Case Study: Inside the ChaCha Startup Failure


A few years ago, it seemed like startups were crawling out of every nook and cranny of the Internet. Of course, they had plenty of inspiration.

We still see some of the more successful ones operating today. Facebook, Skype, Digg.

But there were hundreds, if not thousands, that started up and then went out of business a few short years later. Cha Cha out of little-known Carmel, Indiana was probably one of the most infamous examples.

They came on the scene when Internet search was still in its adolescent years. Things like Siri, Cortana, and GoogleNow didn’t exist back then.

ChaCha saw a niche to fill — and they really tried to fill it. Maybe they ended up trying a little too hard. Fortunately, we can learn from their mistakes. 

ChaCha: The Bad Idea That Raised Tons of Money

Let’s get one thing straight: ChaCha was a horrible idea.

But at the time, it must have seemed like a good idea to investors Jeff Bezos. It also appealed to Compaq Computer founding CEO Rod Canion. Same for veteran Silicon Valley investor Jack Gill.

ChaCha raised over $10 million in investment capital in 2007! They must have had some great digital marketing.

What was the idea behind ChaCha that was so enticing? Human-powered search.

Keep in mind that Google hadn’t refined its algorithms and ranking signals just yet. So, searching the Internet was akin to digging through old library catalogs with the help of a robot. And the library catalog cards are filled with spammy links to awful business websites devoid of content.

But you could still find the information you sought on your own if you knew all the tricks.

ChaCha attempted to make search easier by allowing users to outsource search to real people sitting at their home computers.

How It Was Supposed To Work

You logged on to a chat interface and connected to a ChaCha representative. (Think MSN Messenger-style chat.)

You’d tell the representative what you wanted to search for and they would find it. Simple.

It seemed like a great idea. You could have expert searchers on the other end. They would have the requisite skill set to find the information, right?

Was ChaCha Really That Good?

The problem was, the only people in 2007 who actually understood how to search for real information on the Internet had framed Masters Degrees hanging on their walls.

If you really wanted to find something online, you needed a library scientist.

The regular Joe who applied to ChaCha probably didn’t have a degree in Library Science — or any other science, for that matter. Those people were probably working in real libraries someplace, making real money.

Instead, you got people who didn’t even know what Digg.com was.

As well all know, the Internet is also fertile ground for practical jokes other kinds of pranking behavior. So, the poor ChaCha “guides” (yes, they called them guides) received more prank requests than legitimate requests.

And why not? Just look at the ridiculous things people ask Google even today. Something about the anonymity of search makes us feel like middle schoolers again.

And while the human powered search idea was interesting enough to garner the attention of investors like Bezos, it still failed.

Why?

Why Did the ChaCha Startup Sensation Fail?

ChaCha even added the ability to text questions to their guides early on to allow users mobile capabilities. And if this had been 2005, we might have seen ChaCha succeed for a while.

But this was 2007. The iPhone was gaining popularity, and Google Android wasn’t far behind.

Competition came at ChaCha from both sides. This quickly dissolved the pain point users went to ChaCha to solve. You had Google launch their Panda algorithm in early 2011. This massively improved Google’s search engine.

Then you had other, more efficient human search and aggregate data collecting services like Mahalo.com. These companies put a lot of pressure on ChaCha to perform and gain more users.

But ChaCha couldn’t keep up. They faced massive scaling problems. Plus, their quality control was extremely poor.

At 55,000 part-time guides, most of them remote at a time when remote was hard to do. At the end of the day, they couldn’t give quality search results.

And users didn’t just want useless sound bytes and random lists of facts. They wanted answers to more subjective questions sometimes and more in-depth search results.

And ChaCha couldn’t pay their employees enough for such detailed research. Because of this, as we mentioned, nobody with the expertise to find great content was going to apply.

Google soon swallowed the search market whole.

And the desire for “human-cultivated” answers just petered out. And when your core idea no longer has traction, you either adapt or die.

The problem is, if you don’t see the tread wearing off your tires early enough, you’re only left with the “die” option. And that’s exactly what happened to ChaCha.

Why Didn’t ChaCha Try to Adapt?

They did try to adapt. But it was much too late for the poor Indiana startup.

They seemed to be going in a great direction with their text and voice service addition back in 2008. And in 2009, they raised $12 million and restructured their corporation.

They even launched an iPhone app in 2011 to keep up with the mobile revolution.

And ChaCha launched a “Buzzfeed” type website called “Social Reactor” that died with the next Google Algorithm update. Meaning they missed the contemporary website design and development setup by then-current trends.

Nothing seemed to work. Although they were cash-flow positive for a few years, nothing stuck. And their inability to really move out of startup mode coupled with real structural and quality control problems scuttled their very expensive ship.

What Lessons Can We Learn from ChaCha?

While there was no way ChaCha could have known the future. They could have at least hired a real expert or two for quality control purposes.

And a startup’s ability to adapt is a huge determinant in their future success. “Adapt Or Die” should be your motto if you’re looking to build a startup even today.

If ChaCha appeared on the scene even five years earlier, we might see some form of their service here today. But they failed to adapt and they died a fiery death.

Are you looking to build a startup in the near future?

 



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