Consumer electronics company Jawbone had more than enough money to take on Fitbit and other health-tracking devices in the “wearables” market.
That may have ended up being its biggest problem.
Top-tier venture capital firms Sequoia, Andreessen Horowitz, Khosla Ventures and Kleiner Perkins Caufield & Byers, and then a sovereign wealth fund, invested hundreds of millions of dollars in Jawbone, lifting its valuation to $3.2 billion in 2014, reports Reuters
Ultimately, all that money couldn’t save San Francisco-based Jawbone, which began liquidating proceedings in June after its fitness-tracker product failed to take off. It now ranks as the second largest failure among venture-backed companies, based on total funding raised, according to the research firm CB Insights.
Jawbone’s fall after raising more than $900 million provides a stark example of how the flood of cash pouring into Silicon Valley can have the perverse effect of sustaining companies that have no future, technology executives and financiers say.
The irony is Jawbone could have been a suitable acquisition target some years ago, these people say, had it just kept its valuation lower by raising less money from venture capital and sovereign wealth funds.
“They are basically force-feeding capital into these companies,” said Sramana Mitra, a tech entrepreneur and consultant, and founder and CEO of startup accelerator One Million by One Million. “I expect there will be a lot more deaths by overfunding.”
The Jawbone case also underscores the risks that non-traditional startup investors such as sovereign wealth funds face as they ramp up investments in Silicon Valley. The Kuwait Investment Authority led a $165 million investment in Jawbone just last year, when its prospects had already dimmed to the point that most of its original investors were unwilling to put up new funding.
These funds, which mange funds of hundreds of billions of dollars, invested $12.7 billion in private tech companies last year, up from $2.2 billion the year before, according to CB Insights.
Startup failures are not uncommon, but a billion-dollar company that has raised huge pools of money going belly up remains a rarity. Jawbone ranks behind the solar technology company Solyndra, which became the largest failure among venture-backed companies when it filed for bankruptcy in 2011.
Other recent big-dollar failures include used car marketplace Beepi, which closed after raising about $150 million.
Some investors say failures like Jawbone won’t seriously dent startup funding in the near term. Venture capitalists last year raised $41 billion, a record.
“Everyone is trying to find a way to play in the tech economy,” said Rich Wong, a partner with Accel venture firm. “It’s inevitable” that there will be big-ticket failures.
But the Jawbone situation could give pause to investors considering nine-figure investments in unproven firms, say venture capitalists.
Since Jawbone’s “downround” last year, a number of other startups – including human resources software firm Zenefits, food subscription company HelloFresh and ride service Ola – have had their valuations slashed because of poor performance and waning investor enthusiasm, contributing to heightened caution in the startup industry over the last several months.
The quarterly number of startup financing deals continues to drop from its high in 2015, although with so much cash, investors aren’t shy to write large checks for the select companies they believe will succeed. Ride-services firm Lyft, for instance, raised $600 million in April.
Jawbone’s liquidation was first reported last week by technology news site The Information and independently confirmed by Reuters. A spokesman for Jawbone declined to comment. Co-founder and chief executive Hosain Rahman did not respond to email from Reuters, and its VC investors declined to comment.
Alex Asseily, Jawbone’s co-founder who resigned as board chairman and director in January 2015, told Reuters “it’s saddening to see Jawbone end this way.”