Bubble “unicorns”: as investors lose billions on startups

Non-public technology company, the cost of which, according to the investors, exceeds $1 billion, referred to as “unicorns” — the phrase back in 2013 suggested the founder of the venture Fund, Cowboy Ventures Aileen Lee. Like mythical creatures startups “per billion”, a true rarity, to find them and invest in them — akin to a miracle, explained there then. Three years ago, there were only 39 “unicorns”, was estimated by Fortune magazine. However, in subsequent years the “population” sharply increased to 156 projects, and their total valuation has exceeded $550 billion, given the data of consulting company CB Insights, in may 2016, the Financial Times newspaper.

The current stars of the technology business — Amazon and Google — IPO carried out, without waiting for investors “disperse” their cost to $1 billion, now they are already $329 billion and $485 billion, respectively. For many startups the last wave title “the unicorn” became an end in itself. “This is a psychologically important level. $1 billion better than the $800 million — in the eyes of customers, employees, the media,” admitted in an interview with Fortune’s Stewart Butterfield, the founder and CEO of enterprise chat service Slack, which in 2015 was attracted from a group of investors $200 million at an assessment of the entire business at $3.8 billion.

In the end, the speed at which startups playing hard to get “on paper”, has revived talk about a “bubble” in the technology market with a Bang. In 2015 software text about the threat of “the invasion of the unicorns” on the website Above the Crowd were influential investor, Fund Benchmark partner bill Gurley. According to him, in pursuit of the next big thing (in translation — “next big thing”) investors is not of sufficient quality to conduct audit of startups, and they, in turn, either intentionally manipulated financial performance and hide the lack of effective business models, or they themselves do not fully understand the Economics of their business. Investors, already hurried with investments in overvalued companies, in a spiral pulling for the other, inflating this bubble, noted by Gurley.

The predictions of the naysayers came true. In 2015 several of the favorites of the technology market faced a reassessment of its value and the threat of restructuring of the business. For example, the Fidelity Fund in the quarter reduced the estimate of fotomastera Snapchat, which at that time reached $16 billion, and 20% of the file hosting service Dropbox, with $10 billion to $8 billion. Analysts CB Insights has counted 58 “unicorns” that have stopped growing or lost in investment value at the end of 2015.

The Commission on securities and exchange Commission (SEC) and other regulators are also sounding the alarm. Evaluation of almost all “unicorns” “very subjective”, said during a speech at the law School at Stanford University in March 2016, the Chairman of the SEC Mary Jo white. According to her, investors have created these risks, paying insufficient attention to the valuation of assets.

RBC has studied the history of the three companies, which have experienced rapid rise and even more rapid decline.

Theranos: the tale of new Jobs

In 2003, 19-year-old Elizabeth Holmes left a prestigious school in Stanford on the money saved and started a company, Theranos. The startup offered the market a unique technology — a blood test over the fence just one drop and receive prompt, accurate and complete results. For 12 years, Theranos has gone from one of the many ambitious young companies to the main expectations of the biotechnology industry, claiming the status of a breakthrough project, raised $686 million Investors and journalists in Silicon valley were fascinated by Holmes — she quickly gained a reputation as the “new Steve jobs” and acquired the status of the youngest female billionaire in the Forbes list in 2014, Theranos is valued at $9 billion, and the condition of the Holmes — $4.5 billion.

That all changed in October of 2015. The newspaper the Wall Street Journal published an investigation, which indicated that most of the Theranos tests does not by its own innovative technology, and typical laboratory equipment from other manufacturers. The sources said that the results of the analyses on the technologies developed by Holmes differed significantly from the values obtained on conventional equipment, and in internal communications Holmes, and its managers discussed the need to hide this information from the public. The scandal struck at how the business reputation of Holmes and company.

In respect of Theranos has been the subject of several investigations — the Commission on securities and exchange Commission and the U.S. justice Department. Holmes is suspected in deceiving investors and regulators. 11 may 2016 Theranos announced important personnel changes: out of Sonny Balani — President and COO, from the very beginning of Holmes helped create the legend of the revolutionary technology.

In an online Forbes the condition of the Holmes “blown away” up to $3.6 billion in addition, the Center for health insurance, regulating the activity of clinical laboratories, revealed violations in California Theranos lab: if the organization adopts sanctions against the company, Holmes for two years were forbidden to engage in medical research.

Zenefits: a license for fraud

Created in 2013 a startup Zenefits in just three years attracted $583 million from investors and has reached a valuation of $4.5 billion, Forbes magazine named him the “fastest growing software company in history.” Zenefits has developed a software for personnel management. Startup free gave other companies the software that aggregates all the information about the employees, and in exchange were issued for health insurance — a compulsory condition for work of any American company, too time-consuming for small businesses that cannot afford full-fledged HR Department. Earned Zenefits as traditional insurance brokers on a fee — about 5%, or an average of $450 a year with one of the insured “lives.”

In January 2015, the founder and at that time CEO Parker Conrad said that Zenefits annual revenue reached $20 million, and a year will break the mark of $100 million In may 2015 Zenefits raised $500 million and began aggressively increase the staff by September the company had 1.6 million people, four times more than the year before. Soon, however, the magazine Bloomberg Businessweek stated: “Zenefits was the perfect start. Then he self-destructed”.

One of the former employees in an interview with Business Insider called the company’s office in Arizona “zoo”: “we had a tradition — every time we closed some kind of deal or set a new record, all handed out shots of alcohol. At some point the records we started to beat twice a day. It was necessary to stop the tradition [with alcohol], but we didn’t do that”. By the fall of 2015, it became obvious that the company will not be able to fulfill the plan for revenues of $100 million, the maximum will be $63 million swelling state has led to inefficiency of the staff, the leadership Zenefits 14% have reduced their salaries and reversed paid holidays: the company, which was for the management staff, she could no longer cope with internal HR, wrote The Wall Street Journal.

Problems began to surface one after another. For example, it was found that the software that Zenefits provides customers, does not work fully automatically as it was applied by the company: not all insurers provide services synchronization information, so employees Zenefits often had to do it manually and actually free of charge.

In addition, it appeared that the company was cheating on the licenses for its insurance brokers: for example, in California, for such work, the broker must undergo a 52-hour online training and then take the exam. In Zenefits bypassed this requirement by apps for Google Chrome — Macro, which is counted all the time in online employee training. The company also did not comply with the ban on the sale of insurance with a license in one state in other. Preliminary results of the investigation in respect of Zenefits in Washington showed that about 83% of brokers startups might not have the necessary license, found by the portal BuzzFeed. The company faces a fine of $20 thousand for each such violation, and if they occurred all over the country, we are talking about multi-million dollar sanctions.

In early February 2016 the Board of Directors unanimously Zenefits sent Conrad into retirement. Even the founder of the project voted for a new candidate — COO David sacks. One of the first steps of the new head was a ban on alcohol consumption at work. Soon, Saks has cut himself a staff by 17%. While these emergency measures are not returned to the investors faith in the project: in March, the Fidelity Fund has written off part of the cost of their investments in Zenefits, lowering the company’s valuation from $4.5 billion to less than $2 billion Despite the fact that some of the offices are empty, it still remains 20 thousand customers and a chance for survival — though not in the status of perspective “unicorn”, noted Businessweek.

Evernote: a startup without focus

Application for structuring and storing personal and corporate information in Evernote 2007 created by Russian programmer Stepan Pachikov. In 2012 the project became one of the first in the list of “unicorns”. At that time, the number of registered users exceeded 30 million, and the total amount of investment in the company reached $290 million Earned on a paid Evernote subscription: the free version allows you to keep notes of no more than 25 MB, and a paid option (from $2.99 per month), they opened for user access to large data sets. In addition, the company offered a version for business (about $10 per month for each user) — when a common “notebook” for taking notes can be used by all employees of the company.

In 2011, Evernote has become a “company of the year” by Inc. magazine Financial performance the company was not disclosed, but in August 2014 the portal TechCrunch, citing sources, reported that the annual revenues of Evernote is $36 million with an audience of 100 million people. The number of users, Evernote has grown to 150 million people in 193 countries, the business version of the service by 2015 used 20 thousand of corporate clients. During the announcement of one of the rounds of funding the company has said it is ready to go in the “Mature” stage of development and to maintain their business model for decades.

However, in the fall of 2015 Evernote began to cut staff and cut expenses, Business Insider found. Sources told the publication that the problems have Evernote arose from the “spray” on new products — for example, running an app with recipes Evernote Food or PenUltimate, an app for entering text written by hand with a tablet, etc. “we Have the feeling that the user needs only a constant hype in the press. But they have no ideas how to optimize the business and make it grow,” complained one of the sources of Business Insider.

The staff cuts were the first step in a new strategy of “tightening the belts”. Evernote also had to abandon bonuses: the company paid for them every two weeks cleaning the house, many of the developers at the company’s expense could go to work for up to three weeks abroad or to ask for a “scholarship” to pay for the recharging of electric vehicles, pointed out Business Insider. The company also cancelled its annual conference for developers, which was held for four years in San Francisco.

In the end, by 2016, Evernote has shut down three of the ten office, has cut 18% of staff (until the layoffs, the company employed about 400 employees). In the summer of 2015 the resignation of the first CEO Phil Libin, it was replaced comes from Google’s Chris O’neill, who just over a year supervised the project Google Glass. He Libin explained his departure to the portal Re/code’s unwillingness to lead the company during and after the IPO — the Evernote still expects to return to development, however, has the status of a public company.