Color raised 82 times more money than Instagram. Why did it lose so badly?
It was supposed to be a Facebook killer. Mobile, social, and photos? Those are the kind of trends that drive cool billion-dollar valuations. In other words, the kind of trends that get venture capitalists to hand over blank checks. Okay, not exactly blank. But close enough. For the startup Color, it was $41 million, a record-setting pre-launch figure -- and from blue blood firms Sequoia and Bain Capital, no less. It was a perfect storm of hype.
And then they actually released their app.
There's a tension inherent to most startups. You're usually building something that doesn't already exist, and that people don't already know they want -- and then you have to iterate on what they tell you they want. To translate that into business jargon, you have to PIVOT. It's a messy, exciting process -- and a messy, exciting process that's best done in the dark. It's hard enough to make something that some people like. It's even harder to iterate and make something that some more people like. Just look at Instagram.
Before it became the go-to destination for rich kids to post photos of themselves, Instagram was not Instagram -- it was Burbn. What was Burbn? Good question. It was a location-based service kind of like Foursquare and Twitter. But there was a small problem. People didn't want it. But people did want to share photos -- that part of Burbn was taking off. So founder Kevin Systrom PIVOTED and Instagram was born.
Of course, it's not as if Systrom got a billion dollars from Facebook the next day. It just seems that way. Instagram had plenty of competitors, even ones that let you add filters to photos -- remember Hipstamatic? -- that it had to beat out. And it did, by taking what its competitors did and making it a little simpler and a lot more social. It helped that Systrom (and later co-founder Mike Krieger) started in stealth mode, figured out which parts of their intuitions were correct, built and tested their new app in private, and then launched. It was the right product, in the right market, at the right time. Which brings us to Color.
It's hard to do much in private when you raise $41 million before doing anything else. The good news is that kind of raise buys you gobs of attention -- and startups certainly need attention. The bad news is that that kind of raise buys you gobs of attention -- maybe before you're ready for it. Color definitely wasn't ready for it. When they actually did launch, nobody could figure out how to use their app, or even why they'd want to. (It had a two-star rating on iTunes). Rather than connecting you with people you knew or people you thought were interesting -- like Instagram -- Color connected you with people around you. It's an interesting idea -- the kind of interesting idea that might get you venture funding! -- but not the kind of interesting idea that people wanted. At least not now. That wouldn't have been such a problem if its user interface wasn't quite so indecipherable. It was. Users came, they saw, and they didn't come back. Color was stuck in what Y Combinator's Paul Graham calls the Trough of Sorrow -- and it was especially sorrowful because so many people had already written them off.
So Color pivoted. Well, not quite. There's a very fine line between "pivoting" and "flailing". The former is when you take the part of your business that is working, and focus on that. Think Instagram. The latter is when nothing about your business is working, and you frantically grasp for something new. That was Color. Less than three months after its launch, Color decided it might scrap the whole photo-sharing thing. Or it might not. In either case, CEO and founder Bill Nguyen -- who had just fired his co-founder -- told the New York Times he had a bold, new, grandiose plan:
Mr. Nguyen outlined an ambitious plan to compete with Apple, Google and Facebook by tying together group messaging, recommendations and local search, all while making money through advertising. He plans to build applications that will use data from Facebook to create temporary social networks, say at a conference or sporting event, to help users meet people who grew up in the same town or like the same band. "It's literally going to turn your Facebook network from 500 people to 750 million people," Mr. Nguyen said. Photos might not even be a part of Color in the future....
The only company Nguyen apparently didn't want to take on was the one that had just crushed him in mobile photo-sharing -- Instagram. I'll give you one guess how well this plan that substituted buzzwords for details turned out. Within six months, Color was pivoting again, this time into mobile video-sharing. In other words, Color went from trying to beat Instagram to trying to become the Instagram of video. It was quite a fall for Nguyen, who a year earlier had compared Instagram to "mice nuts." No, not like peanuts.
Still, obituaries for Color are a bit premature. But only just. They can certainly afford to flail pivot. Sure, they've burned through piles of cash -- Nguyen dropped $425,000 on the domain names color.com and colour.com -- but they still have piles of cash because they started out with such a huge pile of cash. That's how math works. Thanks to this looooong runway, Color has managed to reach a deal with Verizon over its video-sharing. Maybe Color will still end up making it. Or maybe not. This video explaining what Color is (now) and how to use it has a very sad 22 views as of pixel time. According to AppData, around 110,000 people use it every day. That's better than where they were back in March, but it's about two orders of magnitude below the big boys.
It turned out the hype was justified ... for Instagram. It was a Facebook killer, potentially. It took Facebook's killer app -- photo-sharing -- and created a new social graph around it from the post-PC web. In other words, big bucks. Facebook thought it enough of a threat to make a Godfather offer of $1 billion in stock and cash. (Which is admittedly worth quite a bit less now). Instagram was the perfect product in the perfect market at the perfect time. Color was ... not. It had bad execution, worse marketing, and a conceit that was at best ahead of its time. Its massive pre-launch raise didn't create those problems, but it did make them more likely. Color felt like it had to move quickly -- beta testing, what's that? -- and justify its big valuation with big talk. This was a company that Google tried to buy for $200 million before they even had a product! These massive expectations made its launch much higher stakes than if it been in stealth mode.
Although it's not as if the little-startup-that-could in our story was some kind of underdog. Instagram raised half a million in funding themselves, including from top firm Andreessen Horowitz. But staying in stealth mode let them do a lot of the dirty work of figuring out what people want without the inevitable missteps that occur getting dissected under the spotlight. That's not to say that Color would have succeeded with less money, but that having more money can make you think you can skip steps -- and you usually can't.