In this case, it's my opinion that the startup in question was just never a good idea to begin with. No solid business model and no good reason why it would be widely adopted.
Penflip apparently is just one person.
If penflip makes $500k/year, it's a lot for 1 person but not even close to covering 11 people.
Collaborative writing is not a junk idea. There is a bazillion of different takes on that (draft, all the etherpad clones, google docs, ...).
There is no way that this will ever achieve anything close to $500k/year. For this to happen, at $8/month it needs to attract 5000+ subscribing, paying users. This is not going to happen when anyone can just use Google docs for free. Especially when Google is more well-known, better maintained, and integrates into existing Google accounts. There is just no good reason to sign up for a new service.
Most people have never heard of draft or etherpad. I'm willing to be that they are not actually generating any substantial revenue either, which is the benchmark for whether it's a good idea to start a business or not.
Google docs for example is not a great tool for writing books, in fact there are very few tools that are particularly nice to use that are web based and strong on the collaborative front.
I think the problem perhaps with Editorially is too much pressure to get things going early. If there's 10+ people with salaries, sales better be good. I think a bootstrapping approach or an open source approach a la WordPress would be much more viable. Editorially seems to have only failed because of their specific criteria, not because there's isn't a need for a better tool.