Nine out of ten startups fail, and, while it’s usually because no one wants their product, reasons can range from running out of cash, to problems with the team, to burn out. It’s important for entrepreneurs to be aware of these hurdles because, as important as market validation so obviously is, the reality of the industry means that even startups with popular and useful products can fail.
One of these startups was StreetEats, the Brisbane-based food truck app that closed in November last year. Launched in April 2015 after graduating ilab’s sixth Germinate program, the team were still growing when they chose to “fail fast” after it became clear that their unit economics were unsustainable.
“There was never a problem with the product, the product always worked well and was very different to anything else that’s out there,” co-founder and former CEO Chris Illuk said. “For us, it was really a decision about the economics.”
“We started with pretty particular growth goals, and we were basically not growing as fast as we wanted to,” he said. “The real moment that crystallized it for us was actually when we got an offer of investment, and that was when we were like ‘with this much money, it’s not enough for us to turn this into a mature business’.”
Reasons for Closing
Simply put, StreetEats was not growing fast enough. For the product to have succeeded, Illuk said they would have had to find broader appeal in a market where they could have charged people more for it.
“It’s not like we were building a social network somewhere,” Illuk said. “There’s no justification for a company like this to not be profitable for a number of years because the massive network effect is going to save it and monetize it later. We’re not Twitter.”
The app, which allowed customers to order and track street food from local vendors such as The Bone Lorry and Just Steak It, worked in conjunction with hardware supplied by the StreetEats team. Being able to track customers created a whole new serving system for vendors, which was designed to both manage crowds and appeal to a broader customer base.
However, the process required customer support, which in turn required StreetEats to either charge more or invest time and money into a free service (they chose the latter). And while the tablets provided a necessary point of differentiation for potential vendors, it added to the startup’s upfront costs and delayed rollouts.
“By providing hardware, it firstly gave us an upfront expense, which gave us a time-lag to recoup,” Illuk said. “So it obviously limited our money, limited our ability to put the next customer on until we recovered money from the first one – that was definitely a mistake we made.”
“But there’s also the fact that not many people have just two tablets lying around,” he said. “So our greatest mistake was also the one thing that made the solution unique and made our customers like it so much.
“It kind of created this Catch-22 situation where no new customer would ever go out and purchase two tablets to try StreetEats, but every customer who tried StreetEats with the two tablets, and continued to use it, said ‘this is actually a really great solution’.”
Successes, and Potential Repurposing
None of this is to say the app didn’t find its market; StreetEats was well-received at the packed launch party in South Brisbane last year, where vendors were inundated with orders and the app had to be temporarily disabled.
The team went on to sign up roughly twenty five partner customers around South-East Queensland, and the StreetEats app was downloaded about 2,500 times. Feedback from customers was generally positive, with churn at roughly 25%, and Illuk lists disappointing them as one of the hardest parts of closing the company.
“The thing that’s heartbreaking about it though is, you’ve worked so hard to work for these customers, to build relationships with customers, and then I felt that we were kind of pulling the rug out from under them,” Illuk said. “We gave them as much time and helped them transition to other things as much as we could, our vendors had lots and lots of notice but there was a shutdown date, and some of them are like ‘is there any way we can use it?’”
“So we’re looking at ways to licence the product to individuals, like old customers who’d like to continue using it but we’re not responsible.”
Possible forms of continuing the technology include licensing the platform to individual customers, who could change the branding and manage their own app, or selling it to a larger, enterprise style buyer looking to unify a market or franchise.
While enticing, this avenue has its own problems. Talks are still active with a number of parties, but Illuk has thus far found licensing the technology to be almost impossible due to the potential support burden. The team are now all busy on other projects, and would need a clean sale to draw a line under their responsibilities for the tech.
This is why startup acquisitions are often as much about the team as the product. ilab director Bernie Woodcroft, who oversaw StreetEats throughout the Germinate program, agreed that licensing the technology would be difficult without ongoing support.
“They certainly are looking into repurposing it and selling it as a framework down to the basics, Woodcroft said. “That’s a difficult thing to do, in my view, because no one is coming with it.”
“You’ve had two guys developing it full-time for twelve months,” he said. “So what [would the buyer] do with it? How do I evolve it, how do I change it, how do I highlight a little colour there? All that stuff gets a little bit challenging.
“It’s really hard to sell a piece of software asset without people. But hey it’s not impossible and I hope that they do, because that would be a return on the efforts they put in.”
Woodcroft stressed that he had “absolute, awesome respect” for the team, and, in regard to their decision to shut down, said “I’m really impressed with the way they went about things, and no one should in any way take away any of that effort”.
Silver-Linings and the Future
On top of having a pipeline of work to show for their efforts, the StreetEats team have honed their skills and formed a strong network across the Brisbane startup ecosystem.
The team made last year’s RiverPitch finals, software engineer Michael Sive joined Startup Catalyst on the back of his StreetEats work, and both Sive and fellow engineer Jace Patel are now working for San Fransisco-based code monitoring platform bliss.ai.
For his part, Illuk drilled down on his passion for customer acquisition, which he has brought to his new role as Growth Manager at cloud management platform Cloudmgr.
“I’ve managed to decouple myself from corporate life, and now I’m just obsessed with funnels and customer acquisition,” Illuk said. “And now the whole technique for selling digital products is something I went from being interested in to being literally obsessed with.”
Ultimately, the most striking thing about Illuk’s explanation of the app’s closure is his mature, grateful attitude towards it all, and perhaps here is the most useful lesson.
While he is obviously passionate about his product and clients, Illuk and his team’s decision not to take investment money and instead use the offer of funds as the catalyst to close speaks to a forward-thinking entrepreneurship.
“Again, because we were all quite deliberate about it, it was fine,” he said. “We’d always run the thing quite maturely, as a series of experiments, and you’re not really using a good scientific method if your experiments fail. We would formulate a hypothesis, tested the hypothesis, and then acted on those results.”