, allowing the carrier’s 83M+ US customers to get Quibi for free. That’s a massive channel partnership, unlocking a day 0 distribution advantage. Plus, they invested heavily in their own advertising, spending over $100M on awareness marketing (including at the Super Bowl) before launch.

And just to reiterate…this was all before having one single user.

Nonetheless, all of this investment wasn’t enough. So, what the hell happened? 😕

As we look at all the reasons behind probably the fastest collapse in the entertainment/tech industry, we’ll see it really boils down to this: Jeff and Meg heavily over-indexed on their experience, and solely relied on their instincts, which proved wrong.

Let’s go deeper.

Post-mortem: What we can learn from Quibi’s 7 causes of death

There are a lot of reasons (as covered in Why Vine Died) why most startups never make it. And our startup autopsy suggests 7 main reasons Quibi failed.

• Not addressing an untapped and pressing problem/desire: AKA, nobody needed it.

  • Lack of problem validation, built on a faulty thesis

  • Over-indexing on a single big launch

• Entering a deeply competitive space without an advantage

  • Miscalculating the market they were actually entering

• Quibi’s core value—their content—was low quality

  • The inability to license content due to technical constraints: Dual focus on both a platform and content play

• Selling the wrong value, and bad marketing

• Disconnect between product and organic user behavior

• Resistance to adapt in response to the pandemic

• Too much money, too quickly

We’ll start with Quibi’s nonstarter.

1. Not addressing an untapped and pressing problem/desire: AKA, nobody needed it.

Sure, Jeff and Meg had a grand vision that was exciting to rally behind. That’s why investors poured in cash.

The thing is, nobody actually cared. Quibi didn’t add value to people’s lives, and time and time again they failed to answer the most important question there is: “Why do I need this?”

I clearly remember seeing Quibi ads pasted all over the New York subway system and thinking that exact thing…“Why would I download that? What’s the point?”.

Unfortunately, Quibi could have been successful if its go-to-market strategy had any form of a hypothesis-driven approach. As you’ve seen over and over again in this newsletter, the most successful products start small and expand. They find a niche audience, create a wedge into the market, and use it as an initial hook to break in. It’s all about figuring out if people want what you need, learning and iterating as fast as you can, then growing from there.

That’s what you’d call as essential as knowing your ABCs in startup land.

Quibi, however, was not treated as a tech product in that sense. Rather, much more like a Hollywood blockbuster with a grand launch day.

In hindsight, that explains very well why the investor lineup noted earlier had very few Silicon Valley VCs in it. Tech people were skeptical about the overreliance on the founders’ backgrounds. Likely, they also noticed the disconnect between their experiences and how to launch and maintain a high-growth tech product. If someone at Sequoia asked, “How do you know people need this?”, Jeff and Meg would have probably had an answer based on their own observations and instincts.

Simply, the first time Quibi actually tested its hypothesis was when it launched. 👇

Lack of problem validation, built on a faulty thesis

Having deep expertise in your domain as a founder is a massive advantage. By and large, that’s because it means you understand the market and customers deeply and are in a leveraged position to uncover a unique insight into a problem.

But, in Quibi’s case, the founding team’s vast experience and previous successes worked against them. Jeff and Meg’s conviction that this is where the market was going and what people wanted was so strong, that they simply did not accept the notion that they could be wrong.

And if you’re that confident and sure in yourself, you can see how “building lean” and rolling something out more incrementally all seem like a waste of time.

In short, these two boomers saw a bunch of “kids” who couldn’t get off their phones (not wrong about that) and thought they could just shove more content in front of them there and win. That’s kind of like saying at a restaurant, “Hey, all these people are eating right now. They must all be so hungry. Let’s go sell them more food.”

Quibi never ran an MVP (minimum viable product) or any experimental beta to try to test what kind of content and what kind of features resonated well with their target users. They never even did focus groups, and honestly, I struggle to see Jeff or Meg speaking to users about the idea. Because, if they did, and if they asked the right questions, they would have known right away that people actually didn’t want to watch short-form drama series episodes when they had a few minutes to kill on their phones. They’d have had people asking why Quibi when they have TikTok, Instagram, and YouTube for free when they’re on the toilet. And why Quibi when they are paying for Netflix and Prime already?

Any startup that feels as though they don’t need to launch an MVP or beta is fooling themselves. Mistakes will be made and money will be wasted. You just can’t take shortcuts here.

In Quibi’s case, they were essentially running a $2B high-risk, high-reward, experiment to validate the most important thing underpinning the business. And that’s the biggest mistake you can make — building something nobody needs.

So, Quibi never got to product-market fit, and they scaled far too quickly without any validation. Looking back, it’s easy to imagine that just chopping up a movie into 20 pieces doesn’t add any real value. Instead, Jeff and Meg could have preserved capital before they knew what they had was working. And as their audience grew, they could have ramped up their library of shows and the rest of the product.

Except, they did the total opposite. They didn’t just launch with an untested product. They had a massive launch event. 👇

Over-indexing on a single big launch

We have one chance to launch, and we need it to be absolutely perfect.

— Meg Whitman

Even for Apple, the company famous for iconic product launches, that just isn’t true.

Where that is more true though, is with theatrical movie releases. Opening weekend is huge for Hollywood, and perhaps that’s why Jeff and Meg steered the ship that way.

But in the world of tech, the idea of a single launch is nonsense. Airbnb famously “launched” multiple times, as has SpaceX (who are literally launching rockets) with test flights. At first, nobody knows you and very few people will care. There is nothing stopping you from launching multiple times, trying new things, tweaking the product/positioning, or even rebranding. Ultimately, with each launch more people will keep trying your product if you’re listening to their feedback and baking in your learnings from the time before.

Again…one big launch day is almost always a mistake. Of all the companies we’ve looked at in How They Grow, (if I remember correctly) not even one of them “launched” like this.

🛠️ Takeaway: Expertise can be a double-edged sword. It brings you the value of knowing the customer and market, but also can lead to overconfidence in customer assumptions. Nothing substitutes speaking to customers. Big ideas and insights should still be treated as untested hypotheses, and the only job you have in the beginning is to figure out of you’re right as fast, and as cheaply, as possible. Once you have an inkling of validation, go and validate the next risky assumption. And this incremental approach should gradually spend more capital, and (in most cases) totally avoid this misconception that a product needs to “launch”.

Onto the second cause of death.

2. Entering a deeply competitive space without an advantage

Let’s start with this. There are obviously limits to a consumer's appetite for another streaming site. Like, how many do we actually need, seriously?

Just considering the period when Quibi was available, here’s some data on how many services people actually subscribed to:

60% of people subscribed to 3 or fewer when Quibi launched. And Quibi was entering the market having to compete with titans like Netflix, Prime, Hulu, etc who not only had broad libraries of content (and were spending many multiples more for more of it), but also had brand advantages, distribution power, and large platforms with huge audiences already paying them and locked into shows.

Simply, Quibi had to fight out of the gate to be, at least, a top 3 service in the consumer's mind.

And the hook they were using to try and disrupt the space—and win a place on the coveted podium—was mobile-first short-form TV shows. Except, again, there was really no indication people wanted that.

That was Quibi’s challenge against the incumbents. But, Quibi also lacked an essential advantage that the new subscription services that were also entering the market at a similar time (circa 2020) had.

Take Disney+, HBO Max, and Peacock. All three of those (now very successful) services already had a deep catalog of original content that they had a loyal audience around. By launching a new streaming platform, all they had to do was bring over their existing audience and bring them the exclusive content they were familiar with.

Quibi, on the other hand, had no such audience. No hits, no must-have content, and really just nobody knowing their shows. In a super competitive space like streaming, that’s a massive disadvantage. AKA: audience > than the ability to turn your phone sideways.

Okay, we’re talking a lot about the streaming market here. And we should be, because Quibi had the same price point as other streaming sites, and for all intents and purposes, was a place to stream content.

Except, Jeff and Meg spent a lot of time focusing on that space (in honestly, what seemed like a bit of a Hollywood ego war with their Hollywood buddies), at the expense of another market that they really should have considered themselves as being in. 👇

Miscalculating the market they were actually entering

Quibi was regularly spoken about by leadership in the context of Netflix and the then-nascent Disney+.

But, if you are a mobile-only app, designed to be used on the go and to fill transitory moments of boredom, and people are consuming content….it doesn’t take too much to realize you’re competing against TikTok, Instagram, Snapchat, YouTube, etc.

If I am on my phone, no matter what your app is, you are competing for my attention against TikTok or Instagram. Those apps are highly addictive, and it’s why people regularly complain about being sucked into the scrolling vortex without realizing even how they go there.

So, Quibi needed to break that and say, “Hey, we’re a better use of your time.” While I never used Quibi, so perhaps I am wrong (although I don’t think I am), a neat way to turn your video horizontally isn’t that big a deal. I regularly watch YouTube on my phone and never thought their method was a problem. Do I really need full-screen in both views?

And speaking of these apps (which Quibi didn’t really position themselves against)…they are all free. They all have highly shareable content, are full of variable rewards, and have friends and community basked inside of them. For many people, that’s the pricing model they needed to compare themselves to, and $5 or $8 a month is, as this man would say…“It’s too damn high!”

This is evidence of a clear lack of understanding of the power of substitutes. You can say you’re not like Instagram all you want, and you can claim “but we’re different” as much as you like, even spending $400M on marketing to make sure I get it, but if I’m on my phone, that’s your competition. And again, on the “direct competition” side, if I’m lying in bed in the evening ready to watch a show with Julia, my TV sounds way better. 🤷

The gap for Quibi becomes harder and harder to find.

🛠️ Takeaways: To very much oversimplify it, startup success comes from careful market analysis, sensible product design, pricing aligned with value proposition, and iteration based on customer feedback.

When looking at a market, you need to find what your competitive advantage is that gives you a shot (which could be an asset or distribution advantage). That comes from first knowing all your competition (direct, indirect, substitutes, adjacent, apathy), and then (1) sizing up the market’s appetite for another product like yours, and (2) understanding your customer’s perspective about what you do and where you fit in the market. Remember: positioning is how your customers see you, not what you write on a document and talk about as a team.

So, perhaps the saving rope here could have been incredible content. If Quibi had a House of Cards-level show that attracted an audience and fan base, they could have built momentum.

Except, you guessed it, they didn’t.

3. Quibi’s core value—their content—was low quality

Content quality is the main determinant of why somebody signs up and stays subscribed to a streaming service.

And for Quibi’s big launch, they rolled out a library of 175 original shows and 8,500 episodes. For perspective, Apple TV+ (launched in 2019) currently has 50 original shows (which is give or take 100 episodes) and 30 original movies.

To make that happen, they had to mass-buy as much content as they could get. And for a $1B budget (including script buying and production), they couldn’t exactly be too picky. This meant they were buying the bottom-of-the-barrel stuff that the other giants were ignoring.

As one producer working on a Quibi project said: “If we have a show that’s going to be a huge hit, you pitch to Netflix, HBO. If it doesn’t get traction, you pitch to Quibi.”

Besides that being a quality problem in and of itself, there was another huge problem: screws don’t work very well as nails.

Meaning, the projects were designed for traditional streaming, and not written for short-form consumption. You can’t just buy a movie and chop it up to become a short-form series. I struggle to see how such a short episode gives you enough time to build character and tell a real story worth sticking around for. Users complained about the same thing: rushed narratives with hard-to-make-sense of shows, leaving people with a cheap aftertaste.

Despite all that, as the Verge wrote:

Some of those projects will cost hundreds of thousands of dollars to make, reaching as much as $125,000 a minute. That works out to be about $7.5 million an episode — on par with early Game of Thrones episodes.

Yet, their content could not be further from GoT.

Plus, people love the binge. They love well-paced stories worth talking about. Quibi just didn’t have that because they weren’t trying to be that.

Basically, the tradeoff was 1 episode of a brilliantly done Stranger Things episode or 5 episodes of (despite excellent actors) B-rated crap.

That might be a strong word, but feel free to be the judge…(I suggest just picking one of these)

• 50 States of Fright

• Murder House Flip

• Dummy

• When the Streetlights Go On

As the Verge reported:

The streaming works fine. The user interfaces are serviceable. The app itself functions as promised. The shows, though, are a mess. Quibi shows all share a few qualities: They’re short, with episode run times under ten minutes. Short doesn’t have to mean chintzy or trivial, but Quibi shows almost universally feel cheaper and less memorable than similar stuff on other platforms. The Quibi shows that are meant to seem like TV shows do feel like TV shows (Run This Town, Shape of Pasta, Murder House Flip), but their compressed run times and thoughtless cinematography just remind you of how much better they could be if they were TV shows. Camera angles and scene edits look identical to the visual design of a typical TV show, full of panning cameras and long shots, and it’s seemingly meant to signal that “this is a serious, expensive TV show!” Instead, it signals that no one’s put much effort into thinking about what this should look like when played in a vertical format on a phone. The Quibi shows that seem closest to YouTube series (Dishmantled, Gayme Show, Memory Hole) fare better, but even those feel half-hearted, all shell and no inner oomph. The worst are the movies, like When the Streetlights Go On or Most Dangerous Game, which Quibi advertises as “movies in chapters.” In their widescreen cinematography, the beats of each scene, the way they’ve been awkwardly crammed into tiny chunks, I swear you can still hear them screaming, “I’m a movie!” even as Quibi shovels dirt over their short-form-mobile-storytelling graves.

Even for the shows ostensibly conceived for Quibi, nothing gives the impression that it was made by someone whose dream was to make a perfect series of very short episodes meant to be watched on a phone. If enough people actually watch these things, that might change. It’s easier to create something once there’s a model of what works and what doesn’t, and the shows currently available on Quibi had to burst into existence with no previous proof of concep

Then, on the note of content, there was another big issue. 🤦

The inability to license content due to technical constraints: Dual focus on both a platform and content play

Quibi’s content had to fit a very specific format: 10-minute segments, and adaptable to both vertical and horizontal screens.

That uniqueness limited their ability to be able to license. Both licensing from existing content from other networks/studios that could have attracted people, as well as licensing out their own originals in the future to other platforms.

And the real problem with that is best illustrated by looking more closely at the issue of focusing on both Quibi being a platform and content play simultaneously.

Let’s take Netflix. First, they built a platform, and for supply, they licensed other people's content that had a fan base already to flesh out a library and hook people in. Only later, once they had an audience, did they get into Netflix Originals.

On the flip side, Disney had an extensive library (supply) that they built across decades of production. Then they build a platform, laying in that supply and bringing along their loyal Disney audience.

You can see how both of them approached bringing in audiences in different ways by picking either a platform or a content play to enter the market.

Since Quibi was trying to innovate on both fronts (and was unable to license) they had no audience. Nobody had discovered the content or the platform yet. And unfortunately running ads and creating awareness before launch isn’t bringing you a loyal audience. It’s just setting an incredibly high expectation across a bunch of people who now know your name.

Perhaps if they had been a pure content play, they could have licensed mini-shows out to other content platforms. This might have built their loyalty to this new format first, then brought that audience to a platform later on. Or, if they were a pure platform play, they could have opened it up to other creators (attracting them with the creative constraint of short-form TV) and built an audience without spending billions on custom content creation. 🤷‍♂️

🛠️ Takeaway: Most obviously, make sure your core value is, well, valuable. You need to be acutely aware of what people are paying you for, and what features of that they prioritize. And a more nuanced lesson: don’t try to be too many things at once.

4. Selling the wrong value and bad marketing

Somewhat shockingly given Jeff’s background in the movie business, Quibi missed the point that the value of a streaming service is not the tool, it’s the content.

Arguably, that’s why all of the streaming products look and feel nearly identical. The app just isn’t what people care about.

Yet, when you look at Quibi’s marketing efforts, it was all about the platform and its uniqueness, rather than their “best” shows.

Consider the Super Bowl ad. Not a show in sight. 👇

People are far more likely to ask their friends if they saw the trailer for a cool new show than ask if they’re looking forward to being able to turn their phones sideways.

Simply, Quibi was selling the wrong unit of value.

A similar example of this is their 5 Oscars ad spots. Both of these campaigns feel a lot more like an ego-driven attempt by Jeff and Meg to show off their new Hollywood toy to their Hollywood friends over actually acquiring customers.

In unconfirmed market research after the two ads, 70% of respondents said they thought Quibi’s “Quick Bites in under 10 minutes” was a food-delivery service. Not great marketing. 🙃

🛠️ Takeaway: If you’ll bare with me through this cliche—sell the hole, not the drill. Once you understand why people buy your product, that’s the message you want to reinforce and spread. Fancy marketing ads with high production value that leave people scratching their heads is how you burn through $1.75B and close up shop in 6 months.

Anyway, people still downloaded the app to give it a go during the 90-day free trial. After 3 months of being live, Quibi had 5.6M users (very few paying though). But, with those users in the app, Quibi missed some important features. 👇

5. Disconnect between product and organic user behavior

Quibi’s failure to understand and connect to its target audience was just as apparent in the app's (lack of) features as it was in its marketing.

Here’s Jimmy Donaldson (MrBeast), probably the most successful content creator and YouTuber in the world, explaining it in 30 seconds:

Not allowing screenshots shows us that Quibi just didn’t get that most of their target users enjoy engaging around memes. If you watched Succession, you know exactly what I mean.

Shows and movies these days find a lot of success around someone’s screenshot combined with a few words going viral.

Limiting shareable content—especially on a phone perfect for sharing—was a big opportunity missed. This capped content from being able to spread organically through virality right at the knees. And even if the shows were bang average, people would have probably made memes about that.

Eventually, Quibi leaned into meme culture and added the feature, but yup, the hole in the bucket was already too big.

If only they’d spoken and prototyped with users first. 🏄‍♂️

Of course, missing a small feature like this alone isn’t at all why Quibi failed. The point more generally is they were disconnected from the people they were trying to get using Quibi and how those folks behaved.

🛠️ Takeaway: It’s not always enough to know how and why customers use your product. Understanding who they are— and not just in the context of the problem you’re solving for them—is often where a lot of opportunities lie. One aspect of that is to consider the cultural context of your target audience. That’s a big advantage that comes along with building something where you are the target customer.

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This leads us nicely into…

6. Resistance to adapt in response to the pandemic

Being a product that was steadfast in being mobile-only for an on-the-go use case, at a time when people were being locked into their homes, was definitely a contributing factor in making Quibi something that people were less inclined to try.

So, sure, an uncontrollable macro factor like that can’t be ignored in this post-mortem. And Jeff minced no words thinking that in June 2020: “I attribute everything that has gone wrong to coronavirus."

But being adaptive is certainly within the wheelhouse of leadership’s control. And a statement like that quickly brushes off ownership to the larger problems we’ve gone through. [Note: later on, Jeff recanted and did take more responsibility.]

One clear way they could have made themselves more useful while people had large TVs around them all day, was to allow people to actually watch Quibi on them. Yet—and I’m hesitant to use the words “for the longest time” given 6 months is insanely short—for the longest time, Quibi just ignored the demand to cast efficiently onto a big screen. And I truly mean “for the longest time”—they released apps for Apple TV, Android TV, and Fire TV just one day before Quibi announced they would be shutting down operations. The dumpster fire that must have been going on in the Quibi offices for that to happen. 🤦‍♂️

The pandemic is an obvious and easy excuse, but the truth is people didn’t stop using their phones while at home. Just take TikTok, which soared during the pandemic

Simply, people’s daily lives changed, and Quibi didn’t.

🛠️ Takeaway: A startup’s primary advantage is being able to move quickly. That might mean spinning up a campaign to capitalize on a culturally relevant thing that springs up unexpectedly…or, changing something fundamental in the face of a world-altering event. There are very few cases where sticking to your guns and not addressing user feedback (when the data also tells you the same thing) is the right move.

7. Too much money, too quickly

Lastly…let’s talk about the money. 🫰

Quibi just raised too much of it before they had anything. Of course, raising a lot of money is not a reason for failing, but it did speed up Quibi’s time to shut down.

Because they raised so much in such an unconventional way, skipping the usual funding path of seed rounds, Series A, B, etc which all theoretically work off milestones around proof of PMF and growth, Quibi set itself up to have to be a near instant success.

Because it wasn’t, they were not going to get any more money at their crazy valuation which essentially forced them to shut down.

If they raised less and were more cash-conscious, they might have avoided many of the mistakes above and ended up with something people still use today. The rule of thumb is to develop without investing too many resources while testing and iterating quickly. Then, once you know you’re filling up the right rocket, give it as much fuel as possible.

In the end, Quibi was forced to sell to Roku for a (relatively) mere $100M.

🛠️ Takeaway: Be wary of raising money at an unreasonably high valuation. While exciting to get a term sheet that tells you that your business is worth more, it could be signing a death sentence for it. It may well be setting higher than reasonable growth expectations that you’ll need to meet. Which for starters might mean you have to prioritize the wrong things to satisfy investors. And secondly, if you don’t get there, the next time you need to raise you’ll get hit with a down round (lower valuation), which you certainly want to avoid at all costs.

And that just about brings us to the end of this analysis. There were some other issues I considered getting more into, but I didn’t think they were particularly actionable or nearly close to Quibi’s main problems. To keep it super brief, they had internal management issues (specifically, the co-founder relationship between Jeff and Meg) as well as some legal trouble around their Turnstyle technology. But the only real takeaway here is just make sure you don’t steal other people’s IP, and invest in a healthy co-founder relationship.

Awesome! That’s a wrap on our second edition of Why They Died. 🎬

If you enjoyed today’s post— consider subscribing if this is your first time reading, or showing some love by telling a friend or two about How They Grow.

Otherwise, have a wonderful week, and I’ll see you next time.
— Jaryd ✌️

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Hi, friends 🧟

Most startups don’t succeed. About 90% of them fail — 10% in just the first year. And of the startups that don’t shut down, many of them choose a worse fate. They operate in “zombie mode” — resistant to admit defeat and shut down, with no prospect of growth, sucking away resources that could be deployed elsewhere.

Clearly, starting a company and keeping it going is hard.

But you already know that.

This new series will attempt to help us get a better understanding of WHY. What are the red flags? What paths should we avoid on the trek to building an enduringly valuable product? And many more questions…

While How They Grow brings us consistent lessons from the successes of other popular companies, Why They Died is like its morbid sibling who will show up unannounced — sporadically popping into your inbox to bring you concrete lessons from the failures of once high-flying companies.

Billions and billions of dollars and countless decades of manpower have been invested in dead ends. Luckily for us, we can piggyback on all of it to help us make sure our products and ideas stand a better chance of avoiding the same fate.

To quote Warren Buffet again:

When people tell me they’ve learned from experience, I tell them the trick is to learn from other people’s experience.

When I pitched this idea of an off-shoot series a few weeks ago, the response from you guys was alarmingly positive (95% of you “loved the idea”.) This made me really excited because I think balancing analyses on the good with the bad will make us better, more well-rounded, builders.

Knowing what to do is just as important as knowing what not to do.

As an aside, just to set expectations from the get-go; this series will be occasional, and it won’t be as in-depth as our main deep dives.

With that, we’ll be picking ventures that initially showed promise but subsequently crashed and closed their doors because of errors that could have been averted. There are lots of causes of death, but in each post-mortem, we’ll be looking out for common things like:

• Great product, no market.

• Great market, poor product.

• Good product and market, bad business model.

• Founder-market fit. No domain experience.

• Bad bedfellows: VCs, partners, stakeholders.

• No strategy. Bad strategy.

• False starts. AKA MVPs launched without customer research.

• Running out of money. Either not getting enough financing, burning through money faster than they could make it, or just failing to monetize entirely.

• Failing to innovate/adapt and getting out-competed.

• Bad timing.

• Regulatory/legal challenges.

• Founder burnout.

• Lack of focus, taking on too many bets.

• Growing too quickly.

• Badly executed M&A.

And on our first trip to the startup graveyard, we’re visiting…Vine.

Obituary: Here lies Vine 🪦

01/24/2013 - 10/27/2016

There’s no doubt about it. Vine was a company that changed the internet. It was an absolute growth and cultural sensation, creating not just a new format of content, but a new category of entertainment. Short-form, user-generated, and homegrown “viral” videos.

And it happened by accident.

In 2012, three New Yorkers, Dom Hofmann, Rus Yusupov, and Colin Kroll, came together to make their own social networking app. A lofty and ambitious goal given the meteoric rise of Facebook.

The idea: one place to film, edit, and share casual moments in your life through video.

Initially, they planned to allow for unlimited runtime in videos — meaning if you felt like your day deserved a James Cameron-length feature film, go for it. But after some pre-launch testing, they realized the file sizes could be massive, making sharing a terrible experience. Let alone the hosting costs.

So, they landed on 6-second videos — what they believed to be the perfect length for our short attention spans. This was based on various studies showing something along the lines of, “you have about 6-8 seconds to capture people's attention. That's the length of the average attention span, and if you fail to capture the audience in that time, you've lost your chance to convert a potential customer.” This is a significant point…we’ll come back to this.

But, with more private testing, they found an issue with this short format. Videos in the feed were coming and going too quickly. So, they brilliantly landed on the novel concept of looping.

This combination—bite-sized content that looped—was the defining characteristic of their new social media contender. And this hook was so promising, that Twitter came along and bought them for $30M in October 2012.

Vine hadn’t even launched yet.

But 4 months later, on Jan 24th, they went live on the App Store. And they grew at an astonishing pace as people flocked to create and watch this brand-new type of content. In just 6 months, they racked up a solid 13M user count, were a front-runner for mobile video sharing, and reached the top of the Apple charts.

Part of the reason for this meteoric growth was that Vine wasn’t what the founders had envisioned. 🤔

Within just a couple of weeks of being out in the wild, the people made Vine into something else. Something much more culturally interesting and viral. The 6-second format pushed creators to be experimental and creative within the constraints. It wasn’t about journal entries to share those everyday moments. It was about what memes, gifs, funny skits, or viral trends you could squeeze into 6-seconds.

Homegrown video— the real, raw, and funny—it was deez things people went nuts for it.

While big celebs like Bieber hopped on the Vine train, the beauty of Vine was that it was minting a new genre of social media celebrity. Anyone could come on, gain attention and create a following, and start building a career off the back of it.

Much like how MySpace was for Facebook…Vine was the template in many ways for TikTok.

Which takes us to October 27th, 2016. After 4 years on the market, with 200M active users, Twitter told the world, via a Medium post, that Vine was done.

So…with such a meteoric rise, and clearly making something people wanted in a massive market…what happened?

Post-mortem: Closing the loop

In short — it was an unprofitable business that was eaten by the competition.

Of course, that alone is useless information. We need to unpack why.

This category of entertainment and social media was Vine’s to lose…which they did…so let’s look at how they dropped the golden egg.

Our startup autopsy suggests 4 causes of death:

• Poorly executed integration by Twitter— no strategy.

• Failing to innovate, move quickly, and meet market demand

• Money problems

• Getting swamped by competition

Let’s start with the little blue bird landing on Vine’s porch. 🐦

Poorly executed integration by Twitter— no strategy.

When Vine caught Jack Dorsey's attention, they were just three dudes with a beta app. They didn’t even know what they had yet, or what Vine could be. But they got paid $30M for it.

So, why did Twitter buy Vine?

Simply…because Facebook had just acquired Instagram. Sure, there was clear harmony between Twitter’s short-form text posting and Vine’s analogous video content.

But really, Dorsey needed another horse in the race and he couldn’t risk Zuckerberg beating Twitter to it, adding another player to Facebook’s cavalry in the war for social media market share.

So, on paper the deal made sense. $30M was nothing for what might be a goldmine like Instagram (one FB couldn’t get), and for a complimentary product.

The problem was, Twitter had no clear product strategy for video, and therefore, no clear path for how they’d actually integrate Vine post-close.

Just like a dad (yes, you abba) who over-buys a bunch of fruit and veg just because it’s on special — some poor aubergine is without a doubt going to go off in the fridge. Except, a startup costs money to run, and if you don’t have a plan on how to turn that aubergine into a real dish now that they’re in your kitchen, the team behind it will leave.

To illustrate this non-existent strategy. Only a few months after they acquired Vine, Twitter launched their own native feature for 30s videos. They also bought Periscope (that live-streaming app), and Niche (a talent agency for social media videos). Not one of those things is around today. 😕

All of these different efforts around video made it all the more confusing where Vine fitted in. It was a mess, and insiders reported that seeing things like native video launch on Twitter undermined the Vine team's product and performance. So, as soon as a lack of an integration plan became apparent in 2013, the Vine team started to churn at a high rate.

A couple of things plagued Vine, and it all stems from the same thing, which is a lack of unity and leadership on a vision.

— Ankur Thakkar (Head of Editorial at Vine)

In 2014, all three founders left. That’s huge for a nascent new startup. So of course, Twitter rolled in new management…except, Twitter still didn’t know what they were doing with video — meaning there was no leadership towards anything.

Early-stage startups by default are living on borrowed time — a good strategy is how you plan to win more of it. This meant that while the world was seeing this phenomenon unfold and build momentum, behind the scenes Vine was already on its way to an early grave.

When Twitter announced Vine’s wind-down, Rus Yusupov tweeted (the irony) shortly after:

The takeaway?

• If you’re buying another company…have a very clear reason why. Writing a check is the easy part, it’s how you handle the post-close process that either erodes the value you just paid for, or builds on it.

• And if you’re selling, while a paycheck and exit are wonderful, if you care about the long-term value of what you’ve built, sell to buyers who have a clear vision for how you fit in and a plan for how to make the integration happen.

So, poorly executed integration due to no strategy was the beginning; the root-cause problem. But it’s the following things (stemming from it) that killed Vine’s momentum and customer base — leading Twitter to pull the plug.

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Failing to innovate, move quickly, and meet market demand

It’s paradoxical to hear the terms “rapidly growing new startup” and “failing to innovate and move quickly” in the same sentence. But, Vine brings us an important lesson.

When things are going well, there’s a risk of complacency that comes with that. Even for a budding new startup, if you’re seeing nothing but growth, there’s a risk of the “if-it-ain’t-broke-don’t-fix-it” mentality.

Vine’s simplicity and initial hook were brilliant from a go-to-market perspective. But as their ecosystem grew and the Viners pioneered a new and quickly evolving landscape, Vine demonstrated an inability to adapt to it. Over their 4 years, they hardly rolled out any major changes, and they ultimately failed to listen to what the most important side of their platform, the creators, were explicitly asking for.

Sometimes—as Mark Zuckerberg made famous with Facebook's news feed launch— it’s true, people don’t know what they want. And just building because users ask for it, in and of itself, is a bad product strategy.

But Vine clearly didn’t dig into this feedback and give it the weight it deserved. Their whole platform was built on the work of the content creators. If they left, Vine would have no content, and the vineyard would collapse. So, even though Twitter had no video strategy, and Vine, therefore, lacked a cohesive one — very simply and broadly, it should have been “keep the creators happy and engaged at all costs”.

But, they failed to do this on three, massive, fronts:

1. The ability to make longer videos. Vine stubbornly stuck to their strict 6-second length for far too long, making it impossible for creators to experiment with new types of short-form video content. And the platform was all about experimentation. That’s what the creators had made it.

2. The ability to monetize their content. Creators were spending a ton of time filming and uploading stuff, giving Vine their lifeblood. And while creators were getting an audience in return, Vine never gave them a way to monetize it on-platform. So, naturally, it made a lot of sense that once a Viner was big enough, they’d try pushing their audience to other platforms where they’d be able to get paid.

3. Better content discovery, and ways to connect with a new audience. As Vine grew in popularity, their tagging system made it increasingly difficult to discover new content and creators. And for a platform only touting the value-add of building and engaging with an audience, the lack of innovation here was eroding that.

The sad thing is, these cracks were all identified and solvable. But left unattended, they quickly became big, clear, gaps for the competition to wedge themselves into.

Unacceptable gaps for a platform

In Alex Moazed and Nicholas Johnson’s book, Modern Monopolies, they unpack platform businesses in great depth. One of the frameworks they introduce is the Core Transaction.

In short, it’s a model representing how people on a platform create and consume value. This is the main purpose of a platform, and for one to be successful, it has to deliver this set of four repeatable actions. This isn’t exactly a growth loop, but you can see how there’s a virtuous cycle going on here. The more content that people get compensated for….the more they create.

Looking at those three key areas where Vine failed to innovate and meet demand, we can see:

• They did nothing to compensate, meaning the incentive to create was diminishing

• They also limited creation by not leaning into the experimentation tools Viners wanted

• Connecting with creators/content became harder, meaning consuming content was limited

Just like how compound interest is your best friend when you have an investment, but your worst when you’re in debt…a flywheel like the Core Transaction can sink a platform business if it slips into a backward motion. That’s exactly what happened when Vine was too slow to evolve with creators.

And failing to innovate wasn’t just hurting creators’ ability to make money, but Vine also wasn’t making any money.

No Money, Mo problems.

The number one reason startups fail is they run out of money — be that from a bad/unsustainable business model, lack of funding, or simply just not selling enough and making enough to stay around.

Of course, running out of money is like saying you didn’t make it to the grocery store because your car ran out of gas. Sure, that’s the fact. But you ran out of gas because you didn’t check the gauge, chose not to fill up, got lost along the way, etc.

In other words, for all the startups who died and say “we ran out of money”, if you look closer, you’ll find there were more interesting co-morbidities.

For Vine, that was stubbornness, and failing to innovate and meet market demand.

They resisted monetization from the start, and during their 4-year stint, were very reluctant to test different ways to make money — for themselves, and their creators. What’s more, there was generally a lack of investment in the platform by Twitter post-acquisition. This likely had a hand in the lack of resources being put into keeping the app competitive, at a crucial time when others were investing heavily in new features.

Who knows, maybe they thought the ad revenue (in the millions) was enough as a business model. Perhaps. Except, all that money rested on a very simple thing they were ignoring.

When the creators left the platform because they weren’t making any money, and consumer engagement subsequently dropped, guess who left with them? Yup, the advertisers.

And speaking of the creator exodus from the platform…Vine’s nail in the coffin was competition.

Losing the keys to the kingdom

In June 2013, when Vine was this poster child for growth and indicative of a paradigm shift in content, it shouldn’t surprise you who came sniffing for some of that pie.

Instagram, the lunch money bully in the social media cafeteria, sure knows how to spot an opportunity when they see one. And since they missed out on buying Vine, they quickly rolled out their own video product.

When Vine went to market at the beginning of that year, there were a few other video apps in the space. But Vine left them in the dust with their superior interface, simplicity, and that beautiful hook. Then when Instagram put their name down for the fight, the game changed.

They launched with 15s videos, and with marketing/monetization infrastructure for creators to boot. In other words, they closed the gap on the two biggest complaints creators on Vine ended up having. And as creators started asking for longer video formats, Instagram added more room for creativity, and the world of vlogging, with a flexible 60s limit.

They also courted big Viners and celebs by promoting their accounts in Instagram’s already popular distribution hose — the “Explore” tab. This solved that discovery/connection issue we touched on, bringing creators a level of attention with Instagram’s audience (10X bigger than Vine in 2013) that Vine was just not stepping up to match.

But Vine was still a more popular video-sharing app in 2013, 2014, and even into 2015. The community loved Vine. They really lost to the competition not because Instagram simply existed; but because they didn’t, and Instagram did, adapt to the changing landscape of what people found entertaining and engaging.

Instagram was aggressively at Vine’s heels with a more well-rounded Core Transaction. And when creators felt unheard and moved their audiences over to Instagram, Vine was done for.

So, by the time Twitter announced the end of Vine in Oct 2016, most Vine celebs/creators had already moved onto Instagram/YouTube and were thriving with more lucrative careers.

All off the back of the momentum Vine had created.

And it was a lot of momentum at that. Vine changed the internet. They changed our sense of humor. We live in a world of short-form videos now. The content we watch all loops, and we love the homegrown creators who bring us their creative, experimental, and witty takes on the world.

So, in that sense, the legacy of Vine lives on. As their loop closed, they opened a new one for the far more powerful, phenomenal, addictive, and culturally significant generation of UGC.

In death, they were the template for TikTok. But that’s a story for another day.

And that just about wraps up our first edition of Why They Died. In closing, here’s a summary of the lessons to be learned from this post-mortem:

1. Innovation, and a willingness to experiment, are crucial to staying relevant and adapting to new trends, and changing user behavior. Even if a product is successful at launch, it must continue to evolve to meet changing user needs.

2. Selling your company to a buyer without a strategy or integration plan can be a death sentence. And being on the buy-side without one risks destroying the value you’re acquiring.

3. People don’t always know what they want, it’s true. But you need to listen to feedback carefully, investigate the nuance of it, and make sure you’re building what people want.

4. If you’re a platform business — you need all four actions in your Core Transaction model working. If one of them breaks down, you risk a backward spiral.

5. Knowing your value, and how to sustainably charge for it, is essential. Without a way to generate revenue, you can’t invest in growth.

6. Early-stage companies are by default living on borrowed time. A cohesive strategy is how you plan to win more of it. Don’t let good-looking growth become a vanity metric that distracts you from the worry-mode founders should be operating under.

7. Regular updates and product improvements keep users engaged. Stagnation leads to boredom, disinterest, and an opportunity for competition to sneak in.

As always, thank you so much for reading. I really hope this format for WTD worked and you enjoyed it! If you did or didn’t — I’d love to know. Feel free to reach out with any feedback: hermannjaryd@gmail.com 🙏

And of course—if you enjoyed today’s post— consider subscribing if this is your first time reading, or showing some love by telling a friend or two about How They Grow.

Otherwise, have a wonderful week, and I’ll see you next time.
— Jaryd ✌️

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In remembrance, feel free to join me on a nostalgic trip down memory lane, with a few of the iconic vines that changed the world.