One fine day, the CEO of a Series C startup calls everyone for a virtual meet, and announces that they are shutting down operations on the same day. Nobody needs to show up for work, and their salaries would be paid out in 3 months.
Of course, this was a heartbreaking moment for Lido's ~1300 employees. No one saw it coming, not even the seasoned investors who put in $10 million into the company just 4 months back.
So how does a well-funded ed-tech startup, that made $1.5 million in revenue and aiming to reach $100 million next year, suddenly disappear in a day?
This is the story of Lido — a company that ran out of money after spending more than ~$15 million and had to shut down in less than 3 years.
Firstly, what exactly was Lido doing?
Basically, Lido Learning offered tuition in Mathematics, Science, English and coding for students from KG to Grade 12.
But doesn't Byju's or Vedantu do the same thing?
Well, yes. But Lido does this in a slightly different way. Here's how:
- Lido focuses on small groups for teaching, ideally groups of 6.
- They want to be a substitute for the tuitions in your colony or neighbourhood.
- So, Lido is not preparing you to crack IIT-JEE or NEET, but they want to replace the lady who lives two blocks away and teaches English in her drawing-room to 5 students who live nearby.
- They also focused on making their user interface fun for kids. For instance, they had 'gems' as rewards for completing homework, which can then be used to buy goodies on Lido store.
This market, according to Lido, is worth $15 billion and surely a lucrative space to be in.
Got it, so what went wrong?
The biggest reason that Lido had to shut down was because they ran out of money.
Take a look at their numbers for instance — Lido's revenue 3x'ed in a year from ~$500K in 2020 to $1.5 million in 2021. But they were also losing $5.7 million in 2020, which increased to $7.7 million in 2021!
Clearly, they needed more cash to burn. But they must already know this, so why didn't they raise more money?
Of course, they tried. In fact, they were expecting 2 major funding deals to go through but that didn't happen.
- $100 million+ from China's ByteDance (TikTok's parent company) — India banned Chinese apps, and possibly this hampered the deal.
- ~$10 million from Cure.fit's Mukesh Bansal — Cure.fit themselves had a huge setback since their fitness centers were shut due to Covid, so the deal didn't end up happening.
But you might be wondering why did they need so much cash in the first place? Also, they raised $10 million just 4 months ago, in September 2021. So where did all that money go?
There were deeper problems the company was facing already. And here's where we get into the real reasons for failure.
It isn't just the cash, it's much deeper
Lido was facing problems much before they ran out of cash.
1) Wrath of the pandemic
Lido's model of selling works similar to Byju's where salespeople visit homes to sell products physically. In fact, more than half of Lido's employees were such salespeople. Of course, with the pandemic, these salespeople weren't able to make their visits, and the growth took a huge hit.
2) Bad hiring decisions
During Covid, Lido had pay cuts of upto 50% for existing employees but they were also hiring for key roles at the same time. The new hires were mostly friends & family of the top management (source: anonymous employee interviews for Forbes)
These new hires also ended up burning cash in all the wrong areas — for instance, they ran ads on social media, where people were pouring in negative comments. Forget the ROI for ads, this damaged the brand name even further.
3) Unhappy customers
Now here's where everything broke down.
If Amazon is the epitome of customer obsession, Lido would be the exact opposite. Pick up any tweet from Lido's timeline and you'll see a flood of replies asking for refund and complaining about Lido's poor customer service.
In fact, this problem started much earlier. Customers were offered a 15-day free trial, wherein if people didn't like the classes, they could ask for a refund. But such refunds never came through. What's worse is that Lido's customer support didn't even respond to such queries.
All in all, the company already had its plate full of serious problems. But then, you'd wonder why Lido didn't fix all of these problems first, before looking for more money or expanding.
So why not solve for these problems?
Now, there have been arguments against the refund complaints. Some say that such refunds came with a condition that customers had to return the devices given to them and they never did before asking for refunds.
Be what may, if your customers are unhappy and at such scale, anyone would logically want to solve for it first, before thinking of taking the next big step.
However, with the $10 million funding that they raised in September 2021, Lido instead decided to spend it all on expanding to international markets. They opened up coding classes in the US & Canada, when their troubles at home were unsolved!
Finally, what do we learn from Lido's failure?
This entire episode makes us think that the ambition to scale is clearly clouding people's judgment. It doesn't take an Einstein to make this inference for Lido. Sadly, most startups operate on similar principles in some form where you aim to scale fast and have to raise & burn money even faster to do that. And if you can't do it for some reason, you're doomed.
But it's key to understand that "go big or go home" is NOT the only way to grow. In fact, it's insane to consistently think of scaling and compromising every aspect of your company to achieve it.
There is a sane way of growing and companies like Zerodha & Zoho have scaled patiently to where they are now. So it's a choice you need to make. Do you want to constantly worry about scaling to a billion dollars when you're still at zero OR do you want to grow consciously taking one step at a time?