Why Startups Benefit When Big Investments Come Later

Before the Color Labs photo-sharing app was launched, in 2011, its developers raised $41 million from Sequoia Capital, Silicon Valley Bank, Bain Capital, and other investors—an extraordinary amount for a startup that hadn’t even released a product. In less than a year, the app surpassed one million downloads on Apple’s App Store. But its success was short-lived. Users began complaining about Color Labs’ lack of features, technical problems, and poor user experience. But, rather than tweaking the app to address those issues, Color Labs remained focused on signing up more users. Usage plummeted. By December 2012—and with $25 million of funding capital still unspent—Color Labs’ investors and board members voted to cease operations.