Jawbone’s Demise Has a Silver Lining for Early Investors

Jawbone is liquidating its assets… finally.

I don’t often say, “I told you so.” But I saw this coming a mile away.

Two years ago, I pointed out that “At 16 years old, [Jawbone] is no closer to making a profit than it was a decade ago.”

In another article I posted soon after, I explained my concern…

“Jawbone is close to raising another $300 million. It has already raised $519 million in 11 rounds. Yep, VC companies are going back to the well a 12th time. Its most recent valuation was over $5 billion. So let me repeat what I said in March… The company has yet to generate a profit. Are valuations running ahead of logic and common sense?”

The only thing that’s surprising is that it lasted this long.

Here are my three takeaways on Jawbone’s demise…

The Downside of Charismatic Leaders

I usually like charismatic leaders. I never thought I’d say this, but Hosain Rahman (pictured below), the CEO and co-founder of Jawbone, was too damn charismatic for his own good – not to mention the good of investors.

Hossain Rahman

Boy, could he talk the talk. He got some of Silicon Valley’s most prestigious venture capital firms to invest hundreds of millions of dollars. Sequoia, Andreessen Horowitz, Khosla Ventures and Kleiner Perkins Caufield & Byers – all A-list VC investors.

They gave Rahman multiple chances to right the ship. With Rahman, success was always right around the corner, and these experienced and uber-successful VCs believed in him.

Takeaway No. 1: Deal in facts. Past success is real. Future accomplishments are fantasy until they actually happen.

Too Much Money

Jawbone raised $900 million – its biggest achievement and its biggest problem.

Jawbone’s valuation reached a high of $3.2 billion (Reuters’ estimate) to more than $5 billion (my estimate as stated in this 2015 article).

By the time the Kuwait Investment Authority led a $165 million investment in Jawbone just last year, its valuation had fallen to $1.5 billion. Jawbone was clearly struggling to the extent that its earlier Silicon Valley backers weren’t coming to its rescue this time around.

So why did the Kuwait Investment Authority invest?

Sovereign wealth funds – especially the ones from oil-producing countries – don’t necessarily consider this high level of risk a deal breaker.

For one, they have a ton of money to spend. For another, they often operate under broader marching orders, which go beyond just chasing profit. They’ve been told to spread their investments into non-oil assets.

That includes tech. The U.S.’s young high-ceiling tech companies are practically irresistible.

Here’s a slide from Mark Suster’s excellent presentation “State of the VC & Tech Industry 2017.” It shows the correlation between oil’s dimming prospects and Saudi Arabia’s and Kuwait’s huge investments in two of the U.S.’s priciest tech startups…

Takeaway No. 2: When a company gets a flood of money pouring in, sometimes it drowns.

Late-Stage Froth

I’m reminded once again why I prefer early-stage investing. Late-stage investing can be full of false signals.

Raising huge amounts? False signal. Favorable (or at least uncritical) press coverage? False signal. Getting VC companies to double down on their investments? False signal.

And the most misleading signal of all? Raising money at ever-rising valuations.

It’s true that both late- and early-stage investors lost with Jawbone. But Jawbone had a choice. At one point, it could have raised less and kept its valuation low. It would have had a decent shot at getting bought out.

Early-stage investors would have been ecstatic with such an outcome. Later-stage ones, perhaps not so much (depending on the acquisition price).

Instead, Jawbone priced itself out of the market. By the time it tried to sell itself in 2016, it was unable to find a buyer. It had morphed into an expensive, slow-growing nine-year-old company that couldn’t even scratch out a profit.

Jawbone isn’t the only startup that fits this description. And, fortunately, it’s an extreme example. Billion-dollar companies that raise huge pools of money and go under are pretty rare.

But investors have taken note. And they are wary of later-stage (also known as growth-stage) companies. Another of Suster’s slides show that 60% of investors think late-stage startups are overvalued.

Investors Wary of Late-Stage Growth Companies

Valuations at the earlier stages are much lower and are extremely reasonable compared to the later ones. And the rewards are correspondingly bigger – with the opportunity to invest at minimums as low as $100 under crowdfunding rules.

Takeaway No. 3: Market trends are moving in favor of early-stage investors rather than late-stage ones.

These later-stage companies aren’t typically available to crowdfunders. But early-stage startups are, which suits me just fine. That’s where we find most of the investment recommendations we make for our First Stage Investor members.

Invest early and well,

Andy Gordon
Founder, Early Investing