Startups that get too big too fast often die

We talk to a lot of companies that have an unhealthy infatuation with growth.  There is a belief that if you’re not the first and biggest in a market right away, you’ll die against whoever is.  But, being the biggest the fastest only works if you watch cash efficiency, unit economics, and build a real business that is or can be profitable.  Below is an example. 

 

Bluum.com and CitrusLane.com were competitors in a similar space: they were a subscription box targeting moms with newborns to pre-k toddlers.  CitrusLane launched a few months ahead of Bluum in 2011 and they raised substantial venture capital ($6.6 million from investors including Greylock and GGV Capital).  They did a great job of growing quickly and were the largest in the space.  It was a pain for Bluum because CitrusLane was willing to pay more to vendors, so they hurt Bluum on pricing.  CitrusLane also paid more to affiliates and paid more to Facebook, thereby driving up Bluum’s marketing costs.  In their largest month, Citrus Lane spent $400k+ per month on marketing, and did so without regard for unit economics. 

 

CitrusLane was ultimately acquired in July 2014 by Care.com for $48.6mm.  According to one article, CitrusLane had revenue of $6mm in 2013 which was 300% growth over 2012.  Care.com was expecting revenue to double in 2014. 

 

Then, in December 2015, Care.com decided to shut CitrusLane down.   Care.com doesn't yet have any estimates on the costs the company will incur as a result of the wind-down, but reported a write-off of $9.7 million in goodwill and intangible assets.  The problem with CitrusLane is the cost of acquiring the customer was well in excess of the value of that customer.  CitrusLane ignored unit economics in favor of growth, and ultimately the business failed. 

 

Bluum.com on the other hand is now thriving.  They’re growing rapidly, their largest competitor in the space is gone, and they’re profitable.  2016 will likely be a banner year for them and DAN Fund is looking hard at making an investment.  The founders built a real business with profitable unit economics, and they didn’t have a growth at all costs model.  You shouldn’t either.  

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