Webvan – A Business Idea Too Early For Its Time
In the 90s, developer Louis Borders created a software program that enabled tracking of inventory and helped forecast sales. This gave Borders the idea that an unexplored blue ocean existed for an online company based on this tracking software and would deliver a vast array of products, a model reminiscent of Amazon as it is today. Once his vision was conceived, Borders’ next step was to look for investors.
Initially, investors were sceptical of the business idea itself. However, Borders was able to impress and compel them to invest in his vision with his intellect and ambition. One of the first investors, the partners at Benchmark Capital, convinced Borders to start slow and begin the business with only grocery products. Upon Borders’ agreement, they invested $3.5 million into his company. From other investors, including Yahoo, CBS, Knight-Ridder, along with the public sale of equity shares, the venture was successful in amassing $1.2 billion for kickoff- and Webvan came into being.
Webvan began operations in June 1999, but the company was forced to shut down only two years later. Webvan’s management had squandered more than a billion dollars within just two years.
Why did Webvan go out of business? What Went Wrong?
The mistakes that led to the demise of Webvan, which was an otherwise promising business idea, are threefold.
What was Webvan’s business model? A poorly thought out business model:
Since the executives at Webvan had little to no experience and knowledge when it came to the grocery store industry, the venture’s business model was set up for failure from the start. The management considered Webvan a tech startup more than an online store. It so failed to consider the fact that grocery stores have some of the smallest profit margins among industries. This meant that right from the outset, Webvan was operating at a loss.
An inadequate understanding of the consumer:
The management at Webvan made no efforts to research the market and understand who their target audience was. Most grocery shoppers in the US had specific shopping behaviours that Webvan disregarded. For instance, many people shopped for groceries using coupons and bought convenience products such as toiletries, stationery, etc., as bulk purchases. Webvan did not have features to support these buying behaviours integrated into their model; this drawback of the service and the long wait times resulted in poor customer retention as first-time customers never returned for repeated purchases.
Jumping the gun on current infrastructure:
Management at Webvan took the dire misstep of developing its own infrastructure instead of making the most of the systems already in place. They were quick to spend billions of dollars setting up distribution centres all across the US. These centres had a load of features that made little to no strategic sense. Further, they only operated at 35% of their total capacity. Such a waste of capital and resources proved disastrous for the company.
In conclusion, Why does Webvan fail?
Webvan failed to establish a first-mover advantage because the company focused on a Get Big Fast strategy instead of conducting research and pacing the venture appropriately. Louis Borders was not incorrect in believing the potential of online supermarkets was astronomical. As is showcased by companies like Amazon that built on the same model and are valued at billions of dollars today. Still, the inability to pay attention to the market and banking on the uniqueness of the idea proved to be ultimately catastrophic for Webvan.
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