Jawbone’s demise a case of ‘death by overfunding’ in Silicon Valley
SAN FRANCISCO: Consumer electronics company Jawbone had more than enough money to take on Fitbit and other healthtracking devices in the ‘wearables’ market.
That may have ended up being its biggest problem.
Top-tier venture capital firms Sequoia, Andreessen Horowitz, Khosla Ventures and Kleiner Perkins Caufield & Byers, and then a sovereign wealth fund, invested hundreds of millions of dollars in Jawbone, lifting its valuation to US$3.2 billion in 2014.
Ultimately, all that money couldn’t save San Francisco-based Jawbone, which began liquidating proceedings in June after its fitness-tracker product failed to take off.
It now ranks as the second largest failure among venturebacked companies, based on total funding raised, according to the research firm CB Insights.
Jawbone’s fall after raising more than US$900 million provides a stark example of how the flood of cash pouring into Silicon Valley can have the perverse effect of sustaining companies that have no future, technology executives and financiers say.
The irony is Jawbone could have been a suitable acquisition target some years ago, these people say, had it just kept its valuation lower by raising less money from venture capital and sovereign wealth funds.
“They are basically forcefeeding capital into these companies,” said Sramana Mitra, a tech entrepreneur and consultant, and founder and CEO of startup accelerator One Million by One Million. “I expect there will be a lot more deaths by overfunding.”
The Jawbone case also underscores the risks that nontraditional startup investors such as sovereign wealth funds face as they ramp up investments in Silicon Valley.
The Kuwait Investment Authority led a US$165 million investment in Jawbone just last year, when its prospects had already dimmed to the point that most of its original investors were unwilling to put up new funding.
These funds, which mange funds of hundreds of billions of dollars, invested US$12.7 billion in private tech companies last year, up from US$2.2 billion the year before, according to CB Insights.
Startup failures are not uncommon, but a billion-dollar company that has raised huge pools of money going belly up remains a rarity.
Jawbone ranks behind the solar technology company Solyndra, which became the largest failure among venture-backed companies when it filed for bankruptcy in 2011.
Other recent big-dollar failures include used car marketplace Beepi, which closed after raising about US$150 million.
Some investors say failures like Jawbone won’t seriously dent startup funding in the near term. Venture capitalists last year raised US$41 billion, a record.
“Everyone is trying to find a way to play in the tech economy,” said Rich Wong, a partner with Accel venture firm. “It’s inevitable” that there will be big-ticket failures.
But the Jawbone situation could give pause to investors considering nine-figure investments in unproven firms, say venture capitalists.
Since Jawbone’s ‘downround’ last year, a number of other startups – including human resources software firm Zenefits, food subscription company HelloFresh and ride service Ola – have had their valuations slashed because of poor performance and waning investor enthusiasm, contributing to heightened caution in the startup industry over the last several months.