When the ocean of hype turns toxic.
San Francisco-based Jawbone was a unicorn whose valuation peaked at $3.2 billion in 2014. Past tense because the maker of fitness trackers and other gadgets began quietly liquidating last month. And it’s being sued by vendors that claim they’re owed money, according to Reuters. Yet, Jawbone had raised nearly $900 million in equity and debt capital. And it blew this money.
Jawbone’s liquidation was first reported by The Information on July 6 and confirmed on Monday by Reuters. It’s the second largest failure of a venture-backed startup in terms of money raised, behind the bankruptcy in 2011 of solar-panel maker Solyndra.
Top venture capital firms — including Sequoia, Andreessen Horowitz, Khosla Ventures, and Kleiner Perkins — had invested in Jawbone. In September 2014, it raised $147 million at a valuation of $3.2 billion. In February 2015, it raised $400 million in debt, of which $300 million from BlackRock. By November 2015, with prospects curdling, it laid off 15% of its workforce.
In January 2016, when VC firms refused to throw more money at it, Jawbone’s president Sameer Samat, who’d arrived from Google seven months earlier, went back to Google, and in the same breath, the Kuwait Investment Authority led a $165-million Hail Mary investment in the company.
It was a huge “down-round” that slashed Jawbone’s valuation by nearly 55% to about $1.5 billion. Getting something at half-off must have been too tempting. Similar down rounds have since bedeviled the startup scene.
Jawbone started making stuff in 1999 – headsets, speakers, and the like. In 2011, it entered the hot field of fitness trackers. But it never got to 5% market share, slammed by wearables made by Apple, Samsung, Xiaomi, Garmin, TomTom, Moov, etc., and by crashed IPO darling Fitbit. Fitbit went public in June 2015 at an IPO price of $20. Within weeks, shares hit $51.90. They closed on Monday at $5.23.
So what killed Jawbone? Why didn’t some company with deep pockets just buy it, as it happened countless times in recent years? It doesn’t matter for venture investors that these startups, once under the corporate mantel, were often just shut down. A profitable exit is what matters. Apple, Cisco, IBM, Microsoft… they’re all buyout machines. Why not Jawbone a few years ago, when it was still hot? What kept them from buying it?
Its valuation, according to Reuters. At $3.2 billion at the peak, it had been driven to a level where no one wanted to touch it.
Other venture-backed startups too have failed or have blown up spectacularly, such as Theranos, once valued at $9 billion, and now barely limping along (but with $750 million in funding, it plays second fiddle to Jawbone).
Some made it out the IPO window in time, such as Fitbit, Snapchat’s parent Snap, whose shares closed today below the IPO price for the first time; or Blue Apron, which went public on June 29 at the lowered IPO price of $10 a share. It closed today at $8.13 a share. Like many startups, it has no chance of making money. But by going public, it raised another $300 million to burn, and it can raise more money in the future by selling more shares. Now at least, it’s losing money while in the public’s lap.
But super-high valuations make this type of exit difficult to impossible. That’s Uber’s problem too, with its valuation of $68 billion and a laundry list of scandals and deep issues, after having received nearly $13 billion in funding that is being burned at a breath-taking rate.
This money has been flowing into Silicon Valley from around the world. It keeps companies with hopeless business models afloat, and large prior investments lure more investors into these companies. And it inflates valuations to a point where companies and these investors are stuck.
“They are basically force-feeding capital into these companies,” Sramana Mitra, founder and CEO of startup accelerator One Million by One Million, told Reuters. “I expect there will be a lot more deaths by overfunding.”
Blame the sovereign wealth funds. They plowed $12.7 billion into tech startups in 2016, up from $2.2 billion in 2015. Among the Middle Eastern and Asian sovereign wealth funds that have taken expensive stakes in startups: Saudi Arabia’s Public Investment Fund and the Qatar Investment Authority; both have big stakes in Uber. Reuters:
Because they have so much more money than traditional venture firms and are less experienced as tech investors, sovereign wealth funds are often called upon to co-invest or lead a risky funding round, say people who invest alongside these foreign funds.
Such large fundraising rounds can “create this artificially bloated valuation that doesn’t compute with the revenue,” Mitra said.
Then there’s the factor that many of these startups don’t have self-sustaining business models and are just burning through investor money, as if by design. Many of them were funded when money simply didn’t matter, when there was just too much of it floating on an ocean of hype, and it all was trying to find a place to go. This condition persists. But now the downside is becoming more apparent. And some nuance of caution is starting to set in.
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