Via Wolf Street

The out-of-money moment is here. The party is over. But it sure was fund while it lasted.

By Wolf Richter for WOLF STREET.

It’s now a near daily litany: Startups, once assured to be fed endless cash to burn, are laying off people or are shutting down entirely as funding for them dries up, and as exits for investors get tough after the recent IPO fiascos, including Casper, Lyft, and Uber, and the messily scuttled IPO of WeWork that has pulled the rug out from under SoftBank.

San Francisco startup Starsky Robotics, which tried to develop autonomous-with-remote-human-control-trucking technology, and which had raised over $20 million in four rounds, has laid off the majority of its engineers and office staff after investors backed out of a funding round late last year. A potential buyer with deep pockets has not yet emerged either, senior VP Paul Schlegel, whose last day was January 31, told FreightWaves.

But it’s not the autonomous-driving industry overall that appears to be cutting back: According to Schlegel, 85% of the laid-off engineers have been hired by Google’s Waymo, GM’s Cruise, TuSimple (which has raised nearly $300 million, including from UPS), and others. It’s just that this company ran out of funds and investors refused to throw more money at it.

Then there are the cutbacks and layoffs among startups in the consumer DNA testing space, which has gotten tangled up in all kinds of privacy scandals, and now a drop in demand, but which received billions of dollars in funding over the years.

In January, Sunnyvale-based unicorn 23andMe cut 14% of its jobs, as consumer demand for its DNA test kits and family-tree discovery has slowed. CEO Anne Wojcicki told CNBC at the time that she was “surprised” by the slowdown in demand.  “One of the most important things right now is to win back customers’ trust,” she said. According to CrunchBase, the company had raised $786 million in numerous funding rounds, including from Alphabet, Sequoia Capital, and GlaxoSmithKline.

San Francisco-based startup, Café X, which operated robot coffee shops and which had raised $14.5 million in seven rounds of venture funding, including $12 million in August 2018, closed its three coffee shops in San Francisco, and is now down to two robot kiosks, one each at the San Francisco International Airport and the San Jose International Airport.

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It’s these kinds of business models that show how crazy the startup funding space has gotten. The thing is, coffee-making robots have been around for a long time. For example, the rest stops that dot the Japanese expressways have long used vending machines that grind and brew fresh coffee right in front of you while playing a digitized version of the Coffee Rumba. Pretty good coffee too. And you get to watch the process.

San Francisco-based unicorn Zume, which tried to use a robot mounted in a food truck that made the pizzas while being delivered to the customer, and then swerved into food packaging, had raised $423 million in venture funding, including $375 million from SoftBank in November 2018. In November 2019 – just a few months ago – SoftBank et al. tried to rope in more investors by hyping a valuation of $4 billion, which would have more than doubled the book value of SoftBank’s prior investment. Stroke of genius.

That’s the method SoftBank used to show gains on its WeWork investment before it collapsed. The efforts to double Zume’s valuation also collapsed. And in January, it reportedly laid off 80% of its staff after a wave of executive departures last year.

San Francisco-based ecommerce startup Brandless, which had raised $292 million in venture funding since its founding three years ago, including from, you guessed it, SoftBank, announced on February 10 that it had shut down, blaming a “fiercely competitive” ecommerce market that was “unsustainable” for its business.

New York-based HQ Trivia, which made what was once a reportedly “popular” game app, and which had raised $16 million in funding, shut down in mid-February, after its “lead investors” were “no longer willing to fund the company,” as it said in a statement, and as a potential buyer backed away. No money, no fun.

Palo Alto-based electronics maker Essential Products, which had raised $330 million in venture funding – including most recently $300 million in 2017, which was one deal that SoftBank had walked away fromannounced on February 12 that it’s shutting down because it had “no clear path forward.”

San Francisco-based scooter-sharing unicorn Lime, which had raised $765 million, announced in January that it is pulling out of 12 cities – seven in Latin America, four in the US, and one in Europe, and that it would lay off 14% of its staff.

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Its primary focus is now on making a profit, it said, which is hard to do with scooter rentals, because there is a lot of labor involved in collecting the scooters scattered around the city, taking them to be charged up, and then distributing them again to key points. And these scooters don’t live long, given the abuse they take, and have to be replaced frequently. Then there are the injuries.

There could be some use for scooters as a toy for tourists in a walkable tourist-rich city like San Francisco – to the dismay of pedestrians that have to dodge them on the sidewalks where scooters are not allowed to operate but where many of them operate anyway because they’re too scary to ride on busy streets.

The entire scooter space is now being decimated because it is becoming clear that this business model, other than attracting billions from besotted investors, isn’t functioning. The other big scooter sharing outfits – Bird, Scoot, Lyft, and Skip – have all laid off people or pulled from some markets.

San Francisco-based car-rental unicorn Getaround, which raised $403 million in venture funding, including from, you guessed it, SoftBank, announced in early January that it would lay off about a quarter of its staff. CEO Sam Zaid indicated at the time that SoftBank’s sudden unwillingness to throw good money after bad was to blame, that SoftBank has been a “thoughtful partner,” but “had their own challenges, and it’s hard to say that doesn’t have a ripple effect across their whole portfolio.”

No kidding.

San Francisco-based logistics unicorn Flexport, which had raised $1.3 billion, including from, you guessed it, SoftBank, at a $3.2 billion valuation a year ago, announced that it was restructuring its operations and laying off 3% of its staff “to move faster and with greater clarity and purpose.”

Then there is the entire cannabis space of startups, following years of exuberance, where in 2018, VC funds poured $1.2 billion into cannabis outfits, according to PitchBook, which was topped off in 2019, with VC funds pouring another $2.6 billion into 300 cannabis outfits, according to PitchBook. After numerous scandals, ranging from accounting issues to illegally growing weed, numerous startups in that space have cut staff and are struggling to stay alive.

The epic collapse of the cannabis hype is tracked by Tilray, based in Canada, which went public in July 2018 at $17 a share, which then spiked to $300 in September 2018, giving it a market capitalization of $29 billion. Shares have now collapsed back to $16.92 a share, giving it a still-ludicrous market capitalization of $1.7 billion, having lost $36 million last quarter on just $51 million in revenues.

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All this investor money that was plowed into startups got spent by startups. It went into office rents and computer purchases, into fridges stocked with craft beers, into salaries and benefits and catered lunches and dinner parties, and it went to gig workers, and an amazing amount went into advertising on social media and other channels, and it went to insurance and financial services.

This money from SoftBank and elsewhere that came from all over the world was spent by these startups and their employees and gig workers and entered the GDP equation and cranked up the local economies but also housing prices and office rents in places like San Francisco, Silicon Valley, Seattle, Austin, and New York. And it was recycled as these landlords and brewers and office-furniture vendors also spent the money they’d received from these startups, and it got multiplied and it all cranked up the US economy.

The problem is that this generation of startups has no idea how to be a self-sustaining business that makes money on its own. They just burn money. When there is no more money to burn, the company shuts down. And the local economies, such as San Francisco’s, are going to miss this investor moolah that won’t get spent.

I’m not worried about subprime-specialized banks or investors in subprime-credit-card backed securities. If they take a beating, fine. But what does this bifurcation tell us about consumers? Read…  Subprime Credit Card Delinquencies Spike to Record High, Past Financial-Crisis Peak, as Other Consumers Relish the Good Times. Why?

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