Here are examples of failures in startups where issues could have been mitigated by using a tailored chart of accounts (CoA) and conducting thorough financial feasibility studies, assessments, or audits. These cases highlight the consequences of poor financial oversight, inadequate tracking of innovation investments, and the lack of differentiation between core operations and new initiatives.
1. Theranos: Failure Due to Overlooked Financial Feasibility
• Issue:
Theranos, a health-tech startup, claimed to revolutionize blood testing with a device requiring minimal blood samples. The company raised over $700 million, but the technology didn’t work. A lack of rigorous financial feasibility studies and audits masked the true costs of developing and deploying the technology. Operational expenses and R&D costs were poorly tracked, making it hard to identify financial and technical issues early.
• How a Tailored CoA Could Have Helped:
• A tailored CoA could have separated R&D costs, regulatory compliance expenses, and operational overhead.
• This would have flagged escalating development costs and facilitated more realistic feasibility assessments.
2. Juicero: Overinvestment in Innovation Without Financial Justification
• Issue:
Juicero, a smart juice machine startup, raised $120 million to produce a Wi-Fi-connected juicer. The company failed because the machine was expensive ($400) and the innovation didn’t provide value beyond manual squeezing. Financial feasibility studies were overlooked, and development costs were not differentiated from core marketing and operational expenses.
• How a Tailored CoA Could Have Helped:
• A tailored CoA to track product development, hardware manufacturing, and marketing costs could have highlighted unsustainable unit economics.
• Better financial oversight might have led to early intervention or a pivot to a more cost-effective strategy.
3. Fyre Festival: Ignoring Financial Assessment for Event Logistics
• Issue:
Fyre Festival, promoted as a luxury music festival, collapsed due to poor planning and financial mismanagement. The organizers did not perform adequate financial feasibility studies or audits for event logistics, accommodations, and transportation. They mixed promotional spending with core operational costs, making it impossible to track the true feasibility of delivering on their promises.
• How a Tailored CoA Could Have Helped:
• Separate CoA categories for marketing, logistics, venue costs, and vendor payments could have clarified budget constraints and feasibility.
• Financial transparency would have highlighted the gap between budget and actual costs, allowing for corrective action before the event.
4. WeWork: Poor Financial Assessment of Business Model
• Issue:
WeWork, a coworking space startup, grew rapidly based on a flawed business model and questionable financial practices. The company overextended on long-term leases without clear financial feasibility studies or audits. Costs for leasing, property management, and marketing were lumped together, masking the true expense structure.
• How a Tailored CoA Could Have Helped:
• A tailored CoA to track long-term lease obligations, property acquisition costs, and operational expenses separately could have exposed unsustainable financial practices.
• More rigorous financial assessments might have prevented overexpansion.
5. MoviePass: Flawed Financial Viability of Subscription Model
• Issue:
MoviePass offered unlimited movie tickets for a $9.95 monthly subscription fee. The business model was not financially viable, and no thorough feasibility study was conducted to ensure the subscription price could cover costs. User acquisition costs and ticket reimbursement expenses were poorly tracked, leading to massive losses.
• How a Tailored CoA Could Have Helped:
• Separate tracking for ticket reimbursements, user acquisition costs, and operational expenses could have highlighted the unsustainable nature of the pricing model.
• Financial feasibility assessments would have shown that the model required substantial price adjustments.
6. Coolest Cooler: Mismanaged Innovation Costs
• Issue:
The Coolest Cooler, a Kickstarter-backed product, promised a high-tech cooler with multiple features. While it raised $13 million, production delays and escalating costs led to the company’s failure. Costs related to R&D, manufacturing, and shipping were underestimated, and financial feasibility studies were ignored.
• How a Tailored CoA Could Have Helped:
• A tailored CoA to separate prototype development, manufacturing, and logistics costs could have provided a clear picture of escalating expenses.
• This could have led to better decision-making on pricing or feature reduction.
7. Beepi: Startup Collapse Due to Overlooked Operational Costs
• Issue:
Beepi, a peer-to-peer car marketplace, shut down after burning through $150 million. The company failed to control operational costs, logistics, and marketing expenses, which were not tracked separately. Financial feasibility was overlooked in favor of rapid expansion.
• How a Tailored CoA Could Have Helped:
• Separate CoA categories for vehicle acquisition, logistics, and customer acquisition could have clarified where funds were being drained.
• Better financial tracking could have signaled the need for operational changes.
8. Yik Yak: Failure to Assess Platform Development Costs
• Issue:
Yik Yak, an anonymous social media app, failed due to declining user engagement and high operational costs. The startup did not conduct adequate financial assessments for platform development, server costs, and user retention efforts. These costs were mixed with general expenses, obscuring financial risks.
• How a Tailored CoA Could Have Helped:
• A tailored CoA to track technology infrastructure, development, and marketing separately could have highlighted unsustainable spending patterns.
• Financial feasibility assessments might have prompted efforts to improve user retention or reduce costs.
9. Quibi: Misjudgment of Financial Feasibility in Content Creation
• Issue:
Quibi, a short-form streaming platform, spent over $1 billion on content and marketing without validating the financial feasibility of their business model. They did not separate costs for platform development, original content creation, and marketing campaigns effectively.
• How a Tailored CoA Could Have Helped:
• A tailored CoA for content production, platform infrastructure, and user acquisition costs could have provided clarity on ROI for each expense category.
• This might have led to more cautious spending or a pivot in strategy.
10. Jawbone: Ignoring Financial Feasibility for Hardware Development
• Issue:
Jawbone, a wearable tech startup, collapsed due to high hardware production costs and technical challenges. Financial feasibility assessments for hardware development, manufacturing, and distribution were overlooked, leading to cash flow issues.
• How a Tailored CoA Could Have Helped:
• A tailored CoA to differentiate R&D costs, manufacturing expenses, and distribution fees could have highlighted financial challenges early.
• Better feasibility assessments could have prompted design simplifications or pricing adjustments.
Key Takeaways for Startups
In these examples, the absence of tailored CoAs and overlooked financial feasibility studies led to:
1. Unsustainable Business Models: Inability to assess the financial viability of pricing strategies or services.
2. Mismanaged Costs: Poor differentiation between R&D, operational, and marketing expenses.
3. Lack of Transparency: Difficulty understanding where funds were being drained or misallocated.
4. Missed Red Flags: No early indicators of financial or operational problems.
5. Inadequate Audits: Failure to perform financial audits that could have highlighted risks before escalation.
By adopting tailored CoAs and rigorous financial assessments, startups can mitigate these risks and make informed decisions about growth, innovation, and resource allocation.