There seems to be a series of news lately of well-funded startups failures: Homejoy ($38m in total funding), Zirtual ( $5.5m funding) and now Shopa ( $11m funding), only this one is much closer to home. Shopa failing reminded us of how easy it is to underestimate the B2C pivot and, for us, the very early investors, how deceptively easy it is to drift into disengaging with our investments when these get “marquee” follow on investors on board.
In the early days of AngelLab we made an investment in Shopa. The size of the investment is inconsequential in the context of our portfolio today but this does not take the bite out of our disappointment. Shopa had a bold vision of changing the way we discover and make buying decisions. It was one of many startups who ventured in the social commerce area but it was the one that raised the most substantial amount from institutional investors. We loved the team and the founder’s entrepreneurial spirit and commitment to make this venture a success was a reassuring sign. What we liked more however was that Shopa had a B2B offering in a sea of “me too” B2C social commerce offerings. As investors, we generally like B2B, we get it. You target a piece of an enterprise budget which is owned by someone who has the explicit intent of spending it.
Shopa, at the beginning, was offering retailers a platform to turn their existing customers to their most effective customer acquisition machine by incentivising them to share what they buy and get rewarded for it too. With all its risks, this was a believable if bold proposition that relied on, amongst other things, building a piece of tech the retailers did not have and could not easily build.
When and how exactly Shopa pivoted from B2B to a highly ambitious B2C proposition is for another day. But pivot it did and this – alongside other things- was the beginning of the end.
Almost invariably failure comes down to key strategic or operational decisions. Our learnings from Shopa are about how easy it is to underestimate the pivot from B2B to B2C:
- Pivoting to B2C requires a business model overhaul not merely a facelift: Don’t underestimate the depth of the change. It requires more than a new deck and a few million dollars in funding. Ultimately, businesses try to get a piece of someone’s budget. But when this someone becomes the consumer rather than an enterprise the business model needs a fundamental readjustment, not merely an expensive facelift.
- When pivot, make sure there is Opportunity AND Aptitude; successful pivots happen when the company unexpectedly discovers a particular aptitude for converting an opportunity in the market. “Aptitude” as well as “opportunity”, though not sufficient, are both necessary ingredients of a successful pivot.
- Beware of the “revenue does not matter, traction does” mantra; this *may* hold true when the company’s funding can cover its burn for a long enough period (24 plus months and then some!) to get the company to a substantial value accretion point. Revenue however does matter in most cases. When SV startups and their investors say “we do not focus on generating revenue right now, we want to build an awesome product” what they mean is they focus on the metrics (eyeballs, engagement, repeat, CAC, whatever they have decided that proves significant latent demand for their product) until they reach a substantial part of their Total Addressable Audience.
- Fundraising can become a bottomless pit for the CEO’s time: B2C startups, especially when they believe “revenue does not matter”, usually survive only if the CEO spends disproportionate amount of time on explaining the vision, model and metrics in the service of raising cash. When this happens, no matter how good the C-team behind him/her is, there is something wrong. In the UK, where risk capital is in short supply relatively to the US, this can send the company to a dangerous spiral.
There are many other reasons why Shopa failed but most of these will sound familiar to all of us who have been investing in young businesses for more than a few years. There may be variations on the specifics– different stage of business, different stage in the economic cycle, different investors, different excuses – but the themes are the same.
What makes Shopa’s failing a little more interesting by UK norms is its spectacular speed given the size of its last raise: it was only recently that Shopa had closed a significant round of investment on the back of an aggressive B2C pivot and expansion plan. It was even more recently that the company was on the road raising for an even larger round at a valuation that would make our multiple on this investment – though not our IRR as our investment was small – probably record breaking. It is not every day that we see that. At least in the UK.
Shopa’s failure that came so soon after the last funding round, served a stark reminder to all of us at AngelLab as early investors: we must remember to keep a close eye to those companies in our portfolio who have “spread their wings” and grew to attract “marquee” investors on board. Being an early investor is not an excuse for becoming a disengaged investor later on. This is what the shareholders information rights are there for. The early investors probably still know the founder – and to some extent the business too- better as they have met him/her during the crucial, formative period of the early days.
Back to the Shopa vision and the social-discovery-led shopping: we still believe the way we discover and make shopping decisions will change; “googling it” is the frictionless way to discover generic, commoditised products but it will not work for more aspirational purchases. Consumers yearn for inspiration from trusted influential sources. So, watch this space especially now that Shopa is out of the way and does not discourage new talent from “attacking the opportunity”!
Onwards and upwards to discovering the next one hoping that we know a little more about what not to do when we find it.