Nearing Bankruptcy, Fruugo Burned Through €40 Million to Generate €100K

Fruugo was one of the most talked about companies in the Finnish startup scene, perhaps due to the fact that the company was able to attract the top executives of the Finnish business world. In the early days, the most well known people on board were Jorma Ollila (the former CEO and Chairman of Nokia), Risto Siilasmaa (Chairman, Founder and former CEO of F-Secure and current Chairman of Nokia) as well as Marko Parkkinen (co-founder of Bob Helsinki and a board member of various Finnish companies), among others. The company has also gained some infamy in Finland due to the millions of euros it burned through in anticipation of their global, multi-retailer online store.

Fruugo has tried to innovate in the space of e-commerce through a multi-retailer site where consumers would be able buy goods from numerous stores on one site and pay in their own, local currency through one check out. The company was started in 2006 by Nils Forsblom, now currently running TenFarms.

"The figures also reveal that the company is basically bankrupt."

We've gotten our hands on Fruugo's 2010 financials and they're not pretty. The company generated less than €85 000 in commissions, revenue, while running a loss of around €8 million, taking the cumulative losses to around €37 million (as of the end of 2010). The figures also reveal that the company is basically bankrupt.

In 2010 the loss was €8 million, in 2009 it was €11 million and in 2008 they burned through €14.5 million. This has pushed Fruugo's equity into negative territory. To be exact, the 2010 financials reveal their equity was € -5.7 million, while in 2009 it was € -5.9 million.

Once a company has "negative equity", it must apply for bankruptcy procedures file a registry notification without hesitation, according to Finnish legislation. Clearly Fruugo has not applied for this and keeps it business running in a situation when it should not be possible. The notification will also notify creditors allowing them to decide if they want to pursue with bankruptcy procedures in this kind of a situation.

Furthermore, the financials reveal that the company has received some €31 million in funding as well as €6 million in other loans. These push the overall funding to some €37 million.

Back in 2010 when we wrote about the merger between DTL and Fruugo, the current financials reveal that Fruugo Oy (the Finnish company) owns 98.99% of the UK based Fruugo.com Ltd (formerly known as DTL). The financials tell us that that Fruugo.com Ltd is also in the red, generating a loss of around €100 000 in 2010.

"The biggest setback in all this is that startups are condemned as bubbles that don't deserve the hype when only the executives of the company at hand are to blame for the wrong strategic decisions."

As Fruugo slides towards bankruptcy (unless it is able to take care of its finances), the company's journey will most likely become difficult for many people to understand.

Luckily there is much more awareness towards early stage companies, even though they are not yet as mainstream as we would hope. The biggest setback in all this is that startups are condemned as bubbles that don't deserve the hype when only the executives of the company at hand are to blame for the wrong strategic decisions.

While we don't know exactly which management decisions took place, Fruugo is a great reminder that the processes in place at larger companies seldom work on a startup level. Larger companies can usually afford to work through the uneffective waterfall model where as startups need to iterate constantly and be in contact with their users, clients and customers to better understand the need in the market. Fruugo burned a lot of money in the couple of years leading up to its launch when perhaps it should have gone live earlier and responded to the needs of its users.

If you're not able to understand the market and consumer behaviour - you're bound to head to the wrong direction for years while burning through a lot of cash in the hopes that your hypothesis and expectations will carry through.

Spending almost €40 million and being able to generate just €100 000 cumulatively is hard to swallow when you work in e-commerce.

Image by Fruugo

Disclosure: The author of this article is, at the time of writing, an advisor to TenFarms Inc.

Update (16th of April 11.20AM GMT): Added a factual error regarding bankruptcy procedure. The company must file a notification to the National Board of Patents and Registration, which will allow creditors to decide if they want to pursue with bankruptcy procedures.

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deltorode April 16, 2012

Old boys club sitting in the so called "steering group"!

"If you're not able to understand the market and consumer behaviour - you're bound to head to the wrong direction for years while burning through a lot of cash in the hopes that your hypothesis and expectations will carry through."

IMHO: very bad steering group, poor VC market knowledge, ignoring the market rules and customer feedback. Sad to hear and read this.

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Mohamed El-Fatatry April 16, 2012

"The biggest setback in all this is that startups are condemned as bubbles that don't deserve the hype when only the executives of the company at hand are to blame for the wrong strategic decisions."

http://en.wikipedia.org/wiki/Privately_held_company#Reporting_obligations_and_restrictions

Perhaps we should start debating the attitude that treats privately-held companies as if they were public institutions.

And, here is what Steve Blank thinks about "bubbles":

Business Insider: Do you think we're at the beginning of another big tech boom like the 90s?

Steve Blank. Absolutely. Tech boom and bubble. Away we go. I think it's going to be great.

BI: So you'd call it a bubble?

SB: Oh absolutely. There's no rational basis for the valuations. It doesn't mean it's a bad company, it just means that we're now into buying things because we think the sector's going to be hot and there's going to be more to follow.

I also think we're much smarter this time. Last bubble, we didn't say it was a bubble. We said it was the new normal. Now at least journalists and financial analysts are being smart and asking "what does this mean and when does it end?" I think it's not March 2000, I think it's August 1995 -- Netscape's IPO. It'll bring a lot of cash and innovation into technology clusters.

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, April 16, 2012

How much from the €40 million was from tekes? I don't mind old boys club losing their bonus in a investement, that's just life. But I cringe of the waste of tax payer money.

The employers were clearly the winners. They got a salary and experience (eg. how not do things).

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Jani Penttinen April 16, 2012

"Spending almost €40 million and being able to generate just €100 000 cumulatively is hard to swallow when you work in e-commerce."

Antti - startups either succeed or fail, there is not much middle ground. Similar to Muxlim, but at a larger scale.

At the end of the day it makes little difference if they generated almost no revenues or a few million euros, if the project ended up failing anyway. If being the new Amazon was the other end of the spectrum, it was probably a risk worth taking as long as they were able to raise the funding.

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Mohamed El-Fatatry April 16, 2012

Jani, it ain't over till the founders/management say it's over. When the startup ecosystem keeps saying that pivoting is a normal thing, we have to walk the walk. Crying "bubble" every couple of days gets old, and it hardly becomes news anymore (check Steve Blank's interview above).

"Definition: A bubble is defined as a market where an asset goes up one day solely because it was up the day before. In other words, people see it going up, so they rush in because they are greedy that it will go up more."

http://blogs.marketwatch.com/thisisinsane/2011/07/18/6-more-reasons-bubble-talk-is-insane/

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Joris April 16, 2012

Their website is a disaster, after reading this article I wrote a blog post about how bad it is imo; http://www.jvandenbroeck.com/2012/04/fruugo-how-to-make-an-ecommerce-site-that-burns-e40m-and-earns-e100k/

It's fascinating how they can do such a bad job with €40M

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Mohamed El-Fatatry April 16, 2012

The merger happened towards the end of 2010, so it should be no surprise that 2010 results were not stellar. It would be wise to wait and see what happened after the two firms started working together (2011-2012).

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Tuomas Rinta April 16, 2012

@happosai: Quick look at Tekes reports says that they got about 1.6M EUR total in 2007-2011 (hint: it's all public, google for it).

Of course with that amount of money and the amount of personnel they've employed at one point or other, the money has been paid back to the government in the form of taxes, more than once.

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Heikki Hyppänen April 16, 2012

I think Joris is right on the money. The site was frustrating when I visited it ages ago, and it doesn't look any better today. You're just overwhelmed with the conflicting messages, badly thought out product lists, and completely unnecessary UI elements.

Fruugo looks like it was designed by a committee of engineers. Nobody cares about the metric shitton of stuff if they're not able to find anything. Your social media circles may wary, but mine have met Fruugo with deafening silence.

All of this is, of course, very unfortunate. I'd been hoping that all that money and man hours would have translated to some truly novel ideas and approaches.

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Mohamed El-Fatatry April 17, 2012

Fruugo's visuals do not differ much from Ebay. Trivializing the matter down to the user interface is also a symptom of "engineer-mentality".

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SjoerdHandgraaf April 17, 2012

I think the point is more that the way the UI is handled is a symptom of this "engineer-mentality" rather than the cause.

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deltorode April 17, 2012

Have a look on http://www.zalando.de/ or your neighbor from Sweden www.nelly.com. The first case were done by the German Samwer Brothers by Rocket Internet (they sold alando to ebay Germany and Jamba to Verisign). These are standards shop today right! Fruugo is incredible poor and old fashioned. Who has had here the lead? Unbelievable.

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Mohamed El-Fatatry April 17, 2012

The point is, there's much more to the story than just the user interface. And this whole conversation seems premature without the company's 2011-2012 results.

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Imants@Molport April 17, 2012

I did not know about Fruugo before. I am myself in a relatively recent start-up MolPort.com that mashes up suppliers of research chemicals into one big online shop. It's interesting that two startups in about the same geographical area are exploring about the same multi-vendor marketplace idea. For sure, selling rare chemicals in a B2B environment or apparel B2C is not exactly the same, but I must say this story is a great reminder among all the inspiring start-up success stories that all is not so easy. Even though we have invested considerably smaller amounts and we’re doing a lot better on the sales to investment ratio, we also see the technical challenges of consolidating offering of several suppliers in to one site. Like what Mohamed says – there’s more than the user interface to it. We launched the website very quickly and now are on a version that looks nothing like the first one. I would say using feedback of early visitors and customers has been important to test our assumptions and ideas to avoid the situation in which Fruugo now is.

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Heikki Hyppänen April 17, 2012

Well, duh. Of course there's more to the story! Even though UI may have been a factor, some terribly designed websites have been good enough to make handsome profits. Ebay is a good example. Mashable ran a story couple of days ago, and I couldn't believe how ugly some of the biggest sites of today were in their infancy.

What I tried, but failed to argue was this:
Aggregating and presenting the stuff from other sources around the web is the core of Fruugo's business. They don't seem to do that well.

It's not just that some UI elements are here and there, but taxonomies, product categories and arrangement of product listings were not properly designed. For example, their photography category contains binoculars, batteries and magnifying classes. DSLR lenses, for example, are nowhere to be seen. This is unfortunately not an isolated example.

I think it's pretty hilarious to see shot classes in the "children > party" category. Unless you're trying to find something, that is. At that point it becomes something that doesn't inspire confidence.

Then there's the matter of marketing the store. Could someone perhaps enlighten me on this? Has Fruugo been running advertising campaigns? Where? This is a honest question, because I have no idea. I've heard about Fruugo only because I occasionally read sites like Arctic Startup.

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Mohamed El-Fatatry April 17, 2012

"I've heard about Fruugo only because I occasionally read sites like Arctic Startup."

I believe this is because you do not fall within Fruugo's target audience. Most of your analysis does not look at the whole value chain from manufacturers to consumers (which is the company's real value proposition), it just talks about just one aspect of it's website.

At the time of the merger, DTL operated the largest independent multivendor online store in the UK. This whole post and comments, completely lack this perspective (what happened after the merger? what are the current results?). If DTL had something that worked for consumers (hence, their standing as a market leader in the UK), I don't care if their user interface seems outdated to a bunch of software engineers and designers (who are out of its target consumer base).

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SjoerdHandgraaf April 18, 2012

Mohamed: About the UI-design discussion here: "correlation does not imply causation".
I don't think Joris or Heikki is arguing that their bad UI is the cause of the abominable performance. But it can be interpreted as a sign of how things were run. It's not just about the looks of the UI, it is about the UI's performance. It is not doing its job to the best possible standard. This is nothing else but a failure when you are trying to make it in a competitive, overcrowded market with well-established competitors, where trust plays a major role.

And of course this is not the (single) cause of Fruugo failing (I see much bigger problems in the go-to-market/gaining visibility in this case), but it's one of the few thing that is visible to us, and therefore we speculate on it.

It would be great and very informative to uncover the real story about this whole thing. Even though I agree with Jani's comment about there is no middle ground between failing and succeeding, for learning purposes, I do see a distinction in the amount of "failure".

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Mohamed El-Fatatry April 18, 2012

"It would be great and very informative to uncover the real story about this whole thing."

This is my point exactly, speculating from different angles without an official statement from Fruugo or having complete information might be a waste of time (and a sensationalist news piece I might add). I'm guessing the 2011-2012 results will be better than this article assumes (i.e. basically declaring it game over).

"Even though I agree with Jani's comment about there is no middle ground between failing and succeeding, for learning purposes, I do see a distinction in the amount of "failure"."

I believe as long as founders have the capacity and resources to keep trying, they should take bold risks and not hesitate to pivot as many times as necessary till they find the right business model. We could have speculated 51 times why Rovio "failed" before Angry Birds.

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SjoerdHandgraaf April 18, 2012

"speculating from different angles without an official statement from Fruugo or having complete information might be a waste of time"

Come on, uninformed speculating and opinionating is the life blood of forums like this! ;)

"I believe as long as founders have the capacity and resources to keep trying, they should take bold risks and not hesitate to pivot as many times as necessary till they find the right business model. We could have speculated 51 times why Rovio "failed" before Angry Birds."

I agree, but for me it is still interesting to share opinions, analyses & thoughts.

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Mohamed El-Fatatry April 18, 2012

"Come on, uninformed speculating and opinionating is the life blood of forums like this! ;)"

Sadly.

"I agree, but for me it is still interesting to share opinions, analyses & thoughts."

Sure it's interesting, but let's not make it sound like the ultimate solution to failure is "less trying" ;)