Startup tales are generally peppered with large fundraises, valuations, and exuberance. At least the well-known ones. However, the reality is that 80-90 percent of all startups, funded and otherwise, fail. These stories are often less told.
On May 27, Gagan Biyani, US-based co-founder of online restaurant startup Sprig and online education firm Udemy, opened up on Twitter about the failure of Sprig, which had to shut down despite having raised $60 million from top-tier venture capitalists and revenue of $20 million.
In 2013, Biyani observed the rapid growth of ride-hailing startup Lyft, wondering what would a Lyft for food be like? Food delivery firms did exist, but Biyani found flaws there too.
He looked at Postmates and thought restaurants don't care about delivery and food condition, it took forever (an hour) and was too expensive.
“We struggled through product iterations until we found "magic". 3 taps and $15 for a healthy meal delivered in 15 min. To make it possible, we had to run the restaurant ourselves; it would be expensive but worth it,” he wrote in a Twitter thread.
He onboarded three more co-founders, launched the product and saw immediate success. “The buzz was unbelievable. Within months we were on track to do $1M revenue/year,” Biyani says. He also raised $10 million in a “hot” Series A round, from Battery Ventures, Accel and Greylock -- the firm started by LinkedIn co-founder Reid Hoffman.
For early-stage startups still figuring out a business and the market, a large funding round and reputed investors are generally a sign of success and future potential.
But then came the challenges. San Francisco’s health and planning departments in the government became a thorn in their flesh. Sprig had to bribe them (‘lobby’), in addition to a business with high burn -- they were losing money on every order and had negative gross margins.
The high revenue growth came along with high cash burn, as much as $1.5-2 million a month, and a perpetual state of “1-2 months away from managing the burn”.
When margins finally got better, they had to degrade the food quality. Less money came in, and worse food went out.
However, they were still growing at a rapid clip, often seen as the most important metric for early to growth-stage startups. At its peak in February 2016, Sprig delivered 4,500 meals a day, had a revenue run rate of $22 million, 1300 employees, and had raised $60 million in capital.
The success brought its own glory and challenges. “I had never felt better. I was confident and getting super-strong reviews from my team. The public treated me like a star, which was both uncomfortable & awesome. Even my dating life felt like it had improved 2-3x. But secretly, I was nervous -- it didn't feel like a done deal,” he says.
Everything changed for Sprig on February 22, 2016. It went from growing 2 percent a week to growth falling 2 percent a week.
“We scrambled to figure out why. Was it seasonality? Was it our rising prices? Was it the quality of the food?” Biyani wondered.
Like many cases throughout startup history, competition had come knocking. Uber had launched UberEats. Uber was always known for its win-at-all-costs mentality and mercurial founder Travis Kalanick. “F***ing Uber. After hearing all the war stories from @lyft, I knew they were unsavory competitors. Super smart, ruthless with big coffers,” Biyani wrote.
After considering many options including layoffs and a sale, Sprig pivoted to a new offering that focused on food quality.
“Everyone thinks you're doing well and you can't tell them you're not. We were in pure panic mode. We launched Sprig 2.0, shut down Chicago and laid off 1/3 of HQ staff to conserve burn,” he says.
During a crisis, managing external parties becomes tough. Biyani stopped talks and press meets, generally a staple for startup founders, when everyone is interested in their stories.
However, Sprig 2.0 was not enough. Traction did not improve. They were running a restaurant doing $6 million in revenue but paying real estate for a place that needed $20 million in revenue to be profitable.
“The team had fought hard - but we were all completely exhausted. After 3 pivots & multiple layoffs, we faced a final decision. We had $8M left and knew we had to restart or quit and return the money,” Biyani says.
They shut down Sprig on May 27, 2017.
Why did they fail?
While delivery apps got better with scale as the years went by, Sprig got worse. San Francisco alone was too small a market for it to be profitable. They “blitzfailed”, as opposed to many startups who “blitzscale”-- grow at all costs at breakneck speed to beat competition and win a large market.
Spending $50 million and burning cash in a short period leave no room to restart, he concedes.
However, the experience also taught Biyani a lot, much more than what his degree at the University of California- Berkeley, or his other startup Udemy- valued at $2 billion, taught him.
“All told it was just 4 years. If you're gonna fail, do it fast. If you're gonna succeed, do it slowly. In startups, remember to watch your flanks. Your competitors are not your direct competitors, but the whole market,” Biyani concludes.