Failure sign No. 4: You've built your business on a legal landmine
Play with fire, and you're bound to get burned. It may sound obvious, but man -- an awful lot of startups have disintegrated in heat-generated meltdowns.
The most prominent examples revolve around rights-related woes. Take Grooveshark, a music discovery startup that managed to last an impressive 10 years before its legal oversights caught up with it.
"Despite [having the] best of intentions, we made very serious mistakes," the company conceded in an unsigned shutdown memo. "We failed to secure licenses from rights holders for the vast amount of music on the service. That was wrong."
Grooveshark's settlement agreement with record companies forced it not only to shut down the service and wipe all the company's servers clean, but also to turn over everything it owned -- the website itself along with all apps, patents, and copyrights -- to the rights-owners it had wronged.
Things weren't quite so dire for Exfm, another music discovery service. But while the company didn't get clobbered in the same way as Grooveshark, legal issues definitely played a key role in its decision to go dark.
"The technical challenges are compounded by the litigious nature of the music industry, which means every time we have any meaningful growth, it’s coupled with the immediate attention of the record labels in the form of takedowns and legal emails," the company's founders stated in an email to subscribers.
Once-trendy "social streaming" startup Turntable.fm suffered a similar fate -- and even noted that it should have paid closer attention to the troubles its predecessors had faced.
"Ultimately, I didn’t heed the lessons of so many failed music startups," founder Billy Chasen says. "It’s an incredibly expensive venture to pursue and a hard industry to work with. We spent more than a quarter of our cash on lawyers, royalties, and services related to supporting music."
Failure sign No. 5: Your product depends on someone else's service
Call it the "single point of failure" fragility: If your business relies on someone else's service to exist, you're pretty much asking for trouble.
We've seen sob stories from several startups that hitched their wagons to Twitter only to have the virtual rugs pulled out from under them with little to no warning. The most recent high-profile example is Twitpic: The once-vital image sharing service clashed with Twitter's growing ambitions and found itself immersed in a battle it couldn't win. According to the company's bye-bye missive:
Twitter contacted our legal [department] demanding that we abandon our trademark application or risk losing access to their API. This came as a shock to us since Twitpic has been around since early 2008 and our trademark application has been in the USPTO since 2009.
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