Why So Many Social Media Startups Fail Despite Early Momentum

As technology-driven markets become increasingly saturated, and users become more discerning - and frankly, lazier about the hassle of switching from services they already use, the notion of beating the competition with a new idea becomes harder. JL


Serene Chen reports in Medium:

Most startups fail because there was no market need (42% of them, actually).Industry buzz and a highly engaged user base don’t necessarily guarantee success.Because they never articulated the why for their product-market fit, they ultimately failed to protect or strengthen their competitive advantage.

Most startups fail because there was no market need (42% of them, actually). But what about the rest? We need only look at three once-promising startups to understand that industry buzz and a highly engaged user base don’t necessarily guarantee success.

---

Yik Yak (2013–2017)

Fatal flaw: Changing the core identity of the product

At the height of its popularity in 2014, Yik Yak had a $400 million valuation and was ranked higher on the App Store than Facebook, Twitter, and Pinterest. By September 2016, that number of downloads had dropped from 1.8 million to 125,000. In April of 2017, founders Tyler Droll and Brooks Buffington announced that the app was closing for good.

Despite the dismal numbers, anonymous university-based Facebook pages and anonymous forums like Whisper seem to indicate that there’s still a market for Yik Yak.

So what went wrong?

Due to bullying and security threats, Yik Yak was faced with lots of external pressure to de-anonymize the app. In mid-October of 2014, the app was delisted on Google Play, which means that Android users can find the app via search but not by spotting it in Google Play’s top charts. Yik Yak was also banned on a number of college campuses.

By cutting off teenaged users in an attempt to curb bullying, Yik Yak gave up a decent chunk of their user base. When it mandated that users create handles and shed their anonymity, users predictably abandoned the app in droves. Even when the founders realized their error and re-introduced anonymity, the app had lost its critical mass and the users that did return found a ghost town. (Some say Yik Yak was doomed to fail because it’s impossible for users to create lasting connections or build up a “presence” on an anonymous app; Yik Yak isn’t around to prove them wrong but their German copycat Jodel seems to be alive and well.)

---

Fab.com (2010–2015)

Fatal flaw: Premature ambitions that destroyed the competitive advantage

Fab.com began as a flash sale site that sold unique, third-party items from small design shops — a $1,775 chandelier made of martini glasses, for example. Fab’s distinctive curation and built-in virality propelled the site to 240,000 members, with 5,000 new users signing up each day, in the same year it was launched. By the end of that year, that number was up to 1.3 million users, bringing in revenues of up to $100,000 per day. At its peak, the site saw over 10 million users, and was touted as the “fastest growing startup in the world.”

Former Fab employees say “we had that [magic] that got people to open emails and engage with content;” it was obvious there was a “real business there.”

So what went wrong?

Without truly understanding the product market fit that had made them so successful, Fab.com aggressively pursued growth that they were not yet ready for.

In 2012, just two years after inception, Fab entered the European market via an acquisition spree, buying up their European copycat startups: Cascanda (February), Llustre (June), and True Sparrow Systems (November). This premature expansion cost the company $60–$100 million and without a stable, pre-existing business in the US, there was no “playbook” that would allow them to scale efficiently overseas. As a result, Fab.com was unable to generate enough sales to make up for these huge expenditures.

In an effort to improve their 16.5 day average shipping time, Fab.com also stopped doing flash sales and began holding inventory in a New Jersey warehouse they purchased. This appetite for growth also drove them to increase their product portfolio from 1,000 per day to 11,000. With this massive increase in SKUs, Fab products diminished in originality; whereas their customers previously came to Fab to find unique products, now they could find the same products on competing sites that shipped faster.

By the end of 2012, piles of inventory remained untouched. While they had generated $112 million in sales, Fab had missed their $140 million target. Having burned through all its cash, the company needed to raise $300 million to keep going; they were only able to get $150 million.

Next, Fab cut their burn rate by laying off most of their staff and narrowing merchandise scope, but even that was too little, too late. Jason Goldberg now refers to that time as “the period in the story that I regret the most.”

“Not many people know what it’s like to raise $150M at a $900M valuation and know that you’re sailing right into a shit-storm. It sucks. […]

I was too quick to focus on slashing costs and narrowing scope vs. taking a step back and devising a plan with our board to preserve value for our shareholders.”

— Jason Goldberg, “On the Rebound from Epic Failure” on Medium, June 2016

Plummeting sales, continued losses, and $10 million of low-margin 3rd party inventory spelled the end for Fab. In early 2015, Fab was sold to PCH International for a rumoured $15 million and still exists today as an e-commerce store.

---

Vine (2013–2017)

Fatal flaw: Lack of direction, stifled by growing competition

It might not be fair to treat Vine as a startup since it was purchased by Twitter prior to its official launch, for $30 million. It came to market in early 2013, at a time when video content was just beginning to gain popularity and social videos were novel. The six-second, looping style of the platform became a source of creative inspiration for many musicians and comedians. At its peak, Vine attracted more than 200 million monthly users.

So what went wrong?

In June 2013, Instagram started hosting 15-second long videos. In October 2013, Snapchat added a “story” function. Facebook began pushing video content and built out their live streaming capabilities. Vine’s competitive advantage became increasingly blurry to both creators and advertisers as they failed to build robust advertising, sponsorships, or analytics platforms around the app.

But the root cause behind Vine’s inability to adapt seems to be years of executive churn and management instability.

“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. Vine didn’t ship anything of consequence for a year.”

- Ankur Thakkar, Vine’s head of editorial from 2014 - May 2016

On October 27, 2016, Vine and Twitter announced plans to discontinue the mobile app.

---

Momentum in Hindsight

Getting to product-market fit is no easy task. No one expects to read thousands of obituaries for their startup when just a couple of years ago, they were being congratulated on another funding round or milestone.

Yik Yak, Fab.com, and Vine were able to amass a huge userbase because they had something unique their audience wasn’t able to access anywhere else.

• Yik Yak capitalized on the desire to be in the know in a highly relevant community, by leveling the playing field for joining the conversation
• Fab.com found the perfect formula for generating buzz through unique curation, urgent flash sales, and incentivizing shoppers to share the site with friends in order to unlock new products or parts of the website.
• Vine was lucky to be one of the first innovators in social networks centered around short-form videos.

However, because they never articulated the why for their product-market fit, they ultimately failed to protect or strengthen their competitive advantage.

The good news is that people are more open to discussing their failures than ever before. I have a deep appreciation for founders that honestly and publicly share these painful lessons with us — transparency drives far more innovation than exclusively celebrating wins ever could.