By Rob Copeland
SAN FRANCISCO -- Messaging startup Hustle projected the picture
of Silicon Valley largess. The company spent millions of dollars
raised from investors such as Alphabet Inc. 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, PitchBook
says.
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 12% 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 researcher 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.
Write to Rob Copeland at rob.copeland@wsj.com
(END) Dow Jones Newswires
January 22, 2019 05:44 ET (10:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Mar 2024 to Apr 2024
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Apr 2023 to Apr 2024