Growth Expectations #004

Learning From Others' Failures

Hi and welcome to this issue of Growth Expectations, a newsletter with thoughts about startups from GO Ventures’ Head of Investments Paul Grech

There is an episode of the Silicon Valley TV series where the team find out that all prospective hires have opted to join another startup called Sliceline. It eventually turns out that this - an app that promises to source customers the cheapest pizza - is simply buying pizza from one supplier and then putting them in their own boxes.

What that meant, in turn, was that every pizza sold was coming at a loss as they aimed to quickly gain market. It also meant that all that the Pied Piper team had to do to get access to the employees they needed was to buy enough pizzas to dry Sliceline of cash and out of business (summary of story arc, for your entertainment: NSFW).

Now, Silicon Valley is a sharp and humorous critique of the tech industry, particularly the startup culture, venture capital, and the personalities of entrepreneurs. Their stories are slight exaggerations of reality aimed at being humourous. And yet…

…on Monday electric bicycle manufacturer VanMoof was declared bankrupt in the Netherlands with the main reason, if a report earlier this year by the Dutch financial newspaper Het Financieele Dagblad is to be believed, being that “the more bicycles VanMoof sells, the greater the loss.”

Which sounds a lot like reality aping fiction.

As per Crunchbase, VanMoof had raised $189million (approximately €171 million) as it looked to become the dominant e-bikes brand. With shops in a host of prime locations, they had big ambitions with quoted targets of selling ten million bikes over five years.

Much of their growth happened during the harshest days of the COVID pandemic when sales of outdoor related gear experienced a boom and allowed VanMoof to raise a massive $100m+. All of this made the company “the world's fastest-growing and most well-funded e-bike brand”.

Yet, despite VanMoof e-bikes typically costing in excess of €1,800 it seems that they never really managed to control their costs. The company’s vision mimicked that of Apple with a desire for “controlling the supply chain with their own made-for-VanMoof components is essential for quality control, compared to relying on a million different suppliers also working with rivals.” All of which is laudable but also inflates costs significantly unless you have the volumes - and as a result, leverage - of Apple.

The problem with having parts designed and manufactured to your specifications is that you do not benefit from economies of scale; you have to pay a premium. That’s what happened to VanMoof who, as a result, could not manufacture an e-bike that could return a gross profit. And so, like Sliceline on Silicon Valley, they were drained of cash one sale at a time.

In startup circles there is a lot of talk about the importance of failure (all together now: fail fast, fail forward) and there is a lot of truth in that. Yet it is just as important (arguably even more) to learn from others’ failures.

VanMoof had a fantastic vision to transform e-bikes into an alternative to the motor vehicle. They brought together great, minimalistic design with a host of innovative features (GPS tracking and auto-locking to minimise theft, for starters). When the COVID pandemic resulted in a cycling boom, they ‘exploited’ investors heightened desire to participate in the market by raising vital funds. They did a lot of things right.

Yet they took their eye off the most important figure in any business: cash in bank.

Of course, it probably wasn’t that simple. It is likely that there were projections that showed them turning a profit per unit once they hit scale. And they might have hit those numbers were it not for the cost of living crisis to suddenly make spending 2K on a bike very unattractive. Just as there were other unexpected costs that sucked cash from the business (indeed, it seems that cost of parts for replacement were too high).

That is the fine line that startups have to thread. They need to think big; dream about how they could disrupt their industry or transform the market which will excite people enough to give them money. But at the same time always keep an eye on the bank balance, constantly planning what to do if it starts getting too close for comfort.

Surviving and thriving in the business world is an art that demands unwavering commitment and constant adaptation. There are very few successful business that didn’t have to survive some scares and close calls. It is those who best learn this lesson, and are capable of adapting to the changing circumstances regardless of initial vision, who manage to thrive.

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