A once-bustling group of companies, backed by billions in venture capital funding, saw a record year for IPOs in 2021. Now, three years later, most of those direct-to-consumer, or DTC, companies still struggle with profitability.
“It’s that profitability angle now that demarcates the winners in DTC from the losers,” said GlobalData Retail’s managing director, Neil Saunders. “One of the problems with a lot of direct-to-consumer companies is they’re not profitable and a number of them don’t really have a convincing pathway to profitability. And that’s when investors get very nervous, especially in the current market where capital is expensive.”
Allbirds, Warby Parker, Rent the Runway, ThredUp and others once represented a new era of retail. These digital-first, ultra-modern companies rose to prominence in the 2010s, boosted by the rising tide of social media ads and online shopping. With the cohort came a huge wave of venture capital funding, propped up by low interest rates.
In just under a decade, venture capital funding exploded, from $60 billion in 2012 to an eye-watering $643 billion in 2021. Thirty percent of that funding was funneled into retail brands, and more than $5 billion went specifically to companies that intersected e-commerce and consumer products. As the Covid-19 pandemic moved most shopping online, venture capital funds were all-in on digital native direct-to-consumer companies.
According to a CNBC analysis of 22 publicly traded DTC companies, more than half have seen a decline of 50% or more in their stock price since they went public. Notable companies in the space, such as SmileDirectClub, which went public in 2019, and Winc, a wine subscription box, have declared bankruptcy. Casper, a direct-to-consumer mattress company, announced it was going private in late 2021 after a lackluster year-and-a-half of trading. Most recently meal kit subscription service Blue Apron exited the U.S. stock market after being acquired by Wonder Group.
Now many of these so-called DTC darlings are being forced to reevaluate their business model to survive a shifting consumer landscape.
Watch the video above to find out what happened to the DTC darlings of the 2010s and how the direct-to-consumer cohort is pivoting in the new decade.
Amazon is unveiling its first buy now, pay later checkout option for the millions of small business owners who use its online store, CNBC learned exclusively.
The tech giant confirmed Thursday that its partnership with Affirm is expanding to include Amazon Business, the e-commerce platform that caters to companies.
Affirm shares jumped 19% on the news.
The service, with loans ranging from $100 to $20,000, will be available to all eligible customers by Black Friday, or Nov. 24. It is specifically for sole proprietors, or small businesses owned by a single person, the most common form of business ownership in the U.S.
It’s the latest sign of the widening adoption of a fintech feature that exploded in popularity early in the pandemic, along with the valuations of leading players Affirm and Klarna. When boom turned to bust in 2021, and valuations in the industry dropped steeply, skeptics pointed to rising interest rates and borrower defaults as hurdles for growth and profitability.
But for users, the option is touted as being more transparent than credit cards because customers know how much interest they will owe up front. That’s made its appeal durable for households and businesses coming under increasing strain as excess cash from pandemic stimulus programs has dwindled.
“We constantly hear from small businesses that say they need payment solutions to manage their cash flow,” Todd Heimes, director of Amazon Business Worldwide, said in an interview. “We offer the ability to use credit cards and to pay by invoice; this is another option available to small business customers to pay over time.”
Amazon Business was launched in 2015 after the company realized businesses were using its popular retail website for office supplies and bulk purchases. The division reached $35 billion in sales this year and has more than 6 million customers globally.
Amazon customer with access to a buy now, pay later option at checkout from Affirm.
Courtesy: Amazon Inc.
If approved, users can pay for Amazon purchases in equal installments over three to 48 months. They are charged an annualized interest rate between 10% and 36%, based on the perceived risk of the transaction, according to Affirm Chief Revenue Officer Wayne Pommen. There are no late or hidden fees, the companies said.
“The financial industry is not great at providing credit to really small businesses,” Pommen said. “They can’t walk into a bank branch and get a loan until they reach a certain scale. So us being able to provide this for purchases” helps business grow and manage their cash flows, he said.
The move is a boost in a crucial relationship for Affirm, which has had to search for revenue growth after demand for expensive Peloton bikes collapsed. Affirm first began offering installment loans to Amazon’s retail customers in 2021, launched on Amazon in Canada in 2022 and was then added to Amazon Pay earlier this year.
Affirm, which uses its own models to underwrite loans for each transaction it facilitates, decided to target sole proprietors first because they make up most small businesses in the country, with 28 million registered in the U.S., according to Pommen.
“We’ll see how the product performs and if it makes sense to expand it to a wider universe of businesses,” he said. “Our assessment is that we can underwrite this very successfully and have the strong performance that we need.”
Jen Van Santvoord rides her Peloton exercise bike at her home in San Anselmo, California.
Ezra Shaw | Getty Images
Peloton shares spiked Wednesday after the company announced a five-year partnership to develop digital fitness content for Lululemon.
As part of the agreement, Lululemon will become Peloton’s primary athletic apparel provider.
Peloton’s stock jumped more than 15% in extended trading. Shares of Lululemon — which has a roughly $48 billion market cap compared to Peloton’s $1.7 billion — were flat in after-hours trading.
Lululemon said it will stop selling the Studio Mirror, which allows users to stream workout classes, by the end of the year. It will still offer service and support for existing Mirror equipment.
The news comes a day after Peloton announced co-founder and Chief Product Officer Tom Cortese is leaving the company. Peloton has shifted its strategy to focus more on subscriptions and less on its pricey exercise equipment.
This is breaking news. Please check back for updates.
People walk past a Peloton store in Coral Gables, Florida, on Jan. 20, 2022.
Joe Raedle | Getty Images
Peloton co-founder and Chief Product Officer Tom Cortese is leaving the company and will be replaced by longtime Silicon Valley veteran Nick Caldwell, the company announced Tuesday.
Cortese, who helped found the connected fitness company alongside former CEO John Foley in 2012, will move into an advisory role beginning Nov. 1, the company said.
“After nearly 12 years of pouring myself into Peloton and serving our Members, I have decided it is time to move on and create space for new perspectives,” Cortese said in a news release.
“I’m eager for new growth for Peloton and for me personally, but I’m also excited to support and watch this next phase of Peloton’s evolution. I could not be more proud of what we have accomplished, together.”
Caldwell most recently served on the board of tech companies Bitly, HubSpot and True Search and previously did stints at Twitter, Google, Reddit and Microsoft, where he worked for nearly 16 years at the start of his career, according to his LinkedIn profile.
He’ll oversee global product development and will start the new role Nov. 1.
“I want to thank Tom for his tireless dedication since launching Peloton nearly 12 years ago as a Co-Founder of the business. We simply wouldn’t be here today without his contributions,” CEO Barry McCarthy said in a statement. “Nick brings impressive engineering, design, and product experience to the Peloton team. Nick joins us at an exciting time as we lean into growing our subscriber base online and on our connected fitness hardware.”
The news comes more than a year into McCarthy’s stint as Peloton’s CEO. Since he took over, he has tapped Leslie Berland as the company’s marketing chief and Dalana Brand as its chief people officer, among other hires. Both Berland and Brand were executives at Twitter before joining Peloton.
With Cortese’s departure, just two executives from Peloton’s early days remain in its C-suite. Jennifer Cotter, the company’s chief content officer, and Dion Camp Sanders, its chief emerging business officer, have both been with the company since Foley was at the helm.
During an interview with CNBC earlier this year, Cortese recalled Peloton’s early days and what inspired him and Foley to start the business.
Peloton co-founder Tom Cortese.
Source: Peloton
“[In] 2013, so 10 years ago now, I was standing in the Short Hills Mall in New Jersey, my kids thinking that I was a mall retail guy, and we were selling people on the idea of being able to access energetic, remarkable fitness from the most convenient place on Earth: their home,” Cortese told CNBC.
“The reason we were doing that is because what we saw happening in the real world … brick and mortar, was that people were turning to boutique studio fitness as something that was starting to excite them, right? So just going to the gym wasn’t quite doing it … hence the Peloton Bike, and all that goes with it, was born.”
Cortese started as the company’s chief operating officer and took over as product chief in August 2021, according to his LinkedIn. Most recently, he was involved in the development of Peloton’s app and the introduction of new product features on its connected fitness products.
Back in the company’s early days, Peloton was a product-first retailer that made the bulk of its revenue selling its pricey connected fitness products, including its Bike, Bike+ and Tread, as an alternative to the gym.
However, in the years since, Peloton’s products have undergone numerous recalls for a series of manufacturing flaws, some that left customers injured.
Its Tread+ treadmill was recalled after a child was killed. The company has since been mired in fines and legal battles related to its products and their recalls.
When Peloton last reported earnings Aug. 23, executives said they believe the most recent recall of its Bike seat post led to increased membership churn and was costing the company far more than it anticipated.
These days, subscription revenue is Peloton’s primary revenue driver. Earlier this year, it announced a massive brand overhaul that elevated Peloton’s subscription offerings and signaled the company is just as invested in its app as it is its hardware.
While the company frequently insists hardware is still one of its primary focus areas, new product development appears to have slowed.
When asked earlier this year if the company had plans to introduce new hardware, Cortese hinted at more to come.
“We maintain a strong hardware development team,” he said. “They are certainly not twiddling their thumbs.”
Instacart, the grocery delivery company that slashed its valuation during last year’s market slide, filed its paperwork to go public on Friday in what’s poised to be the first significant venture-backed tech IPO since December 2021.
The stock will be listed on the Nasdaq under the ticker symbol “CART.” In its prospectus, the company said net income totaled $114 million, while revenue in the latest quarter hit $716 million, a 15% increase from the year-ago period. Instacart has now been profitable for five straight quarters, according to the filing. PepsiCo has agreed to purchase $175 million of the company’s stock in a private placement.
Instacart said it will continue to focus on incorporating artificial intelligence and machine learning features into the platform, and that the company expects to “rely on AIML solutions to help drive future growth in our business.” In May, Instacart said it was leaning into the generative AI boom with Ask Instacart, a search tool that aims to answer customers’ grocery shopping questions.
“We believe the future of grocery won’t be about choosing between shopping online and in-store,” CEO Fidji Simo wrote in the prospectus. “Most of us are going to do both. So we want to create a truly omni-channel experience that brings the best of the online shopping experience to physical stores, and vice versa.”
Instacart will try and crack open the IPO market, which has been mostly closed since late 2021. In December of that year, software vendor HashiCorp and Samsara, which develops cloud technology for industrial companies, went public, but there haven’t been any notable venture-backed tech IPOs since. Chip designer Arm, which is owned by Japan’s SoftBank, filed for a Nasdaq listing on Monday.
Founded in 2012 and initially incorporated as Maplebear Inc., Instacart will join a crop of so-called gig economy companies on the public market, following the debut in 2020 of Airbnb and DoorDash and car-sharing companies Uber and Lyft a year earlier. They’ve not been a great bet for investors, as only Airbnb is currently trading above its IPO price.
Instacart shoppers and drivers deliver goods in over 5,500 cities from more than 40,000 grocers and other stores, according to its website. The business took off during the covid pandemic as consumers avoided public places. But profitability has always been a major challenge, as it is across much of the gig economy, because of high costs associated with paying all those contractors.
Headcount peaked in the second quarter of 2022, Instacart said, “and declined over the next two quarters, reducing our fixed operating cost base.” At the end of June, the company had 3,486 full-time employees.
In March of last year, Instacart slashed its valuation to $24 billion from $39 billion as public stocks sank. The valuation reportedly fell by another 50% by late 2022. Instacart listed Amazon, Target, Walmart and DoorDash among its competitors.
The biggest area for cost reductions has been in general and administrative expenses. Those costs shrank to $51 million in the latest quarter from $77 million a year earlier and a peak of $102 million in the final period of 2021. Instacart said the drop was the “result of lower fees related to legal matters and settlements.”
Simo took over as Instacart’s CEO in August 2021 and became chair of the company’s board in July 2022. She was previously head of Facebook’s app at Meta and reported directly to CEO Mark Zuckerberg. Apoorva Mehta, Instacart’s founder and executive chairman, plans to transition off the board after the company’s public market debut, according to a 2022 release.
The company’s board also includes Peloton CEO Barry McCarthy, Snowflake CEO Frank Slootman and Andreessen Horowitz’s Jeff Jordan.
Instacart will be one of the first independent grocery delivery companies to go public. Amazon Fresh, Walmart Grocery and Google Express are all units of large corporations. Shipt was acquired by Target in 2017 and Fresh Direct, another direct-to-consumer grocery delivery company, was bought by global food retailer Ahold Delhaize in 2021.
Sequoia Capital and D1 Capital Partners are the only shareholders owning at least 5% of the stock. Instacart said those two firms, along with Norges Bank Investment Management and entities affiliated with TCV and Valiant Capital Management, have “indicated an interest, severally and not jointly” in purchasing up to $400 million of shares in the IPO at the offering price.
Instacart’s move into AI has come largely through a string of acquisitions in the past two years. Those deals include the purchase of e-commerce startup Rosie, AI-powered pricing firm Eversight, AI shopping cart and checkout solutions provider Caper, and FoodStorm, a software startup specializing in self-serve kiosks for in-store customers.
The company also touted its use of machine learning in predicting grocery availability for retailers and increasing consumer sales. It said its algorithms predict availability every two hours for the “large majority” of its 1.4 billion grocery items, and that more than 70% of customers purchased items through Instacart’s recommendation algorithm in the second quarter of 2023.
Goldman Sachs is leading the offering. That’s the former employer of Instacart finance chief Nick Giovanni, who was previously global head of the tech, media and telecom group at the investment bank.
Social audio platform Clubhouse announced Thursday that it was laying off half its staff in order to “reset” the company. It shouldn’t come as a surprise.
If there was a posterchild for the tech industry’s irrational exuberance during the Covid pandemic, it was Clubhouse.
With the physical world closed for business, consumers looked for other ways to congregate and find entertainment. So did celebrities. So did tech executives. So did venture capitalists.
Back then, capital was still cheap and plentiful. Software was still perceived as “eating the world,” in the famous words of investor Marc Andreessen. It was time for the next great social network. Clubhouse, which allowed people to listen in on discussions about topics including music, technology, fashion, technology and more technology, was on a viral curve. MC Hammer, Oprah Winfrey, and Mark Zuckerberg were there.
In January 2021, Andreessen’s venture firm, Andreessen Horowitz, led an investment in the company at a reported $1 billion valuation, up from $100 million in mid-2020. Three months later, that number swelled to $4 billion, with Tiger Global and DST Global joining the party. As of mid-April of that year, downloads had reached 14.2 million, according to App Annie (now Data.ai), but growth had flattened before a revenue model was ever put in place.
By late 2021, the Covid boom was fading. Economies were reopening and the Federal Reserve was signaling that the extended stretch of rock-bottom interest rates would be coming to an end. Tech stocks peaked in November 2021, just as the last of a massive wave of high-valued IPOs hit the market. Share prices of stay-at-home beneficiaries like Zoom and Peloton got crushed.
The Clubhouse fad evaporated so quickly that Thursday’s blog post, indicating that the company was laying off 50% its staff, seemed as if it should’ve come many months earlier. Davison told Bloomberg in late 2021 that we “grew way, way too fast” earlier in the year.
In Thursday’s post, Clubhouse said the downsizing was necessary to “reset the company,” which, according to LinkedIn, has just over 200 employees.
“As the world has opened up post-Covid, it’s become harder for many people to find their friends on Clubhouse and to fit long conversations into their daily lives,” co-founders Paul Davison and Rohan Seth wrote. “To find its role in the world, the product needs to evolve. This requires a period of change.”
Layoffs have become a central part of the fabric of the tech industry in the past year as companies across software, e-commerce and social media grapple with a sluggish economy. There have been more than 184,000 job cuts in tech this year among more than 600 companies, following almost 165,000 in 2022 at more than 1,000 companies, according to Layoffs.fyi.
Clubhouse’s situation was more precarious than most. Its valuation was viewed as frothy even in 2021, when the market was red hot. Venture capital, particularly at the late stage, has largely dried up since early last year, and even the most promising high-valued companies like Stripe and Canva have seen their valuations dramatically reduced.
Outside of the artificial intelligence boom sparked by OpenAI’s ChatGPT, there’s little action in the world of billion-dollar private tech.
Still, the Clubhouse founders insist they have enough capital to keep going, after reportedly raising hundreds of millions of dollars in 2021.
“We arrived at this conclusion reluctantly, as we have years of runway remaining and do not feel immediate pressure to reduce costs,” the blog post said. “But we believe that a smaller team will give us focus and speed, and help us launch the next evolution of the product.”
For departing employees, Clubhouse said it’s paying salaries and covering health care through the end of August, accelerating equity vesting and providing career support.
Where does the company go from here? The founders addressed that concern as well.
“For those who are staying, we know this is a difficult time for you as well,” they wrote. “Not only are you saying goodbye to people you’ve built alongside, but many of you will be feeling uncertainty about the future. We want you to know that we’re making this change to ensure that our future is strong.”
Davison and Seth said they’re working on “Clubhouse 2.0” to be a “better way for all of us to hear our friends’ voices, have more meaningful conversations and feel connected to the people around us.”
To succeed, they have defy increasingly long odds. Consumer internet companies win by first attracting huge audiences. Once they’ve reached critical mass, they can monetize their user base through some combination of advertising, subscriptions or virtual goods.
More often than not, though, viral apps are hot for a moment, and then die off either because the novelty disappears or a larger platform creates a copycat. Either way, when the buzz goes away, the momentum rarely returns.
Stocks that traded heavily or had substantial price changes Tuesday: Tesla, Southwest, Peloton fall; Las Vegas Sands, Hess rise
NEW YORK — Stocks that traded heavily or had substantial price changes Tuesday:
Southwest Airlines Co., down $2.15 to $33.94.
The airline had to cancel roughly two-thirds of its flights over the last couple of days, which it blamed on problems related to staffing and weather.
Las Vegas Sands Corp., up $1.94 to $48.46.
Macau casino operators got a boost after China said it will drop nearly all COVID-19 travel restrictions next month.
Redfin Corp., down 40 cents to $3.90.
New data showing U.S. home prices fell in October for the fourth straight month weighed on real estate industry stocks.
NIO Inc., down 91 cents to $10.06.
The Chinese electric vehicle maker cut its fourth-quarter guidance for deliveries, citing production issues, supply chain constraints and other challenges.
Peloton Interactive Inc., down 75 cents to $8.14.
The maker of high-end exercise equipment said it will offer refurbished bikes in the U.S. and Canada at a sharp discount relative to new models.
Tesla Inc., down $14.05 to $109.10.
The electric vehicle maker temporarily suspended production at a factory in Shanghai, according to published reports.
Coherus Biosciences Inc., down 76 cents to $5.69.
The biotechnology company’s application for approval of a cancer drug remains under review by the FDA pending a manufacturing facility inspection.
Hess Corp., up $1.73 to $143.41.
Energy company stocks rose broadly as crude oil and natural gas prices headed higher.
Pedestrians walk past the NASDAQ MarketSite in New York’s Times Square.
Eric Thayer | Reuters
It seems like an eternity ago, but it’s just been a year.
At this time in 2021, the Nasdaq Composite had just peaked, doubling since the early days of the pandemic. Rivian’s blockbuster IPO was the latest in a record year for new issues. Hiring was booming and tech employees were frolicking in the high value of their stock options.
Twelve months later, the landscape is markedly different.
Not one of the 15 most valuable U.S. tech companies has generated positive returns in 2021. Microsoft has shed roughly $700 billion in market cap. Meta’s market cap has contracted by over 70% from its highs, wiping out over $600 billion in value this year.
In total, investors have lost roughly $7.4 trillion, based on the 12-month drop in the Nasdaq.
Interest rate hikes have choked off access to easy capital, and soaring inflation has made all those companies promising future profit a lot less valuable today. Cloud stocks have cratered alongside crypto.
There’s plenty of pain to go around. Companies across the industry are cutting costs, freezing new hires, and laying off staff. Employees who joined those hyped pre-IPO companies and took much of their compensation in the form of stock options are now deep underwater and can only hope for a future rebound.
IPOs this year slowed to a trickle after banner years in 2020 and 2021, when companies pushed through the pandemic and took advantage of an emerging world of remote work and play and an economy flush with government-backed funds. Private market darlings that raised billions in public offerings, swelling the coffers of investment banks and venture firms, saw their valuations marked down. And then down some more.
Rivian has fallen more than 80% from its peak after reaching a stratospheric market cap of over $150 billion. The Renaissance IPO ETF, a basket of newly listed U.S. companies, is down 57% over the past year.
Tech executives by the handful have come forward to admit that they were wrong.
The Covid-19 bump didn’t, in fact, change forever how we work, play, shop and learn. Hiring and investing as if we’d forever be convening happy hours on video, working out in our living room and avoiding airplanes, malls and indoor dining was — as it turns out — a bad bet.
Add it up and, for the first time in nearly two decades, the Nasdaq is on the cusp of losing to the S&P 500 in consecutive years. The last time it happened the tech-heavy Nasdaq was at the tail end of an extended stretch of underperformance that began with the bursting of the dot-com bubble. Between 2000 and 2006, the Nasdaq only beat the S&P 500 once.
Is technology headed for the same reality check today? It would be foolish to count out Silicon Valley or the many attempted replicas that have popped up across the globe in recent years. But are there reasons to question the magnitude of the industry’s misfire?
It was supposed to be the year of Meta. Prior to changing its name in late 2021, Facebook had consistently delivered investors sterling returns, beating estimates and growing profitably with historic speed.
The company had already successfully pivoted once, establishing a dominant presence on mobile platforms and refocusing the user experience away from the desktop. Even against the backdrop of a reopening world and damaging whistleblower allegations about user privacy, the stock gained over 20% last year.
But Zuckerberg doesn’t see the future the way his investors do. His commitment to spend billions of dollars a year on the metaverse has perplexed Wall Street, which just wants the company to get its footing back with online ads.
The big and immediate problem is Apple, which updated its privacy policy in iOS in a way that makes it harder for Facebook and others to target users with ads.
With its stock down by two-thirds and the company on the verge of a third straight quarter of declining revenue, Meta said earlier this month it’s laying off 13% of its workforce, or 11,000 employees, its first large-scale reduction ever.
“I got this wrong, and I take responsibility for that,” Zuckerberg said.
Mammoth spending on staff is nothing new for Silicon Valley, and Zuckerberg was in good company on that front.
Software engineers had long been able to count on outsized compensation packages from major players, led by Google. In the war for talent and the free flow of capital, tech pay reached new heights.
Recruiters at Amazon could throw more than $700,000 at a qualified engineer or project manager. At gaming company Roblox, a top-level engineer could make $1.2 million, according to Levels.fyi. Productivity software firm Asana, which held its stock market debut in 2020, has never turned a profit but offered engineers starting salaries of up to $198,000, according to H1-B visa data.
Fast forward to the last quarter of 2022, and those halcyon days are a distant memory.
Layoffs at Cisco, Meta, Amazon and Twitter have totaled nearly 29,000 workers, according to data collected by the website Layoffs.fyi. Across the tech industry, the cuts add up to over 130,000 workers. HPannounced this week it’s eliminating 4,000 to 6,000 jobs over the next three years.
For many investors, it was just a matter of time.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Brad Gerstner, a tech investor at Altimeter Capital, wrote last month.
Gerstner’s letter was specifically targeted at Zuckerberg, urging him to slash spending, but he was perfectly willing to apply the criticism more broadly.
“I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion,” Gerstner wrote.
Activist investor TCI Fund Management echoed that sentiment in a letter to Google CEO Sundar Pichai, whose company just recorded its slowest growth rate for any quarter since 2013, other than one period during the pandemic.
“Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees,” the letter read. As CNBC reported this week, Google employees are growing worried that layoffs could be coming.
Those special purpose acquisition companies, or blank-check entities, created so they could go find tech startups to buy and turn public were a phenomenon of 2020 and 2021. Investment banks were eager to underwrite them, and investors jumped in with new pools of capital.
SPACs allowed companies that didn’t quite have the profile to satisfy traditional IPO investors to backdoor their way onto the public market. In the U.S. last year, 619 SPACs went public, compared with 496 traditional IPOs.
This year, that market has been a bloodbath.
The CNBC Post SPAC Index, which tracks the performance of SPAC stocks after debut, is down over 70% since inception and by about two-thirds in the past year. Many SPACs never found a target and gave the money back to investors. Chamath Palihapitiya, once dubbed theSPAC king, shut down two deals last month after failing to find suitable merger targets and returned $1.6 billion to investors.
Then there’s the startup world, which for over a half-decade was known for minting unicorns.
Last year, investors plowed $325 billion into venture-backed companies, according to EY’s venture capital team, peaking in the fourth quarter of 2021. The easy money is long gone. Now companies are much more defensive than offensive in their financings, raising capital because they need it and often not on favorable terms.
“You just don’t know what it’s going to be like going forward,” EY venture capital leader Jeff Grabow told CNBC. “VCs are rationalizing their portfolio and supporting those that still clear the hurdle.”
The word profit gets thrown around a lot more these days than in recent years. That’s because companies can’t count on venture investors to subsidize their growth and public markets are no longer paying up for high-growth, high-burn names. The forward revenue multiple for top cloud companies is now just over 10, down from a peak of 40, 50 or even higher for some companies at the height in 2021.
The trickle down has made it impossible for many companies to go public without a massive markdown to their private valuation. A slowing IPO market informs how earlier-stage investors behave, said David Golden, managing partner at Revolution Ventures in San Francisco.
“When the IPO market becomes more constricted, that circumscribes one’s ability to find liquidity through the public market,” said Golden, who previously ran telecom, media and tech banking at JPMorgan. “Most early-stage investors aren’t counting on an IPO exit. The odds against it are so high, particularly compared against an M&A exit.”
There have been just 173 IPOs in the U.S. this year, compared with 961 at the same point in 2021. In the VC world, there haven’t been any deals of note.
“We’re reverting to the mean,” Golden said.
An average year might see 100 to 200 U.S. IPOs, according to FactSet research. Data compiled by Jay Ritter, an IPO expert and finance professor at the University of Florida, shows there were 123 tech IPOs last year, compared with an average of 38 a year between 2010 and 2020.
Buy now, pay never
There’s no better example of the intersection between venture capital and consumer spending than the industry known as buy now, pay later.
Companies such as Affirm, Afterpay (acquired by Block, formerly Square) and Sweden’s Klarna took advantage of low interest rates and pandemic-fueled discretionary incomes to put high-end purchases, such as Peloton exercise bikes, within reach of nearly every consumer.
Affirm went public in January 2021 and peaked at over $168 some 10 months later. Affirm grew rapidly in the early days of the Covid-19 pandemic, as brands and retailers raced to make it easier for consumers to buy online.
By November of last year, buy now, pay later was everywhere, from Amazon to Urban Outfitters‘ Anthropologie. Customers had excess savings in the trillions. Default rates remained low — Affirm was recording a net charge-off rate of around 5%.
Affirm has fallen 92% from its high. Charge-offs peaked over the summer at nearly 12%. Inflation paired with higher interest rates muted formerly buoyant consumers. Klarna, which is privately held, saw its valuation slashed by 85% in a July financing round, from $45.6 billion to $6.7 billion.
The world’s richest person — even after an almost 50% slide in the value of Tesla — is now the owner of Twitter following an on-again, off-again, on-again drama that lasted six months and was about to land in court.
Musk swiftly fired half of Twitter’s workforce and then welcomed former President Donald Trump back onto the platform after running an informal poll. Many advertisers have fled.
And corporate governance is back on the docket after this month’s sudden collapse of cryptocurrency exchange FTX, which managed to grow to a $32 billion valuation with no board of directors or finance chief. Top-shelf firms such as Sequoia, BlackRock and Tiger Global saw their investments wiped out overnight.
“We are in the business of taking risk,” Sequoia wrote in a letter to limited partners, informing them that the firm was marking its FTX investment of over $210 million down to zero. “Some investments will surprise to the upside, and some will surprise to the downside.”
Even with the crypto meltdown, mounting layoffs and the overall market turmoil, it’s not all doom and gloom a year after the market peak.
Golden points to optimism out of Washington, D.C., where President Joe Biden’s Inflation Reduction Act and the Chips and Science Act will lead to investments in key areas in tech in the coming year.
Funds from those bills start flowing in January. Intel, Micron and Taiwan Semiconductor Manufacturing Company have already announced expansions in the U.S. Additionally, Golden anticipates growth in health care, clean water and energy, and broadband in 2023.
“All of us are a little optimistic about that,” Golden said, “despite the macro headwinds.”
Tesla shares could decline dramatically — and that could mean disaster for a number of stocks that have already seen deep share-price cuts, according to equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, called the stocks in danger “zombie stocks,” and defined them as companies with poor business models that are burning cash at an alarming rate and are at risk of seeing their stock decline to $0 per share.
The research firm estimates there could be some 300 zombie companies across the marketplace.
“The Federal Reserve’s aggressive rate hikes so far in 2022 have ended the era of free money and exposed a worrisome dynamic throughout capital markets: zombie stocks,” wrote New Constructs CEO David Trainer, in a note.
New Constructs does not define Tesla Inc. TSLA, +7.01%
as a “zombie stock,” citing CEO Elon Musk’s ability to raise capital, but does see the electric car manufacturer as a bellwether for the sector. “It shares many of the common characteristics of a zombie stock, such as an outrageous valuation and high cash burn,” wrote Trainer. “We believe Tesla’s unrelenting share price rise over the past three years – where investors completely ignored company fundamentals – inspired the birth of many of today’s zombie stocks.”
The company’s stock was trading around $220 on Monday, an increase of over 1,000% compared to three years ago. But Trainer feels that Tesla is at risk of falling more than 80% to $25 a share.
Tesla’s stock has fallen 37.6% in 2022, outpacing the S&P 500 Index’s SPX, +2.65%
decline of 22.7%.
“Its valuation remains nosebleed high because the cash flow expectations baked into the stock price are unreasonably optimistic,” Trainer wrote. “Our message to investors is to take profits in Tesla and avoid zombie stocks at all costs.”
“Investors are now fed up with these kinds of companies, especially amid this year’s stock market volatility,” wrote New Constructs’ Trainer. “If investors start to give up on Tesla and take profits on the stock, which is up over 1,000% over the past three years, that spells terrible news for all of the other zombie stocks that don’t have the cash-raising luxury that Tesla has.”
The U.S. is at risk of prolonging the COVID pandemic if it fails to back an initiative that aims to get vaccines, diagnostics and treatments to lower-income countries, a congressional group has told President Joe Biden.
In a letter to Biden from the group led by Earl Blumenauer, a Democrat from Oregon, the group urged him to back the World Trade Organization’s agreement in June to ease exports of lifesaving therapies.
“With more than 600 million shots in arms, 21,500 free testing sites, the ability to order at-home tests for free, and more treatments available now than at any point in the pandemic, the outlook in the United States is better than ever. Unfortunately, however, the prospect for many low-income countries is not so positive — putting the United States’ own success in jeopardy,” the lawmakers wrote.
The letter was sent ahead of a meeting of the WTO council for trade-related aspects of IP rights that is due to kick off Thursday.
The group noted that lower-income countries are facing a higher risk of severe illness, hospitalization and death as only a small percentage of their populations are vaccinated. Just 19% of people in those countries are vaccinated, compared with about 75% in high-income countries, according to the Multilateral Leaders Taskforce on COVID-19, a joint initiative of the International Monetary Fund, the World Bank, the World Health Organization and the WTO.
U.S. known cases of COVID are continuing to ease and now stand at their lowest level since late April, although the true tally is likely higher given how many people are testing at home, where the data are not being collected.
The daily average for new cases stood at 43,149 on Wednesday, according to a New York Times tracker, down 23% from two weeks ago. Cases are rising in most northeastern states by 10% of more, while cases in the western states Montana, Washington and Oregon are rising.
The daily average for hospitalizations was down 11% at 27,184, while the daily average for deaths is down 8% to 391.
The new bivalent vaccine might be the first step in developing annual Covid shots, which could follow a similar process to the one used to update flu vaccines every year. Here’s what that process looks like, and why applying it to Covid could be challenging. Illustration: Ryan Trefes
• China’s huge Xinjiang region has been hit with sweeping COVID travel restrictions ahead of a key Communist Party congress later this month, the Associated Press reported. Trains and buses in and out of the region of 22 million people have been suspended, and passenger numbers on flights have been reduced to 75% of capacity in recent days, according to Chinese media reports. The region is home to minorities who have been forced into prison-like re-education centers to force them to renounce their religion, typically Islam, and allegedly subjected to human-rights abuses.
• Five current or former Internal Revenue Service workers have been charged with fraud for illegally getting money from federal COVID-19 relief programs and using a total of $1 million for luxury items and personal trips, prosecutors said, the AP reported. The U.S. attorney’s office in Memphis said Tuesday that the five have been charged with wire fraud after they filed fake applications for the Paycheck Protection Program and the Economic Injury Disaster Loan Program, which were part of a federal stimulus package tied to the pandemic response in 2020.
• Peloton Interactive Inc. PTON, +3.84%
said it plans to cut about 500 jobs, roughly 12% of its remaining workforce, in the company’s fourth round of layoffs this year as the connected fitness-equipment maker tries to reverse mounting losses, the Wall Street Journal reported. After enjoying a strong run early on in the pandemic, Peloton has struggled since the start of the U.S. recovery, and CEO Barry McCarthy, who took over in February, said he is giving the unprofitable company another six months or so to significantly turn itself around and, if it fails, Peloton likely isn’t viable as a stand-alone company.
The U.S. leads the world with 96.6 million cases and 1,061,490 fatalities.
The Centers for Disease Control and Prevention’s tracker shows that 225.3 million people living in the U.S., equal to 67.9% of the total population, are fully vaccinated, meaning they have had their primary shots. Just 109.9 million have had a booster, equal to 48.8% of the vaccinated population, and 23.9 million of those who are eligible for a second booster have had one, equal to 36.6% of those who received a first booster.
Some 7.6 million people have had a shot of one of the new bivalent boosters that target the new omicron subvariants that have become dominant around the world.
A Tesla electric vehicle at a supercharger station in Hawthorne, California, on Aug. 9, 2022.
Patrick T. Fallon | AFP | Getty Images
Check out the companies making the biggest moves midday Monday:
Credit Suisse — Shares of Credit Suisse rose 1.7%, reversing an earlier slump that sent the stock to a record low, after the bank over the weekend made a series of calls to calm investor fears about its financial health. In addition, the cost to insure the bank’s debt against default jumped to a new high.
Peloton — Peloton shares rose more than 6% after the exercise-equipment company announced it will put bikes in all 5,400 Hilton-branded hotels in the U.S. Peloton is trying to engineer a turnaround and also said last week that its bikes, treadmills and other hardware would be sold in Dick’s Sporting Goods locations.
Roblox — Shares of the gaming platform fell slightly after MoffettNathanson initiated coverage with an underperform rating. The Wall Street firm said it’s too soon to tell whether Roblox will ever meet its metaverse ambitions.
Viasat — Viasat jumped 28% on Monday after striking a deal with L3Harris to sell its tactical data links business. The deal is for just under $2 billion, the companies announced. Viasat said it would use the cash to reduce its leverage and increase liquidity.
Livent — The lithium company dropped about half a percent after Bank of America downgraded the stock to underperform from neutral, citing “limited upside.”
DocuSign — DocuSign dropped slid 2.4% after being downgraded by Morgan Stanley to underweight from equal weight, citing pricing pressure.
Myovant Sciences — The biopharmaceutical company jumped 36% after it rejected a bid by Sumitovant Biopharma, its largest shareholder, to buy the shares it doesn’t already own for $22.75 per share. Myovant, which said the offer significantly undervalues the company, said it is open to considering any improved proposal.
Box — Box’s stock rallied 7% after Morgan Stanley boosted its price target, implying the cloud storage company could surge 39% from Friday’s close. The firm also upgraded the stock to overweight from equal weight, citing solid macro positioning, strong execution and a more favorable competitive landscape.
Freshpet — Shares of Freshpet rose 7.6% after Barron’s reported the pet-food maker has hired bankers to explore a potential sale.
LogicBio Therapeutics — Shares of the clinical-stage genetic company skyrocketed more than 644% after it announced it was being acquired by AstraZeneca for $2.07 per share. That price tag is a whopping 666% increase from LogicBio’s closing price of 27 cents per share.
InterDigital — InterDigital’s stock rallied 16% after the research and development company raised its guidance for third-quarter 2022 total revenue a range of $112 million to $115 million, up from $96 million to $100 million.
Fluor Corp. — Fluor rose more than 5% in midday trading. The company announced Monday it was awarded two reimbursable engineering, procurement and construction management contracts by BASF for work in China.
Stanley Black & Decker — The tool maker’s stock jumped more than 4% after The Wall Street Journal reported that the company has eliminated about 1,000 jobs in an effort to cut about $200 million in costs.
