From $900 Million to Zero: When Is Too Much Simply Not Enough?

We live in what has been termed the friction-free economy—where labor, information and money move around easily, cheaply and almost instantly.

Overhead is at its lowest. Uber is the world’s largest car service but doesn’t own cars. Facebook is now a monolith of news content yet employs not a single journalist. Innovative high-tech culture disrupts the twentieth-century brick-and-mortar business at every street corner.

The year 2016 saw $41 billion raised in venture capital, a record. So, if overhead is so low, why are billions being poured into these companies? One reason is the frantic need to be first. If you can shell out enough millions, you can be first to grab market share before all the imitators start biting at your heels. But therein lies an inherent problem. Capital investment is as old as money itself; but too much of it, misspent and misappropriated on the wrong things, can spell certain death.

L. Ron Hubbard wrote in his essay of December 3, 1971, entitled “EXCHANGE”:

“Money has to represent something because it is not anything in itself but an idea backed by confidence.”

“Whatever it represents, the item must be exchangeable.”

“To exchange something one must find or create a demand.”

Silicon Valley is inhabited by “unicorns”—private tech startups with $1 billion valuations. With a membership that includes Snapchat, Airbnb, Slack, Pinterest, Spotify and SpaceX, the unicorn list is illustrious and mysterious—just like the mythical beast.

Fortune magazine lists 174 of them; yet in a different article the same publication warned, “Don’t be fooled by unicorn valuations,” claiming the figures are inflated and arbitrary, rooted in the amount of venture capital invested, rather than being a fact-based assessment of a company’s capability for tangible exchange.2, 3

A dramatic example of the phenomenon is Jawbone.

Launched in 1999 under the name AliphCom, they became Jawbone in 2011 and made stylish wearable technology, fitness trackers (UP series), wireless speakers (Jambox), Bluetooth headsets, and related technology. The company raised more than $900 million in capital over the years from top-tier venture capital firms (Sequoia, Andreessen Horowitz, Khosla), using up a reported $500 million. By September 2014, the company was valued at $3.2 billion.

Only now, Jawbone is no more.

In 2016, the Kuwait Investment Authority (KIA), a government-owned “sovereign wealth fund,” led a high-risk funding round of $165 million for Jawbone, but by then the company’s valuation had sunk to $1.5 billion.

Jawbone is now under liquidation. Startup failures are nothing new, but rarely do they fall this far and this hard. Its collapse ranks as the second largest in venture-backed companies.

There’s a stream of speculation as to HOW and WHY Jawbone failed. Some conclude it was “death by overfunding,” where a company must answer to their VC backers and rush to market with a substandard product, only to fall short of customer expectations.4

Jawbone had success with Bluetooth speakers, then entered the emerging and highly competitive field of wearable tech. Protracted legal battles with rival Fitbit, hardware problems, the more sophisticated Apple Watch, drastically lower-priced Chinese models—all likely contributed to Jawbone’s downslide.

But with hundreds of millions in capital, how could a company tumble down a path of deteriorating customer service, dwindling inventory, key executive departures and eventual closing of its doors?

A company that neglects the fundamentals of exchange does so at its own peril, and while thousands of errors in management and misdirection of funds could be cited, their fundamental mistake was related to EXCHANGE.

Mr. Hubbard wrote in the same essay:

“. . . by bringing the problems of viability down to the rock-bottom basics of exchange, one can cut through all the fog about economics and money and be practical and effective.”

“Once you discover what people want that you can deliver, you can go about increasing the demand or widening it or making it more valuable, using standard public relations, advertising and merchandising techniques.

“The fundamental is to realize that EXCHANGE is the basic problem.

“Then and only then can one go about solving it.”

The story of Jawbone is still unfolding. The ingenuity and courage of Jawbone’s founders and engineers cannot be overstated. Only a small percentage can raise that much capital and produce innovative technology for the masses; but to begin to understand their fall from grace, one must grasp the definition of money, an “idea backed by confidence,” and the basics of exchange.

Jawbone looks to be reborn in a new form. Co-founder and CEO Hosain Rahman is starting Jawbone Health Hub, primarily focused on health-related products and services, and many Jawbone employees have followed Rahman.5

The friction-free economy makes for some dramatic headlines, howling achievements and epic collapses. With a keen understanding of the basics of management, money and exchange, the chances for success and prosperity are exponentially higher.