The on-demand economy recently lost another startup. Pre-made food delivery service SpoonRocket announced on March 15 that it is closing shop--in spite of having raised $13.5 million in funding.

The startup began with a mission of "sub-10 minute delivery of sub-$10 meals." A team of chefs mass-produced a limited selection of meals each day; drivers then picked up the meals and stored them in warming cases on the way to delivering food to customers. The goal? To be "the most convenient meal ever."

At first, everything seemed to be going well. The startup raised a total of $13.5 million over three years, starting with a 2013 seed from Y Combinator and a handful of angels, and fleshed out with a 2014 Series A led by Foundation Capital. In addition to this funding, SpoonRocket reported an $8 million revenue run rate at the close of 2015, and it claimed to be profiting on each delivery .

But as SpoonRocket's case demonstrates, simply having millions of dollars in funding and revenue does not a successful startup make. While the founders are to be commended for their three-year run, their struggles can teach the rest of us some valuable lessons about staying afloat as a young startup. Here's how things took a turn for the worse.

They were too reliant on VCs.

Many startups are lulled into a false sense of security by VC funding, particularly when they're hyper-focused on customer acquisition--and it seems likely this was the case with SpoonRocket. Once its funding started to dry up, the company failed to fundraise aggressively (Spoonrocket hadn't undergone a funding round since May 2014 ) and was left scrambling for a new business model.

But raising prices would have flown in the face of the company's mission of "sub-10 minute delivery of sub-$10 meals." Without additional funding or higher prices, there was nowhere to go but down.

Their market was oversaturated.

In SpoonRocket's farewell blog post, the founders state that one of their biggest challenges was "intense competition from competitors like Sprig." They weren't exaggerating: Virtually every layer of the direct-to-consumer market is filled to bursting; startups now exist for everything from bicycles to mattresses.

The on-demand market is arguably even more crowded, especially in the food delivery space--and competitors such as Sprig, Munchery, Postmates, Caviar, and DoorDash succeeded in raising substantially more capital than SpoonRocket. (Combined, Sprig and Munchery raised more than $170 million.)  With competition like that, a startup has to seriously work to differentiate itself. Which brings us to the next point...

Their differentiating factor... wasn't.

SpoonRocket sought to distinguish itself by making meals that were faster than cooking at home, cheaper than ordering out, and tasty enough to eat on a regular basis. But in spite of a four-star rating on Yelp, many consumers complained that the meals simply weren't all that appealing.

No doubt this is partly the result of limited options--the company's chefs pre-made only four different meals a day--and partly the result of food sitting around in warmer bags for undisclosed periods of time.  Despite its low cost, SpoonRocket may not have provided adequate value to inspire customer loyalty or acquisition.

They failed to scale up.

SpoonRocket started out by appealing to hungry Bay Area college students, then began targeting young professionals. In the process, the company expanded from East Bay operations to SOMA in San Francisco. But it struggled to expand its customer base beyond the Bay Area.

The company launched in San Diego in 2015, but shuttered its service not long after it started. It also launched in Seattle in February 2015 before shutting down four months later. Service was eventually resumed in Seattle, but these foibles speak to the struggles the company experienced in scaling geographically and expanding its demographic.

They didn't invest in their drivers.

As with many on-demand startups, SpoonRocket's human point of contact with consumers was also, arguably, the least valued part of the business. The company's drivers were independent contractors who were expected to work irregular hours for low pay -- hardly a strategy for building a committed workforce.

Hamstrung drivers were often late on deliveries, which led to dissatisfied customers and bad reviews. As Steven Hill points out on Salon : When it comes to loyalty, you get back what you put in.

The point of all this isn't to rake SpoonRocket over the coals. If anything, analyzing the startup's failure sheds light on how easy it is to make similar mistakes. SpoonRocket's closure is a good reminder to the rest of us that money isn't enough to keep a business afloat.

Published on: Apr 5, 2016