A tale of premature scaling

 

shypShyp was a star venture that got a glowing profile in February, 2016 by Harry McCracken in Fast CompanyHow Shyp Is Shaking Up Shipping. With this intrepid startup’s service, everything you ever hated about shipping stuff–from rustling up a box to waiting in line–is history. Just about two years later Henry McCracken is profiling Shyp yet again, but his time it’s the postmorten of a company that failed. How Shyp Sunk: The Rise And Fall Of An On-Demand Startup The company that hoped to revolutionize shipping is ending operations today–a poster child for a whole era of venture-funded ideas that has come and gone.

What happened and what can founders learn from this story? What’s really interesting is that cofounder and CEO Kevin Gibbon saw the fatal flaw in his company in early 2016:

It’s quite crazy, in my opinion, how a lot of these companies, they don’t really make money. And they’re able to raises gobs of venture-capital money, to fund these businesses that may not work out in the long term.

Like many venture-funded companies Shyp focused on hypergrowth fueled by $65 million in capital including a $50 million round led by Kleiner Perkins Caufield & Byers. Unlike many of it’s on-demand service fellow companies like Uber, Shyp turned its contractors into employees, taking on somewhere between 20% and 35% in overhead, depending on what benefits they provided. This increased their burn rate as at the same time they were launching an ambitious ad campaign to snag customers. McCracken wrote about Shyp yet again in October, 2015: A new app and logo reflect the startup’s ambitions to go way beyond picking up and packaging items. 

The irony of Shyp’s failure is that customers really did love their service – it just worked. But a great customer experience is necessary but not sufficient for a business to survive longterm. But Gibbon seemed to understand the fatal flaw in what was considered a magical experience:

It’s pretty silly,” he told me in early 2016. “We charge a $5 pickup fee, and that includes the packaging and coming to your home. And all items are not created equal. Shipping your shoes versus shipping your TV, it actually doesn’t sound like it makes a lot of business or financial sense. It doesn’t.”

And here he is again in 2018 after the company shutdown:

Looking back, Gibbon says that “the investment we took, everything we got, wasn’t warranted for where the business was at. And I think that really hurt us. The expectations were way too high. We had a lot of capital. We had to deploy it. And I don’t think we were ready to do that. We prematurely scaled.

There are at least three lessons for founders in this story – and I do recommend you read the full articles to get valuable detail:

  1. Taking VC funds means you are on a rocket ship. They want you to burn your fuel for hyper growth.
  2. You need to build a foundation for a sustainable business from the get go. Waiting until you start running out of cash and investors is a formula for a shut down.
  3. Track you customer acquisition cost regularly.
  4. Track your cost of sales and fulfillment just as regularly.
  5. Not all customers are created equally. Focus on those with a high lifetime value to your venture. Be willing to forego business with customers who generate little revenue.

For those of you with the time going back and reading all three articles about Shyp by Henry McCracken will provide many lessons in what not to do as well  as what you should do to build a sustainable business.  And note well how McCracken lauded Shyp, until they crashed and burned!

And finally Shyp confirms my bias against pure consumer businesses in comparison to SMBs – the small and medium size businesses which Shyp was navigating towards, but that course correction turned to be too late to save the ship.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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