Earlier in this article, I argued that the failure of Webvan was largely due to three mistakes: Investors were too eager to buy its stock, Expensive expansion, and Impatience to go public. But I now think that one more mistake played a critical role in the collapse of the company. I’ll discuss each of these mistakes in this article. Then, I’ll discuss why Webvan did not survive magazine360.
Investors were too quick to buy Webvan’s stock
A Silicon Valley startup, Webvan’s business model is based on a highly automated distribution system. The company’s founders hoped to expand their business into 26 major cities before they hit the wall. In reality, the model didn’t work at all, and Webvan’s management blamed their own unbridled ambition for its failure. Sadly, that wasn’t enough to save the company healthwebnews.
When the dot-com bubble burst, Webvan was losing $2 million a day. The company was not attracting enough customers to cover its costs, and each $100 of groceries sold cost $143. When Webvan’s stock hit $34 in November 1999, investors were too quick to buy it. In a single day, the shares fell to six cents, and trading was halted on Monday theinteriorstyle.
When webvan started to experience rapid growth, it was easy to blame the company’s inability to keep up with demand. The company built enormous distribution centers (DCs) that cost $35 million apiece, and leased a fleet of trucks and vans. The new infrastructure would allow the company to expand its product offering while capitalizing on the existing infrastructure. As a result, most DCs would be able to accommodate 50,000 SKUs, which was more than enough for the online grocery company. Webvan could then use the excess DCs for expanding outside of the grocery business marketbusiness.
However, the company made a critical error in its initial expansion. It had overestimated demand and developed a supply chain that was out of proportion to its demand. Despite its impressive growth and low costs, Webvan could have avoided this costly oversight by better managing its supply chain. To avoid costly underutilization of resources, it would have been prudent to understand the demand for its expansion strategy in advance. This would have allowed Webvan to plan for a more profitable expansion in the future thecarsky.
Impatience to go public
The dot-com excess bubble sank the tech market in 2000, and Webvan was the poster child of overconfidence. The company was the largest IPO in Silicon Valley and had its CEO guest-teach at Stanford the day before it collapsed. The company was largely unprofitable, spending more money buying products than it did selling them. Some analysts estimated that the company lost over $130 on every order it made. In its quest to become publicly-listed, Webvan’s executives made two critical mistakes.
The company assumed it could scale with super-efficient worker productivity and customer-friendly delivery, but the impatience to go public sunk the company. After launching its website, Webvan began aggressive growth plans. It hired the Bechtel Group, an engineering firm based in San Francisco, to build 26 massive warehouses that would be automated and highly efficient. Each warehouse would be identical to the one in Oakland. Webvan had a massive growth plan, but its investors clearly didn’t understand how quickly it could scale.
Grocery chains already in the game
There are plenty of reasons why the grocery business is a bad bet for startups, but in Webvan’s case, there were none. The grocery business is one of the lowest-margin sectors, and the startup founders were no experts in the field. Additionally, brick-and-mortar grocery chains were already in the game, and they could easily fill online orders from their stores. They also had buying power and did not have to invest in a redeveloped warehouse infrastructure.
Although Webvan’s founder, Louis Borders, was 71 years old at the time, he was already a billionaire, having founded Borders bookstore chain with his brother Tom in 1971. He decided to make use of the dotcom boom and created a digital grocery store that allowed consumers to store their shopping lists online and order groceries using their computers. They called their product Webvan, and the business grew to be worth $8 billion in just three years.