A Blog by Jonathan Low


Jan 24, 2019

Venture Trends Show Silicon Valley's Unbridled Optimism Is Getting A Reality Check

Bitcoin appears to have been the bubble many predicted. Blockchain's benefits are uncertain. Virtual reality has disappointed. AI and machine learning are going to take time.

And from Chinese competition to consumers' and government officials' attitudinal shifts about the benefits of technology to a sense that smartphone saturation and incremental innovation means a slowing of tech growth, tech investors reading these signs are beginning to become more cautious, especially with regard to early stage ventures. JL

Rob Copeland reports in the Wall Street Journal:

Publicly traded technology giants such as Apple (are) down 13% from a high set in August  fostering newfound restraint for investors in Silicon Valley, especially for younger, cash-strapped startups. A worrying sign is the shrinking of seed deals, the earliest investments in startups. The number of these deals dropped to 882 in the fourth quarter from1,500 three years earlier. The attitude among technology investors is shifting, “swapping ’fear of missing out’ for ’shame of being suckered.’ ”
Messaging startup Hustle projected the picture of Silicon Valley largess. The company spent millions of dollars raised from investors such as Alphabet Inc. GOOGL 0.54% on expensive new hires, on-tap kombucha, arcade games and a six-figure salary for its pedigreed chief executive.
So it came as a shock to many employees earlier this month when co-founder and CEO Roddy Lindsay sent them an early-morning email announcing mass layoffs. Before the week was done, even the espresso machine was ripped out of the kitchen at Hustle’s San Francisco headquarters.
Hustle is hardly the first startup to spend lavishly in an era of technology riches. What is new these days: The bill is coming due.
Startup investors and company founders warn that the unchecked growth of the past several years—which by some metrics exceeded heights from the dot-com boom—could be hitting a limit. A rout of publicly traded technology companies is fostering newfound restraint for investors in Silicon Valley, especially for younger, cash-strapped startups like Hustle.
“The unbridled optimism that inhabits our world,” said startup investor Sunny Dhillon, “is getting a shot of realism.”
Outright signs of distress remain speckled. And most startups fail, even in the best of times.
Yet a worrying sign is the shrinking of so-called seed deals, essentially the earliest investments in startups. The number of these deals has fallen steadily, dropping to 882 in the fourth quarter from more than 1,500 three years earlier, according to researcher PitchBook.
Venture capitalists typically follow the trajectory of tech stocks, as they did in early 2016 when they abruptly pulled back investments—only to return when the market roared back. The Nasdaq , a bellwether index of publicly traded technology giants such as Apple Inc., is down 13% from its high set in August. That means even the best-funded startups are feeling some pressure.
Electric-scooter startups Bird Rides Inc. and Lime—each valued by investors above $1 billion—both recently lowered their valuation goals in fundraising efforts, people familiar with the matter have said, an indication that backers are concerned about future growth. On Monday, meal-kit service Munchery shut after cycling through myriad business models and more than $100 million from brand-name venture capitalists.
Elon Musk’s rocket company, Space Exploration Technologies Corp., earlier this month said it is shedding roughly 600 jobs to “become a leaner company” with “extraordinarily difficult challenges ahead.”
The announcement came one day after Ford Motor Co. shut its shared-ride business Chariot, citing lower demand.
Even free-spending SoftBank Group Corp. was forced this month to slash a planned $16 billion investment in co-working startup WeWork Cos. by 88% after SoftBank’s backers objected and the Japanese company’s stock had fallen.
The attitude among technology investors is shifting, said venture capitalist Josh Wolfe of Lux Capital, “swapping ’fear of missing out’ for ’shame of being suckered.’ ”
Investors caution that startup deals are typically negotiated over many weeks or months, meaning that reverberations might not be fully realized for a while.
Indeed, U.S. venture-backed companies raised a record $131 billion last year, topping the previous high of $105 billion set in 2000, according to PitchBook. The influx of money from investors at home and abroad has cushioned startups with shaky business models.

That trend might press on. Several venture investors recently raised multibillion-dollar funds. Private technology giants such as Uber Technologies Inc. and Airbnb Inc. are widely expected to go public, cashing out early investors with fresh money to plow into new bets.
Christian Ferris, an investor in venture-backed companies in the once-hot world of blockchain and cryptocurrency, said he served on the boards of three companies that shut down in the past three months. A frequent paid speaker, he said appearance offers this year were light.
“Last year, they were flying you in business class,” he said. “This year, they can barely afford coach.”
Hustle, which helps companies with marketing via text message, gained brief fame in 2016 for helping Sen. Bernie Sanders’s presidential campaign ping volunteers. Mr. Lindsay, a Stanford University graduate and an early hire at Facebook Inc., initially raised $8 million in 2017 and didn’t appear shy about spending it.
A year ago, Hustle flew staff cross-country for an all-expenses-paid retreat around Napa, Calif. Mr. Lindsay, 33 years old, brought disc-jockey equipment, and spun music for his employees, attendees recall.
A Hustle spokeswoman said in an email that the Napa location was chosen in part to boost the local economy after deadly wildfires nearby. She said Mr. Lindsay’s music meant the company didn’t need to hire a professional DJ.
Hustle opened three offices and last April raised an additional $30 million, in part from the venture-capital arms of Alphabet and Salesforce.com Inc. It has hired more than 150 employees, and outfitted the headquarters with a pair of “Killer Queen” arcade games that retail for $12,995.
Hustle was hiring new employees recently, despite having fallen short of revenue goals for the quarter and year, people familiar with the matter said. Investors were uninterested in putting in new money after Hustle failed to reach targets in areas such as signing up new corporate clients, two of the people said.
After inquiries from The Wall Street Journal about layoffs that slashed about half the staff, Mr. Lindsay posted a note disclosing the cuts on Hustle’s website. “I made the rookie misstep of not watching our growth closely enough,” he wrote. “With everything going on in the world, we need more Hustle.”
The spokeswoman said about 70% of the company’s operating costs go toward salaries and benefits. Hustle paid Mr. Lindsay $125,000 a year, which the spokeswoman described as more than 60% below market rate. Last week, Mr. Lindsay agreed to reduce his annual pay to $55,000, she said.
Mr. Lindsay has told associates he is bringing in a new high-level hire for strategic help. The new executive is well-known, according to a person briefed, for having helped liquidate Pets.com during the dot-com bust.


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