Startups come and go all the time, but hope springs eternal that yours will last. When it doesn't, the pain can be soul-crushing, sending you into a downward spiral.

That's how Tommy McClung, CarWoo's co-founder and chief executive, felt last week when had to announce the three-year-old startup he had toiled on day and night was on its way to going belly-up. Within a few weeks, TrueCar, a competitor in the online car-buying space, would bail it out with an asset acquisition--that is, adding nine of CarWoo's employees, including McClung, to its product and technology teams. 

CarWoo's failure serves as an example of how things can go wrong at a startup even if it has a promising trajectory. It wasn't as though CarWoo had no traction--its site solved a real pain point for shoppers who wanted a deal--but the company needed more funding than the $16 million it had in the bank

"Our space is extremely capital-intensive," McClung said by phone from Silicon Valley. "As a group, we really had three options on the table: First, to raise another round of funding; second, to sell the company; and third, to shut it down. We obviously pursued all those avenues."

McClung realized things were going downhill about a year and a half ago, when CarWoo began having problems keeping up with demand. "We had navigated that well in the first [year]," he said, because "we didn't focus on revenue that much. We made a decision as a team to just focus on growing the marketplace."

But the site, which had been free to use initially, was moving to a paid model and the founders weren't prepared. "It took us a good six, seven months to figure everything out," McClung says. "It was clear we were going to need $50 to $100 million."

And that was just the beginning. Customer acquisition required more time and money than the company had, McClung says. CarWoo also needed find a dealer network to supply enough cars to meet demand.

For most of 2013, he worked on the latter with strategic partners and investors, but like a lot of things happening with CarWoo, the deals  fell through. Eventually, he says, "We had to do what we had to do. A lot of people will say, 'Oh, it was just one thing.' [For us], it was a series of events in which we realized it was going to be [too] expensive."

McClung remembers the exact moment when he decided to close down CarWoo. "I told my VC and he was supportive," he says. "Ultimately at the end those are the kind of investors you should have, the kind that are going to be supportive with you up until the final decision is made." 

Fortunately, there was also lot of friendly competition in the space and TrueCar, CarWoo's biggest rival, was amenable to the idea of an asset aquisition. "The other competitors have been around 10 to 15 years," says McClung, but they weren't technologically advanced enough to suit CarWoo's taste. "They were doing classifieds," he says. 

In his heart of hearts, "seeing the success TrueCar was having and how it aligned with the vision we had--it was a pretty obvious decision," says McClung. "Other opportunitites could have been good, but none of them would have put us in a spot where we were working with people who wanted to accomplish the mission we were on." 

Although aligning with a competitor might sound like the ultimate show of defeat, McClung has found working with TrueCar to be quite liberating. "They've been extremely welcoming," he said, noting the party thrown for his employees on the day they arrived. "All around the table, eveyone believes that this is going to be a good thing going forward."  

Published on: Feb 4, 2014