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.
There are some factors in the stock market that are like a tsunami siren that should send inhabitants scrambling to higher ground. But this one will be ignored until it’s too late. Read… Stock Market Tsunami Siren Goes Off
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I have to wonder how does the size of the current tech bubble compare with the late 90’s dot com bubble? Is it bigger or does it just seem that way because of inflation?
The Nasdaq Composite Index, where most tech companies are listed, is showing signs of overheating, with the price to earnings (p/e) ratio of the index increasing faster than that of the benchmark S&P 500. A higher p/e ratio provides an indication that the share price of a company may be overvalued.
The current ratio is still nowhere near the level of the dotcom bubble in the early 2000s where stock prices can reach as high as 80 times the company’s earnings.
Just because it is “IN PRINT” does not make it true or factual.
The accounting gimmicks that companies use hide the truth and facts.
Very few not use honest accounting.
I often wonder how companies that do not have any earnings factor into these full nasdaq average PE ratios? It is a big difference between a company with one cent of earning, of say P/E of 200 verses a P/E of zero to cause big swings in the average. Is there data with the percentage of companies in nasdaq now with no earnings verses 1999 with no earnings.
Seriously ? Come on !
Regardless of what the UK press may think in a moment of delusional wishful thinking ( as well as perhaps a little under the table collusion ) many if not all of todays DotCom tragedies in the making have stock prices in comparison to their actual worth well in excess of anything that was floating around back in the bad ole 90’s DotCom mania . Then factor in the likes of TESLA etc on the virtual manufacturing side of things … as well as the likes of Uber AirBnB etc and y’alls got yerself a Tech Bubble of epic proportions just waiting to burst in everyone’s faces with no doubt untold collateral damage . The Telegraph indeed .
Fact is we’ve got more economic Potemkin Villages going on now than we did back in 1928 .. with that ” Black Swan ” hovering over our heads like an economic Damocles Sword just waiting to make its landing chopping all those unaware off at the knees .
And with the Fed’s toolbox all but empty … cities and states across the nation on the verge of bankruptcy … nations across the world deep in the economic weeds …. this’n .. is gonna be beyond epic when that black bird lands
Quite right Mr. Martin.
And The Telegraph is a shadow of its former self.
I think the write down of AOL to ZERO by AOL Time Warner (which had been purchased with AOL stock!) remains the biggest write off in history. They axed the name too.
There were many big names at the time. Two big ones started an entire industry that just went away. Commerce One started by a founder of Sybase and Ariba were companies and in B2B exchange market. They were going to sell everything through the web for large and small companies. The concept had huge flaws that would have killed innovation for entire product lines and industries, that middle men, rather than middleware, helped to provide real feedback before and after the sale. Big sales with high risk just aren’t made with no sales rep–both should have known, but the insanity of the market lost sight of reality then. Those companies have now just disappeared with Commerce One going out of business and Ariba changing industries and then getting acquired. In Sept 15, 2000, 10 days after the right shoulder top they had market caps of 38 and 11 billion. Jupiter Communications — these research firms are great intellectual sycophants (or, better, psychophants) said the market would be would be $6 trillion by 2005, uh huh, yea, right guys. They disappeared as well through a series of mergers.
the main difference between and then and now is that this one is much broader based. The amplitude may not be as high, but the period of the wave supporting it is much higher.
It’s way bigger and there is a lot less there than meets the eye!
Following the dotcom crash Greenspan decided that the economy needed a home equity injection, and another… and here we are today.
Just these four websites..
Google.com + Facebook.com + Amazon.com + Alibaba.com = $2 Trillion
Combined P/E is 50+, if you beleive the fairy tale numbers.
These “websites” revenue numbers:
Google: 90B+ in revenue last year
Facebook: 27B+ in revenue last year
Amazon: 135B+ in revenue last year
Alibaba: 15B+ in revenue last year (China, so estimated)
That’s 1/4 of a trillion dollars in revenue in one year (and they’re all growing by double digits). Collectively valued at 2 trillion. The issue isn’t at the top of the pyramid, the issue is that people keep investing in the little guys hoping they turn into one of these companies.
GOOGL, FB, AMZN, BABA are not “websites.”
Google is an advertising and data company with the benefit of free products that people love.
Facebook is an advertising and data company with the benefit of free products that people like.
Amazon is an advertising and data company with the most convenient retailing structure the world has ever seen.
Alibaba is Chinese Amazon.
I cannot think of one, not ONE business that doesn’t buy advertising or data from one of these four companies. If you want to make money, it goes through these guys.
Re: Amazon’s revenue. Check bottom line not just top line. They are moving all this stuff around for peanuts relative to Google’s profit.
It’s a warehouse and trucking company priced as a tech that can deliver its product with almost no cost of sale.
I graduated in 97 and entered tech (hardware degree, but biased towards software). I left semi in 99 and – while technically incredibly successful at my second employer – was too young to play the politics game and got ran out. During that time I remember a conversation between me and two coworkers – both my age – in an elevator, on the way back up to our (6th?) floor. A couple of our C execs were in there too, but I hadn’t noticed at first.
I was totally telling my buddy’s about the story of the shoe shine boy and the late 20s stock market – we had a friend that had joined a web outfit because they had a free masseuse at the office as part of the incentive package. I told them – this is the shoe shine boy – they wanted to change gigs (we didn’t have that conversation in front of them) – and I was pointing out there wasn’t a free ride in life. The execs never said a word.
The market tanked a couple months later.
The stupidity in this field is really as strong, if not stronger, today. I am hearing commercials on RADIO (I follow a few stations down south for new trends) and .coms are advertising on radio now. Really just started in the last month or so.
Get out! :-D
P.S. I had reallocated the (very small) amount of money in my 401k at the time (99) – maybe a couple months before this story above. After the market crash, they called me (rhymes with et-na) and told me there was a technical problem with my reallocation and my 401k reallocation wasn’t processed – and offered to reallocate my funds as of the current business date.
The investment community lost a life long customer – at no real gain, it wasn’t much – because I will NEVER trust them again. Always wondered who all they pulled that stunt on – that took balls.
– How on earth is one able to value a company like Uber ? It has no listing.
– But US tax laws allow a company to deduct thse losses against future profits. And that makes these companies more attractive for an investor.
Doubtful that Uber has a Buffett-eque mote, but they may be back stopped by the company, as the rest of Silly Con Valley is. Quien sabe?
Sigh … Wolf may correct me on this … and if so .. so be it … but it is my understand when it comes to FTC etc regulations there is no mandate placed upon any publicly traded corporation or business to reveal timely , accurate or verifiable information to the public nor its investors as to its overall net worth P&L , cash reserves etc .
The only mandate being .. they have to reveal the same information to everyone at the same time . But accuracy and verifiability ? Aint in the regs I’m afraid … at least as far as I’m understanding things .. And thus lies the dirty little secret of the corporate world than none want you to know … assuming none of us would take the time to read those regs … which I have
In as far as US IRS Corporate tax laws … they are so over biased towards the corporate world it is pathetic . But if you think corporate tax structure is at an extreme advantage ? Y’all ought to look into the biases and advantages given to developers and real estate . hint hint .. wink wink ..
We need to distinguish between private companies, such as Uber, and publicly traded companies, such as Apple. The regulator for financial disclosures to investors is the SEC.
As a private company, Uber has no financial disclosure requirements to the public, but it has some (minimal) requirements to disclose information to its private investors (equity and debt). So investors get to see some financial statements, and there are other requirements. If Uber falsifies this info, investors can sue. See Theranos, which got sued by its VC investors.
But the public doesn’t know about the financial performance of Uber unless the financials are leaked or disclosed on purpose, which they are periodically.
Publicly traded companies, such as Apple, have strict and extensive disclosure requirements. Their financial statements and disclosures need to be timely and accurate. If they’re not, all kinds of mayhem can break loose (see Enron, with people going to jail, in theory). It can include delisting the shares.
Tesla and Bloom Energy.
The latter had a secret s-1 filed, and shown to select investors.
must by pretty ugly for them to not want a clean ipo.
-The question about rentability/profitability is very interesting: Do these unicorns really have the potential to become profitable at any point in time? Is it just a matter of time (like the zalando or transferwise, which had written red numbers for years but have finally managed to become profitable)
-Or are unicorns really like ponzi schemes, where they depend on ever more investors pouring money into them, but at some point they are bound to collapse?
-Isn’t possible that many of the unicorns are just too specialized, so they focus on a particular customer service which is just too thin to ever turn into a profitable money stream? Many times they start-ups offer a free version with some premium version on top. In our times where millenials do not want to pay a dime but want everything for free, I wonder if this business model works? Also many unicorns have app services where the get a small transaction fee or something similar but will this be enough to be really profitable?
-How do venture capitalist actually make money investing in unicorns? I mean, they invest money, but the start up is not profitable? What are the returns made of? Is it just money that is being put into the startup by new rounds of funding that pays for the previous investment?
-Where does all the money come from? Is this coming from the huge credit money creation we have nowdays?
-And what is a serious explanation for this unicorn phenomenon? Why have the popped up after the financial crisis? Regulation? Low-interest rates? Culturual behavior?
Thanks for your thoughts
Startups are not about making a profit — they are about making money — a big difference. The point is to get a product to market that attracts investments and then the big payoff an IPO. Everybody walks away happy!
Which leads me to another somewhat related story. Am I the only one who thought that the Uber guy Travis Kalanick got himself fired on purpose, to cash out. That’s the way it looked like to me out here in flyover country.
From what I understand, he is not cashing out, nor can he cash out very easily since he still owns a huge chunk of the company. Someone would have to buy it from him for many billions of dollars. If this happens, it would be all over the news.
There is a secondary market for Uber shares. It includes Uber buying back its own shares from employees, but I doubt it can handle the volume that his stake would require.
Tech start ups certainly strive to make a profit. There are usually big celebrations for getting out of the red.
But as you note the primary goal is to grow large enough to IPO or more commonly simply get bought by a larger company interested in a fast track into your market.
I would say IPO is the dream but looking attractive for a buyout is the more common goal. Becoming profitable early is a potential milestone to prep your company for one of those two ends. Though clearly not always necessary.
For the companies that collect and trade a user base sometimes access to those users is their only form of currency… those cases are unique though. Most company have a revenue stream, even if it’s bad or fledgling.
To give my take on FullofInterest’s questions:
1.) & 2.) Some of these unicorns can become profitable if their per customer losses aren’t too egregious. Amazon actually was a unicorn at one point but after the dot com bust they successfully turned things around and became a real business. But that is the exception, the vast majority end up like Beepi which burned through $120 million in investor capital in 2 years only to go under, or like pets.com to look at an example from a previous era. Wolf is quite correct that the goal of the vast majority of these is not to have viable business models but rather to just raise investor capital. And yes, those unicorns are just legal ponzi schemes, as Tesla has demonstrated you can lose as much cash as you want as long as there’s more investment money coming in to cover the losses. In fact I would argue that there’s little difference between Tesla and Enron’s business models, basically whenever what they’re doing flops and they lose a ton of money they would just cook up something else to distract attention from their lack of profitability and get the hype train going again. They are both products of their respective times.
3.) A lot of times unicorns just can’t control their costs enough to be viable. Netflix right now is spending over $100 per customer per month, who only pays $20 or so a month. That’s a huge, huge gap. As Wolf has said it’s primarily a problem of their business models, which are really just papered over with more investment money until that drys up. I’m not so sure it’s a problem with specialization, all startups need to start with just one product, it’s just not controlling the costs. With all this free money, why bother with cost control?
4.) Venture capitalists make money off unicorns through capital gains, kind of like flipping a house. It’s true they make money that way off of real businesses also, but what makes unicorns different is speculation plays are far larger role.
5.) & 6.) The money largely fundamentally comes from central bank induced liquidity binges. After the financial crisis central banks all around the world dumped huge quantities of “money” into the economy, with virtually all of it ending up in markets. What happens when demand is artificially stimulated? You get inflation, in this case asset price inflation which is basically a bubble. In fact it’s actually a mainstream central banker theory to purposefully inflate asset prices to stimulate the economy, they called it “the wealth effect”. There’s nothing unique to the US about this, we’ve seen it before in Japan in the mid to late 1980’s, we see it all over the world today. Culture and regulation have never demonstrated to have any effect on bubbles, the fact that they happen whenever the monetary policy is too loose in so many different cultures and regulatory systems should prove as much. Unicorns can only exist in bubbles, and with QE and foreign capital being the main causes of this bubble. Once the bubble bursts, the handful of unicorns that can become real companies will go on while the rest (95% percent) will join pets.com into the abyss.
Hope you found this explanation informative.
Dear illumined, thank you very much. Your comments are very informative. I’d like to follow up on a few things you said:
“Some of these unicorns can become profitable if their per customer losses aren’t too egregious.” –> Could you elaborate on this a little more?
“In fact I would argue that there’s little difference between Tesla and Enron’s business models, basically whenever what they’re doing flops and they lose a ton of money they would just cook up something else to distract attention from their lack of profitability and get the hype train going again. They are both products of their respective times.” –> Can you specify this a little more also, why you think Tesla and Enron are actually doing the same thing?
“it’s just not controlling the costs. With all this free money, why bother with cost control.” –> Well one could argue that once the money stops flowing, then these unicorns would have to control forthe costs, so “the market” would foce them to? Couldn’t that happen?
“Venture capitalists make money off unicorns through capital gains, kind of like flipping a house. It’s true they make money that way off of real businesses also, but what makes unicorns different is speculation plays are far larger role.” –> I do not really get this answer. Does this mean that it is true that VC make their money by investing into a unicorn and the unicorn gains in value, but this value is only numbers that have nor realized before someone actually pays these numbers. Up until this point in time, VCs have not been able to get real money, because the unicorn has not been bought. So in the mean time, the yearly profit the VC (and the sovereign wealth funds that invest through VC companies) get returns that are made up of the money that has been streaming into the unicorn after the VC has already invested in it? Is this a appropriate way to say things?
“The money largely fundamentally comes from central bank induced liquidity binges. After the financial crisis central banks all around the world dumped huge quantities of “money” into the economy, with virtually all of it ending up in markets.” –> Well is this true? I often hear that money which CBs created has gone to banks in the first place and these banks have not really lend it out into the productive economy? So what you are arguing is that the money has been used to prop up the prices of unicorns? But you has the money which the CBs created and was put into the hands of banks made its way to sovereign funds and VCs which are the ones that have invested into unicorns? By credit? Apropos credit? The money VCs use to invest in unicorn is itself debt and not equity right?
Traditionally the VCs were just a bunch of rich guys trying to get richer off of the next new thing. It was their money, not borrowed money. I’m not sure if that’s true anymore with low rates, but these guys usually only invested money they could afford to lose.
VCs spread their money around. They know that their investments in most startups will go belly up, they are hoping one will be a big winner, to make it all worth while. This is why VC firms are different from hedge funds, they develop the investment, or try to, instead of sucking the life out of it.
Huh Bloom Energy is still a thing. Solid fuel cells.
They should make little ones, producing 500W or so – think of being able to use one of those instead of those noisy small generators.
Solid fuel cells despite the hype aint ready for prime time nor are they in any way feasible nor profitable at present with their reliability on the best of days suspect and their functionality less than adequate especially in light of the current wretchedly excessive price . Suffice it to say .. as much an advocate for hydrogen as I am [ way down the road ] at present the likes of fuel cells etc belong in the lab … not on store shelves . And Bloom ? Well … Bloom aint exactly blooming when it comes to profits now … are they !
Honda, the world’s largest small engine manufacturer, has been working of fuel cell generators since the early 90’s.
Over 25 years and many billions of yen later they are nowhere near producing commercially viable prototypes, let alone ready for mass production.
I am not saying fuel cells are a dead end, but given the amount of money Honda, Delphi, GE, Panasonic, Rolls-Royce, Hitachi etc have thrown at them over the past three decades I would expect a little more than a couple of absurdly overpriced cars.
You need to look a little deeper into Honda and fuel cells. The tech they have worked on is now on southern Calif. roads with more to follow. The fun fact on the cars if your house loses power the car can power your house
We’ve got hydrogen cars in my neck of the woods. I saw a BMW hydrogen-mobile today and a week or so saw the hydrogen guy filling up the hydrogen “pump” at the gas station on the corner.
As well as all the electrics, of course.
Yes, I am a poor idiot.
Sorry for even thinking about mingling with you omnipotent, omniscient, sum of all virtues Californians.
Remember GoPro? Remember how it was going to change the world? Yesterday their stocks went below the $8 mark for the first time, closing at $7.96. Back in late 2014 it was $90 and climbing and everybody in the media was telling us how it was “not overpriced” and “a bargain”. Then Wall Street realized what eBay and Amazon shoppers had already realized: GoPro had no unique technology and there were similar products doing the same job for less money.
GoPro had a bad Q4 2014 and a simply horrifying 2015 but seemed to have somehow stabilized around $15 in 2016, well below IPO price ($24, not inflation adjusted). The usual suspects were already starting to pitch “how the worst has passed” and how it was time to “buy at this bargain price” when GoPro started to slowly lose value until it got where it is today.
Dip buyers will try to pick pennies in front of the steamroller, as it’s their usual, but somebody will get flattened like Wile E. Coyote. GoPro is not the G in the FAANG.
But at least GoPro manufactures a line of product they sell to people and spent some money in R&D before getting lazy.
Jawbone pretty much slapped their logo on ready made heartbeat monitors (everybody sells them these days, even Ikea) and rode hard the shooting star until it crashed into the ground. It will not find a buyer because not only they have no unique tecnology but their products can be had straight from China for as little as $1/each.
That doesn’t surprise me in the least … I assumed from day at some point even early adapter who had to have one would of bought one with demand then hitting the wall with sales and profits falling into the abyss .
Ahh .. the joys of the Trendy Wendy product . Here today with a bang . Out tomorrow with barely a whimper and a snivel .
GoPros are great but the argument for the marketing side must have been a real bitch. They brought something new to the camera market but it’s still the camera market at the end of the day, which I can’t imagine has a market size that can grow much beyond an average piece of specialized sporting gear… they would need to diversify and innovate their product line in that same vein to attract new customers. That seems difficult.
In San Diego one of my ex coworkers still works for GoPros as a software dev. Two others went to Fitbit pre IPO. Fitbit is in an even worse position with smartwatch competition.
GoPro effectively brought onboard cameras to the masses.
The technology itself was nothing particularly new: onboard stabilized and miniaturized cameras had been used in motorcycle racing since 1985. What was new was the approach of marketing such a product to the masses, which also meant a lot of work went into making the camera itself easy enough to operate for somebody who isn’t a trained and experienced cameraman.
Sadly this also meant the technology was just “out there”. It was only a matter of time before GoPro had imitators and especially competitors: I’ve seen both Olympus and Sony have entered the fray as well with cameras priced at about the same level as GoPro models and, hopefully, some feedback from their full-on professional models.
This is a really smart comment that would make a great case study in marketing strategy:
“…I can’t imagine has a market size that can grow much beyond an average piece of specialized sporting gear…”
To the layman that spends even a moment thinking about it, this comment accurately captures the total addressable market of GoPro. It was never going to be applicable to a wide swathe of consumers.
YET, having worked in corporate strategy (but not GoPro), I can tell you first hand that anyone and everyone who has a 1% chance of buying the product gets counted in the valuation. Kids, moms, grandparents, dogs, plants…sure why not! Surely someone wants to capture the plant growing in slow motion! When these conversations started happening at work, I knew it was time to leave “strategy.”
Having earned my stripes early in my career in strategy, it makes me sad to see where this field is going. As my business grows from small to medium, I’ve considered hiring strategy consultants, but have decided talking to real customers, actually getting out to see my market ultimately yields more information. I can see first hand the dog using the GoPro!
MC, OMG, I’m shuddering right now. “…Back in late 2014 it was $90 and climbing and everybody in the media was telling us how it was “not overpriced” and “a bargain…” I hate to admit it but I almost fell for that hype from those high-tech/snake-oil salesmen and experts. I guess there are some benefits to procrastination and getting older.
“I guess there are some benefits to procrastination and getting older”
Amen to both!
If the GoPro story interests you, check out AAXN and their police cams which work with a cloud-based video storage subscription service. Not yet discovered by the big investors but increasingly gaining attention.
A fool and their money are easily parted.
A good idea deserves investment, but usually these companies ipo on the idea that they’ll keep having great ideas.
How often has that really happened?
Their values fly up as if they’re having great ideas, they burn cash trying to find ideas, which they don’t, and they go down hard.
GoPro 1/2 were half decent very small cameras.
I still have one.
By 2012 everyone else making cameras got in on that segment.
Even after all that money they’ve not even got into pro cameras, stills cams, police body cams, nothing.
What did they spend all that money on?
Investors need to ask “can this fit in a mobile phone for £5 or £10 at the factory, and/or Apple or Google do the software for peanuts?”
If yes, stay away unless you really know what you’re doing.
I think this tech crash will be just as bad for investors.
Some great companies will emerge as always.
I get this feeling more employees will be hit this time.
Not just software this time, but hardware, manufacturing, etc.
Last tech bubble pop was still during a huge boom in pc growth etc.
I see now booming areas in hardware any more.
Unless something ‘new’ turns up which we all need/want?
They’ve tried it with vr but that’s fizzled out quicker than it started.
“A fool and their money are easily parted.”
Sometimes you have to wonder how they got together in the first place.
Amen to that, too!
AR has a much better shot at being a must have before VR. Both need to achieve some difficult tech milestones to become truly must have. No one is showing anything at that level yet. VR isn’t dead but it is going to remain an afterthought probably for at least another 5-10 years as the tech needs a lot of improvement.
There is still room for a wearabble device to come out that becone’s desirable on the level of a phone or iPad. Not convinced watches are it, but maybe if they reimagine their capability and use case.
I have worked for quite a few startups over my career in tech, and from what I’ve seen, they fall into three categories:
1. Completely, 100% half-baked. Frequently launched not because the founders have a good idea or product, but because the founders wanted to get rich.
2. Has a good idea/product, and frequently manages to execute that idea well. See Gopro. Unfortunately, only a minority of these companies have the discipline and ability to go beyond that first good idea. This isn’t helped by the fact that the team who executed the first product well usually cashes out their stock options and leaves the company to go fishing.
3. Solid initial product, and manages to create successful follow-on products after the success of the initial product. These companies are usually created by highly experienced people who have extensive experience in product development and manufacturing. This elusive beast is rumored to exist in the wild, and has been spotted from time to time in strange places. There have been no recent sightings in Silicon Valley.
I worked for a networking startup that fit your number 3 category. This was the third startup for the founders and all the initial employees were network veterans.
Everyone was very focused and NO money or time was wasted. A few months after I joined, it was bought by Juniper. Two years later the group was profitable.
It does happen, but it’s rare.
I saw an interesting thing last night. There is a young lady on YOUTUBE who does what are called ASMR videos. These are soft spoken little video productions of 15 to 30 minutes length that are meant to soothe and relax viewers. Maria aka ‘Gentlewhispering’ is the super star in the field with almost 1 million subscribers and her videos have been viewed hundreds of millions of times. Her latest was sponsored by Blue Apron and she just does her normal thing but this time she unpacks and prepares a Blue Apron dinner. Its very effective if you enjoy ASMR video as you will sit and watch a fifteen minute ad simply because it is her method of presentation that is the attraction.
I had wondered when advertisers would catch on to this format and provide the products these ( almost always women) use in their videos. It is cheaper than conventional advertising. No agency or video producers needed as the ASMR girls do that themselves ( and very effectively) and they have the same sort of loyal following as sports stars.
Here is “Maria’ doing her ‘Blue Apron presentation.
I’d call spam. Even YouTube had removed this video. I think Wolf should remove your post.
Youtube didn’t take her video down. For some reason a URL to it doesn’t work.
My point was not the merits of Blue Apron but using ASMR videos to sell products. IMO it is incredibly effective ( and cheap) at least for now. I have no idea what “Maria” was compensated for doing this ( she makes a fairly decent living just out of her uncompensated video productions) but compared to what advertiser have to pay for other celebrity endorsements it would be a pittance
I read a story recently on Blue Apron; the labor that puts the meals together tends to be ex-cons and such types and shootings and knife fights are real workplace hazards there.
I’d not eat Blue Apron food if it were free.
Well I guess the first time a customer finds a shiv in their turkey tetrazzini, it’s curtains for Blue Apron.
I believe this has already happened. Sorry I can’t provide cites, there are agencies that hook up the owners/producers of hot Facebook pages with people who will pay for product placements. They may have talked to Maria as well.
I’m quite verse in technology, and come up with interesting ideas; but unfortunately, I’m not sleazy enough to sell half baked ideas. This is what many founders of these startups are good at; selling half baked, mostly useless ideas, and yet getting tens, or hundreds of millions of dollars in funding from suckers, oops, I mean investors.
Exactly, and I scratch my head and wonder who the blazes makes up these “valuations”. Pick a number from a hat , dart board? Sure seems that way.
I am going to start a web company called “two faced book”. I figured with all the smarmy mud and lies that is slung in the media and on the net, it would be wildly successful. People just love that sort of thing. Want to invest, it will be worth 3 trillion is six months.
Trace it back to the FED, money for nuttin.
Only 3 trillions? Sorry, I won’t invest unless the valuation is 6 trillions in 6 month ?.
” …I scratch my head and wonder who the blazes makes up these “valuations” .. ”
Overly optimistic ( and somewhat blinded by pseudo science delusional ) investors desperate to get into the ground floor of the potential next big thing … not realizing that in a Transitional Age [ ” At the End of an Age ” ; John Lukacs ] there is no next big thing . Only a whole lotta ephemeral technology for technology’s sake wonder toys .. that aren’t … very wonderful that is
But like lemmings to the cliff .. they keep falling for em
Greater Fool Theory is alive and well in the tech industry.
A friend of mine, now deceased, had an idea for a porn site;
“Naked Farm Animals”.
We have them on our place but they’re on real estate, not a prone site
Let me guess. Your “interesting ideas” end up getting stolen.
Most CEOs are marketing guys, and even if they didn’t start out that way, that’s how they end up. And you know how they are.
It’s hard to get rich if you have scruples. I think you’ll find that the typical tycoon has none at all. Advancement in all large organizations is self-selecting for those who are devoid of ethics and morals but can maintain pretences. Nice guys finish last, unless they’re sharks who are just faking it.
Well said as usual Walter. Yeah, nice guys, who let that pesky little thing called morality to guide their decisions and life will always finish last.
I have a theory. The people who advance most in major organizations are those with:
1) Slightly above average, but not great intelligence.
2) A ruthlessly self-serving predisposition, but masked well behind obsequiousness and priggishness.
I’m certain not to include great talent and/or character.
I don’t think that is entirely the problem. The most important aspect for doing tech startups is access to money. You either need to befriend investors or sell yourself. Plenty of relatively nice guys start companies. As long as by nice you don’t mean stupid. You have to defend your groud long enough to get funding and start buidling a product.
The reason so many people end up being ass holes at the top of the pecking order is simply because most of us, even if we are usually nice, are capable of being ass holes when we see dollar signs attached.
It’s true though that at certain point your startup tends to attract serial start up CEOs and investors who are only interested in cashing out at all costs. But the ground work is often laid by good workers with good ideas.
Sadly even most good ideas hit the brick wall of reality at some point.
“I don’t think that is entirely the problem. The most important aspect for doing tech startups is access to money. You either need to befriend investors or sell yourself.”
As a witness at a Federal lawsuit trial, I heard the judge quip in open court;
“The man with the money met the man with the experience…and left with the experience….
The social Darwinian selection works for the least scrupulous, but only because the railway have been laid that way. There were brief periods in history when culture and education were most valued, but they did not survive.
Hubris eventually brings down all human institutions, in time. Honest and dishonest.
It is amazing how these tech companies seem to be overfunded only to fail later. Many own nothing that’s tangible so bankruptcy auction must be nothing but their expensive office furniture. Will Uber ever turn a profit? It’s nothing but an app but more state courts are ruling that drivers are to be considered employees for purposes of employment benefits which will only increase their costs.
I work in software for a big company and this kind of stuff is probably why they are driving so hard to make a lot of our new business industrial and dispersed over a large diverse customer base.
Being relient on supplying tech startups with chips is a huge gamble if too many of them start to go belly up.
You’ve given a nice summary of why some of these private companies were infused without so much money even though many should have been drastically less optimistic and more frugal about their early investments.
The biggest impact I see for me in the future is work option may catch a few bad years as talent floods the market in the wake of a bunch private tech companies flopping or cutting jobs… easy to higher good people means more competition and less pay for me.
Better to hunker down with my company of 5 years and hope they don’t fully abandon the IoT market if the bubble pops.
“easy to higher good people means more competition and less pay for me.”
I assume you meant hire good people. Part of what you say is true. There was a time when fresh grads were getting paid 90K (in 1999), a number that later fell to 60-70K. When a downturn happens (as it did in 2001 and 2008) most companies put hiring on a hold. So even a very talented person will have trouble getting past the gate keepers that are otherwise known as HR or recruiters. In any case, the work most companies do is not great shakes and the larger the corporation, the lower the chance that very talented people have sought it out in the past. Now, even if a talented person were to accept the job offer, it will be at best a temporary arrangement. Back in 2004, I interviewed a talented fellow when I was at a big database company in Bay Area. He told me up front that he was not going to join (I was the last to interview him) because he was not impressed with any of the talent in the group and we thought we were kickass :).
Then, there is the H1B problem. Try applying to big companies and you’ll see that they want people to stay with them. So they love somebody who needs a green card as s/he is likely to stick around for a good part of a decade.
At least here in Bay Area, the place is full of H1Bs. In the last two downturns, they mostly folded as they believed they had 10 days to find a job or leave (the 10 days rule is not right but in such times everybody panics that the rule may be true and they may not be allowed back in). Today, a transfer is expected to take up to 6 months. In a down turn, 6 months is a life time for most companies. That is how Bay Area empties every time a down turn happens. People will sell their cars, break their leases, and move out.
So anybody who has a job during the downturn can ride it out unless the company has not been diligent in keeping itself lean during good times. The said database company was always cutting fat, so it rarely lays off during a down turn. I am seeing this kind of discipline among other companies.
In any case, big companies usually plan out farther than just a few months and it is not unusual to find groups that are working on products that will see the light of day in a couple of years.
In 2018 the age of cheap credit will be over, in fact I don’t think cheap credit will last till December. Buying gold is what I would advice because it tends to be quite safe and it tends to be a good long term investment. Rare metals might be worth a try, although both the videogame console market and the cell phone market has been cooling down in recent years.
People tends to wait for sales because they know that and the “hipster” market has always been small and Samsung with the high end Galaxy Series and Apple tend to have a monopoly for that.
By the way the exclusive apps Samsung has for their Galaxy series are at the very best years out of date.
Overall I would say this is a bad year for any risky investment and a great year to take advantage of discount sales.
But again don’t blindly trust a single source of information on the Internet, looks for information in several places and make sure not all of them have the same source. And as usual Facebook and Social Media in general are the equivalent of yellow papers, good for a laugh or curiosities but not for real data.
“A profitable exit is what matters.”
And nothing else, evidently. That the financial dealings of Silicon Valley should turn out to be a collection of billion-dollar cons should come as a surprise to no one.
Statistically, the dishonest have a clear natural advantage over the honest because the rewards are often greater than the risks and consequences, particularly in social systems corrupted by the dishonest. Cheating is universal in pro sports, for example: it’s obvious to anybody who has watched American football, which are staged presentations, legally speaking. Doping is expected in the Olympics. Tour de France winners have used hidden motors: the authorities look the other way. Scandals are soon and easily forgotten. He who says that honesty is the best policy is either philosophizing or out to pick your pocket. All the best business schools teach success, not ethics. It’s not profitable.
Some things never change. In classical Greece honesty was equated with stupidity. At no time had ancient Athens lacked for liars willing to sell it out for profit and power, and such men were considered heroes. Athena, goddess of justice, loved Odysseus for his lies and deceits, particularly that trick with the big wooden horse which led to the destruction and enslavement of Troy.
These days, the successful con artist is greatly admired, particularly in the U.S., despite the financial and social wreckage, and regardless of the scale. People aren’t bright about such things: illusions are often attractive, so people cling to them terminally. But reality has a way of reasserting itself when it it most inconvenient, and as has been noted, it will be ignored until it’s too late. The Athenian empire eventually collapsed frome the contradictions of its own inequities, and so has every other. Given the sheer quantity and entrenchment of modern dishonesty it will ultimately be the undoing of civilization.
“Statistically, the dishonest have a clear natural advantage over the honest because the rewards are often greater than the risks and consequences, particularly in social systems corrupted by the dishonest.”
Don’t be a statistic Avoid most social systems. Not kidding!
I feel to be a cog in something turning.
When the first dot.com bust hit in 2000, WebVan was one of its prominent casualties. I remember reading about the auction for its equipment. As I recall, the Kaiser Health System bought some of the equipment for pennies on the dollar. My guess is that we will soon be reading about another round of auctions in Silicon Valley. One company’s loss is another company’s opportunity.
“My guess is that we will soon be reading about another round of auctions in Silicon Valley.”
I wonder if most startups will have anything to sell at all. Their hardware is in the cloud, their software is usually an app with little ip value. I suspect they can salvage something by selling their patents, which by themselves carry nothing original or ground breaking but are useful to prevent patent trolls for coming after the purchaser (for example the company started by ex-Microsoft fellow buys out patents from companies going under and then goes after other corporations). Patent office now hands out patents for something s/w developers do on a daily basis almost everywhere.
Agree Guido with what you say.
I just don’t see how these start ups are producing anything new, so yes I can see a number of tech start up firms going under once they’ve burnt through their cash reserves which with these sort of companies can be quite quick.
I read an interesting observation in the comments section of an article from a year or so ago about how older workers (over 40) can’t find a job in the “hot” tech job market: “I don’t think we should be too impressed by young gunslingers. The fact is that in today’s software development environment most people are writing snippets of code that glue together existing services and open source templates. It’s like adding a sentence here and a paragraph there to a book outline that already exists and then taking credit for writing the entire novel. Very little is truly original…” (http://www.bostonglobe.com/business/2016/03/05/tech-job-market-hot-but-older-workers-struggle/775HPU2OYc5i0Jhr3THTqM/story.html)
Count Oracle among the buyout machines. I do not know what they created in-house, maybe the database.
All modern relational databases derive from Ingres, based on the work of Edgar Codd. Now that he’s a billionaire, even Ellison will admit it.
You are indeed right. Oracle database is a copycat of the IBM relational database for IBM mainframes. So then, zero home products.
Have you seen the homes of the founders and all the executives? They made huge amounts of money selling to venture capitalists. Just look at the $50 million estate the founder has in Montana. Once again, lots of people are getting rich.
Hehehe I wonder how many of those homes will end up with my product? One of the requirements is, “Must look good in a million dollar+ home”.
I was just looking at the San Jose TechShop today and I’m pretty impressed. Yes I am inching toward doing this, and one day I’ll be able to tell you all what the product is. I’m keeping my cards close to my chest until I can fill orders.
Techshop even has little offices in there that can be rented.
But tomorrow I get to rent a storage unit and hand-truck a number of loads from a place up the street to it. Sigh. This is why I don’t look for work, work looks for me.
@Rejected By Target
The page will not allow me to reply to your comment, so I have to respond like this.
“I don’t think we should be too impressed by young gunslingers.”
During the beginning stages of a boom, the people who show up first in the booming field observe patterns and put out what are known as frameworks. These frameworks do all kinds of work so long as you (the s/w developer) are willing to abide by the rules of writing code that adheres to what are known as interfaces. MFC, J2EE, and other horrors come to mind.
Eventually, the developers spend their time writing what is known as business logic. Most business logic is nothing but looking up a bunch of rules that describe a process, loading data from database, and writing it back. That’s it. All the talk we hear about companies asking people complicated questions in algorithms during interview is nothing but a fad since most cannot see a problem (even if they have answered the question in the interview) when it is poking them in the eye or are under time pressure (brought on by managers who pedantically apply Agile practices that they read up somewhere). As a result, even the small blurb they write is nothing to harp about. There’s always the next scrum to improve the code. Not!
The latest fad is distributed computing where one writes code that will work many multiple copies of it are working at once. The nouns in this round of boom are Kafka (30 years ago it was called MSMQ, then JMS, then ESB, and now Kafka), Cassandra database, Spark/Flink etc. Never mind that most of these applications upload useless comments like the current one and save it to be treated as gold (or Tulips if you are thinking of Holland boom).
The point is that most developers today are very far removed from basics; the work they do is not software development per se. IMO, most of these jobs can be outsourced to fresh out of school kids in India for a fraction of the salary one pays here. This was what happened in 2001 and 2008. This time it may not be India because developers there make 12K per year, an inflation of 10x since 2001.
You are absolutely right. It doesn’t matter which languages you know or the DB or the environment. What matters is can you solve this problem. The solution will lead you to the correct pieces. I would interview at one of the big tech companies, just to F*** with them.