Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.
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TLDR
Today’s Topic: Short-Form Video
Scaled: TikTok; Technology leveraging user data to make algorithmic recommendations rather than focus on user-driven curation allows for efficient, frictionless access to personalized content that attracts and engages users phenomenally.
Failed: Quibi; Total failure to understand its target audience and design product and its content around them compounded with market circumstances changed by the pandemic led to a swift failure.
Lessons Learned: Understanding your target market is essential to understanding product-market fit, so get proper research done before and during the development process. Poor feedback should not be a surprise right at launch. Sometimes users won’t articulate what they want, but their actions will clarify what they enjoy and find useful. Words are helpful, but data about how they use your product and what they really use it for can be more beneficial.
Today’s Topic: Short-Form Video
I’ve been avoiding an elephant in the room that no discussion about failures in 2020 can be complete without: Quibi. The company hoped to create a video-streaming platform for short-form content under ten minutes dubbed “quick bites” that could be watched on mobile while out of the house. With a whopping $1.75B in funding from many major Hollywood studios, banks, and VCs, the company started winding down and returned the remaining capital a mere six months after the product launched. It is among the greatest startup failures of 2020 and perhaps in history by measures of capital and entrenched player backing. It turns out all the money, support, and knowledge in the world can’t make a product succeed. 2020 also saw the continued meteoric rise of the video-sharing social media app TikTok, which has now been downloaded over 2 billion times and has gained serious traction in global markets (as of the middle of last year). Although the tail-end of the year was marked by legal troubles in the United States for the app with a bit of a complicated history, it came out of the other side as strong as ever. I can’t say I’m a fan of the app or its content, but its success is undeniable.
Scale: TikTok
TikTok has its roots in the app Music.ly and the Chinese parent company ByteDance. Back in 2014, Music.ly was founded as another Chinese social media app with an office in Santa Monica. Although the reaction in the Chinese market wasn’t extremely enthusiastic, the app allowing users to lip-sync to music videos and post content took off in the United States and later globally. Music.ly raised over $150M in total through its Series C in 2016 and achieved a valuation of around $530M by the time of that funding round. In just a few years, the company had become wildly popular abroad with massive growth on its platform. The basis for TikTok’s rapid domination of social media across the world was Music.ly’s success, though the original Chinese market version of the app, Douyin, was launched in China in 2016.
The other side of this success story is the Chinese company ByteDance. ByteDance was founded in 2012 and has built a slew of other products like Toutiao, an AI-powered personal news aggregating service, and a few other consumer social media and news apps. The company boasts the title of being the world’s most valuable startup, having been valued at $78B in late 2019 amidst rumors of an upcoming IPO and now sitting around a cool $140B. Even before TikTok had taken over most conversations about social media and Gen Z, ByteDance had raised hundreds of millions of dollars and was wildly successful, though most of their products at that time were meant for China and a few other countries in Asia.
These two giants came together in 2017 when ByteDance purchased Music.ly for an estimated $800M and then merged it into the core of its initial foreign market product that kept the name TikTok during 2018. This was the version of its initial app in China, Douyin, that would take off in the United States and then the world. TikTok allows users to create short videos between a few seconds or a few minutes in some cases for any kind of content, usually centered around some background music. The variety of content is as vast as any other social media network and just as difficult to capture in a description: memes, dances, political content, hate speech, comedy, singing, and educational pieces are all present along with an endless amount of other content. It was a rapid success in terms of usage and engagement, particularly in a demographic that seems to be difficult for many advertisers and products to reach: Generation Z.Growth has been phenomenal, but the road has not been without bumps and controversies. Military border skirmishes between China and India have led to a ban of the app in India, the Trump administration tried to force a sale of TikTok to an American company and pursued a ban as well over alleged national security concerns (though this is likely dead in the water now), and the app has been fined by the FTC for illegal collection of personal data from children. There are valid security concerns, evidenced by the fact that US federal employees are banned from accessing TikTok on government devices, and there are well-documented instances of both political censorship and of those deemed not “attractive” by societal norms. Despite these issues, none seem to have deterred TikTok’s popularity.
This article articulates many of the mechanics and reasons that have made TikTok such a wildly popular platform, chief among them its focus on being algorithmically-curated rather than self-curated:
What’s both crucial and easy to miss about TikTok is how it has stepped over the midpoint between the familiar self-directed feed and an experience based first on algorithmic observation and inference. The most obvious clue is right there when you open the app: the first thing you see isn’t a feed of your friends, but a page called “For You.” It’s an algorithmic feed based on videos you’ve interacted with, or even just watched. It never runs out of material. It is not, unless you train it to be, full of people you know, or things you’ve explicitly told it you want to see. It’s full of things that you seem to have demonstrated you want to watch, no matter what you actually say you want to watch.
TikTok is decreasing the friction and inefficiency of working off of user curation and input and looking at the data on preferences, not a user’s lens about their preferences. As much as people complain about specific targeting and data they give up on social media, TikTok’s DNA is rooted in algorithms and central control. ByteDance is first and foremost an artificial intelligence company, not a consumer social platform one; it uses this technological eminence to drive success across its many products. As social networks increasingly move towards algorithmic recommendations and feedback loops, TikTok is ahead of the curve. This model driven by AI comes with a host of risks and benefits but is extremely effective at capturing the attention of consumers. The engagement and growth TikTok has achieved translates to rising revenues for the company through its paid ads for brands and in-app purchases for viewers to gift creators. Big brands like Walmart are even hosting pilots of live events and content on TikTok to experiment on the platform. With the forces of powerful technology and a very engaged userbase behind it, TikTok won’t be clocking out anytime soon.
Fail: Quibi
If you’re like me, you hadn’t heard much about Quibi until it started falling apart (a good indicator of poor performance). As I learned more about the company, I became more and more surprised anyone gave it the green light. The startup launched selling a mobile-only streaming service for TV shows delivered in segments that were ten minutes or less, hence the term “quick bites” and the name Quibi. $1.75B is a lot of money across two rounds and two years, but considering the lineup of Hollywood stars and creators like Steven Spielberg, Guillermo del Toro, Liam Hemsworth, and Sophie Turner the company had recruited for its content, its understandable the costs were immense. The company charged $8 per month for access to its content or $5 for viewing with ads. That isn’t exorbitantly expensive as streaming services go, but in comparison to the massive content libraries on other platforms, there wasn’t much value. Many changes were made to the service to make it more appealing, but they came too little, too late. After the 90-day free trial of Quibi ended, 92% of users dropped off the service, and only a handful of its initial users remained. The company didn’t last long enough to see a turnaround, as it had announced plans to shut down by October. Within about 6 months, the company was dead in the water.
It’s more difficult to think of anything that went right for Quibi than point out everything that went wrong. This article summed it up in the most accurate, scathing way:
No one could possibly have seen this turn of events, except, you know, everyone who wasn't involved in the creation of Quibi itself.
The content itself, though featuring many big names, was lackluster. It was nice to see video properly both horizontally and vertically on a phone screen, but the shows seemed to be awkwardly chopped into short bits rather than made intentionally as “quick bites”. In that sense, it would just be like pausing something on Netflix and picking it up later rather than consuming something meant for mobile devices. Not that many people thought it was even worth watching those shows in the first place, as a quick search of Quibi reveals just how many people thought the content was plain bad. The producers behind the shows evidently didn’t think much of the content on the platform either:
“If we have a show that’s going to be a huge hit, you pitch to Netflix, HBO,” says a producer with a project at Quibi. “If it doesn’t get traction, you pitch to Quibi.” Indeed, many of the shows Quibi picked up had been widely shopped elsewhere beforehand.
Quibi restricted itself from any sort of virality or digital word-of-mouth by restricting screenshots or video capture: there was no easy way to talk about or share bits of content to attract interest online until much later. The speed at which this was implemented was painfully slow, long after the service could capitalize on any sort of buzz around the launch. Considering the service was meant to target younger audiences that are on their phones and social media often, it was a serious failure of market understanding to not allow for easy sharing and discourse about content.
The landscape for streaming services became very crowded by the time Quibi was ready to go, and the pandemic only exacerbated the problems inherent in Quibi though it was not the source of them. Launched at the height of stay-at-home restrictions, the company’s vision for providing content consumable on the go in day-to-day life quickly became detrimental since it had been the reason the service launched only on mobile phones. With Disney+, Netflix, Hulu, Amazon, and other giants available on bigger screens at home, why would anyone go to Quibi? While this mobile restriction was eventually fixed, the pivot took months; too long to make much progress. Quibi wasn’t just playing against streaming giants. YouTube and social media apps like TikTok remain the kings of short-form content, and that content is free to consumers. With how lackluster the shows on Quibi were, there was no real reason to pay for anything more.
All of these factors taken together created the perfect storm to tank Quibi very quickly. Although the pandemic may have hastened the end, many aspects of the company from the content to the platform itself were fundamentally flawed and seemed to have doomed the startup from its inception. In the end, Roku acquired Quibi’s content for less than $100M. It turns out “quick bites” don’t last very long compared to full meals.
Lessons Learned
Quibi provides many very glaring lessons on exactly not what to do at a startup, but there is a critical one that many new entrepreneurs miss often. There was a serious lack of product-market fit that could have been alleviated with proper user research and testing during the development process at Quibi, but for all the money and talent they had, it wasn’t done. Quibi seemed to have built its product around a presupposed insight about the market that was not validated by any actual data or input from its target audience. Just don’t do that. Even if you think you’re building something people want because you think it’s cool, make sure other people actually want it. Follow lean startup methodology and don’t throw endless capital into a solution that isn’t solving a real problem for your customers. No matter what you bring to the table, if the core of your business is fundamentally flawed, it won’t succeed.
TikTok touches on something that can be missed even if you try to develop for your customers: people don’t always say what they really want. While questions and answers can be useful data for user research and testing, people’s words are inherently biased. This type of information should be supplemented by testing data that doesn’t rely on users speaking to you: usability tests, engagement statistics, vision heat mapping, and a host of other methods can contextualize information and paint a better picture. People say they want to curate their feeds and keep up with their friends and creators they like, but TikTok has demonstrated that they’re absolutely fine with an algorithm doing this for them as long as it does it well, though few would likely mention they’d prefer artificial intelligence controlling what they consume. Watch what your customers do, not what they tell you they do.
More Reads and Info
Thanks for reading! I have never downloaded TikTok and never will, but if you like the app send me links to your favorite TikToks. If you found this interesting, consider sharing it with friends and subscribing if you haven’t already!
Cheers,
Amil