ToyGaroo was a subscription service for toys. People would sign up for a “toy box” and pick how many toys—two, three, or another number—they wanted to have at a given time. They could return a toy anytime they liked, and the firm would send another toy to them from their list. The firm’s logic was that this process would yield a constant stream of new toys for customers that they in turn could give to their children. If they really liked a toy and wanted to keep it, they could buy it from Toy Garoo. Behind the scenes, Toy Garoo hosted a constant flow of toys coming in and toys going out. The firm learned quickly that “clean toys” were important to their customers. Because of this, Toy Garoo developed a very capable toy cleaning device. Toy Garoo attracted customers and press. The company appeared on Shark Tank on March 25, 2011 (Season 2, Episode 2). Describing Toy Garoo as the “Netflix for toys,” the pitch was that for parents and caregivers, the firm’s service would be less expensive and more convenient than buying toys. The average family with children spends between \($1,200\) and \($1,400\) annually on toys. The initial price for the ToyGaroo service was about \($42\) per month, or roughly \($500\) per year. After an exchange with the sharks, the entrepreneurs struck a deal with Kevin O’Leary and Mark Cuban for \($250,000\) for 35 percent of the company. Before accepting the invitation to appear on Shark Tank, the Toy Garoo team wrestled with whether it was a good decision in that the firm was growing and generating positive press. However, two pressing issues for the company were the high cost of toys and the high cost to ship them. The argument in favor of going on Shark Tank was to have an opportunity to connect with a shark that could offer help in one or both of those areas. As with most companies appearing on Shark Tank, Toy Garoo got a spike in sales when the episode aired. However, the sudden influx of business caused complications. For one thing, Toy Garoo’s inventory was too low to accommodate the spike in business the firm was experiencing. On April 6, 2012, Toy Garoo failed. According to a thoughtful interview, Toy Garoo cofounder Phil Smy discussed on Failory, a website that tracks business failures, two issues caused the company’s failure. The first failure was the inability to build an inventory of toys in a cost-effective manner. The toy companies did not have an interest in partnering with ToyGaroo and selling toys to them at a discount. Indeed, these companies saw ToyGaroo as a threat in that people would be renting instead of buying toys. Given toy manufacturers’ stance, ToyGaroo literally had to go to Walmart and Toys “R” Us to buy toys. Shipping was the second major problem. The firm offered free shipping, even though toys vary in shape, weight, and size. These toy characteristics resulted in high shipping costs for ToyGaroo. In turn, this reality led to cashflow challenges that become worse as the company grew. The entrepreneurs thought about pivoting away from free shipping, but the firm’s investors objected to doing this. So, ToyGaroo was caught in a tough spot—one that led to its failure. Their investors were pushing for more growth, their inventory and shipping costs were too high, and they could not continue operating given the relationship between revenues and costs. Reflecting on ToyGaroo’s failure, Smy said, “I honestly think that had we been able to source more cheaply and change the shipping model, we would have kept going.....

Discussion Questions:

1. As with most companies appearing on Shark Tank, ToyGaroo experienced a spike in sales when its episode aired. In what ways could a spike in sales be a negative outcome rather than a positive one for ToyGaroo?
2. What steps could ToyGaroo have taken, before the company launched, to better anticipate the problems the firm would encounter with sourcing toys at an affordable price and shipping costs?
3. ToyGaroo was a fast-growing firm. In this firm’s case, did the pace of growth make its two main problems (sourcing toys and the price of shipping) better or worse? How would growing at a slower pace benefit this firm?
4. What are three takeaways about assessing a new venture’s financial strength and viability (this chapter’s subject matter) that entrepreneurs could glean by studying the Toy-Garoo case?