Startup bubble fueled by Fed’s cheap money policy finally burst in 2023

Published

1 year ago

December 29, 2023

admin

Scooters take over SXSW in Austin, TX

As the last decade came to an end, it was easy for a young engineer to hop on a Bird scooter and ride it to a nearby WeWork office, home to the hottest new crypto startup.

Then came Covid. Electric scooters and coworking spaces were no longer important, but there was a sudden need for tools to enable remote collaboration. Money started flowing into entertainment and education apps that consumers could tap while in lockdown. And while trading crypto.

In both periods, money was cheap and plentiful. The Federal Reserve’s near-zero interest rate policy had been in effect since after the 2008 financial crisis, and Covid stimulus efforts added fuel to the fire, incentivizing investors to take risks, betting on the next big innovation. And crypto.

This year, it all unwound. With the Fed lifting its benchmark rate to the highest in 22 years and persistent inflation leading consumers to pull back and businesses to focus on efficiency, the cheap money bubble burst. Venture investors continued retreating from record levels of financing reached in 2021, forcing cash-burning startups to straighten out or go bust. For many companies, there was no workable solution.

WeWork and Bird filed for bankruptcy. High-valued Covid plays like videoconferencing startup Hopin and social audio company Clubhouse faded into oblivion. And crypto entrepreneur Sam Bankman-Fried, founder of failed crypto exchange FTX, was convicted of fraud charges that could put him behind bars for life.

Last week, Trevor Milton, founder of automaker Nikola, was sentenced to four years in prison for fraud. His company had raised bundles of cash and rocketed past a $30 billion valuation on the promise of bringing hydrogen-powered vehicles to the mass market. December also saw the demise of Hyperloop One, which reeled in hundreds of millions of dollars to build tubular transportation that would shoot passengers and cargo at airline speeds in low-pressure environments.

There is surely more pain to come in 2024, as cash continues to dry up for unsustainable businesses. But venture capitalists like Jeff Richards of GGV Capital see an end in sight, recognizing that the zero interest rate policy (ZIRP) days are squarely in the past and good companies are performing.

“Prediction: 2024 is the year we finally bury the class of ’21 ZIRP ‘unicorns’ and start talking about a new crop of great companies,” Richards wrote in a post on X, formerly Twitter, on Dec. 25. “Never overvalued, well run, consistently strong growth and great cultures. IPO class of ’25 coming your way.” He concluded with two emojis — one of a smiling face and the other of crossed fingers.

The 'Magnificent Seven' has more fuel in the tank for 2024, says Morgan Stanley's Andrew Slimmon

Investors are clearly excited about tech. Following a 33% plunge in 2022, the Nasdaq Composite has jumped 44% this year as of Wednesday’s close, putting the tech-heavy index on pace to close out its strongest year since 2003, which marked the rebound from the dot-com bust.

Chipmaker Nvidia more than tripled in value this year as cloud companies and artificial intelligence startups snapped up the company’s processors needed to train and run advanced AI models. Facebook parent Meta jumped almost 200%, bouncing back from a brutal 2022, thanks to hefty cost cuts and its own investments in AI.

The 2023 washout occurred in parts of the tech economy where profits were never part of the equation. In hindsight, the reckoning was predictable.

Between 2004 and 2008, venture investments in the U.S. averaged around $30 billion annually, according to data from the National Venture Capital Association. When the Fed pulled rates close to zero, big money managers lost the opportunity to get returns in fixed income, and technology drove massive growth in the global economy and a sustained bull market in equities.

Investors, hungry for yield, poured into the riskiest areas of tech. From 2015 to 2019, VCs invested an average of $111.2 billion annually in the U.S., setting records almost every year. The mania reached a zenith in 2021, when VCs plunged more than $345 billion into tech startups — more than the total amount they invested between 2004 and 2011.

Too much money, not enough profit

WeWork’s spiral into bankruptcy was a long time in the making. The provider of coworking space raised billions from SoftBank at a peak valuation of $47 billion but was blasted when it first tried to go public in 2019. Investors balked at the more than $900 million in losses the company had racked up in the first half of the year and were skeptical of related-party transactions involving CEO Adam Neumann.

WeWork ultimately debuted — without Neumann, who stepped down in September 2019 — via a special purpose acquisition company in 2021. Yet a combination of rising interest rates and sluggish return-to-office trends depressed WeWork’s financials and stock price.

Adam Neumann of WeWork and Victor Fung Kwok-king, right, chairman of Fung Group, attend a signing ceremony at WeWork’s Weihai Road location on April 12, 2018 in Shanghai, China.

Jackal Pan | Visual China Group | Getty Images

In August, WeWork said in a securities filing that there was a “going concern” about its ability to remain viable, and in November the company filed for bankruptcy. CEO David Tolley has laid out a plan to exit many of the expensive leases signed in WeWork’s heyday.

Bird’s path to bankruptcy followed a similar trajectory, though the scooter company maxed out at a much lower private market valuation of $2.5 billion. Founded by former Uber exec Travis VanderZanden, Bird went public through a SPAC in November 2021, and quickly fell below its initial price.

Far from its meteoric growth days of 2018, when it announced it had reached 10 million rides in a year, Bird’s model fell apart when investors stopped pumping in cash to subsidize cheap trips for consumers.

In September, the company was delisted from the New York Stock Exchange and began to trade over the counter. Bird filed for Chapter 11 bankruptcy protection earlier this month and said it will use the bankruptcy proceeding to facilitate a sale of its assets, which it expects to complete within the next 90 to 120 days.

While the onset of the Covid pandemic in 2020 was a shock to businesses like WeWork and Bird, a whole new class of companies flourished — for a short time at least. Alongside the booming stock prices for Zoom, Netflix and Peloton, startup investors wanted in on the action.

Virtual event planning platform Hopin, founded in 2019, saw its valuation increase from $1.5 billion in December 2020 to $7.75 billion by August 2021. Meanwhile, Andreessen Horowitz touted Clubhouse as the go-to app for hosting virtual sessions featuring celebrities and influencers, a novel idea when nobody was getting together in person. The firm led an investment in Clubhouse at a $4 billion valuation in the early part of 2021.

But Clubhouse never turned into a business. User growth plateaued quickly. In April 2023, Clubhouse said it was laying off half its staff in order to “reset” the company.

“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 in a blog post.

Hopin was equally dependent on people remaining at home attached to their devices. Hopin founder Johnny Boufarhat told CNBC in mid-2021 that the company would go public in two to four years. Instead, its events and engagement businesses were swallowed up by RingCentral in August for up to $50 million.

For some of the latest high-profile failures, the problems stemmed from the tech industry’s blind faith in the innovative founder.

FTX collapsed almost overnight in late 2022 as customers of the crypto exchange demanded withdrawals, which were unavailable because of how Bankman-Fried was using their money. Bankman-Fried’s white knight veneer had gone largely unscrutinized, because big-name investors like Sequoia Capital, Insight Partners and Tiger Global pumped in money without getting any sort of board presence in return.

Nikola’s Milton had dazzled investors and the press, taking on an ambitious effort to transform how cars run in a way that other automakers had tried and failed to do in the past. In June 2020, three years after its founding, the company went public via a SPAC.

Three months after its public market debut, Nikola announced a strategic partnership with General Motors that valued the company at more than $18 billion, which was well below its peak in June.

Within days of the GM deal, short seller firm Hindenburg Research released a scathing report, declaring that Milton was spouting an “ocean of lies.”

“We have never seen this level of deception at a public company, especially of this size,” Hindenburg wrote.

Milton resigned 10 days after the report, by which time concurrent Justice Department and Securities and Exchange Commission probes were underway. Nikola settled with the SEC in December 2021. A week before Christmas of this year, Milton was sentenced to prison for fraud.

Virgin Hyperloop One built the world’s first working, full-sized hyperloop test in Nevada. It ran last year for a little less than a third of a mile, and accelerated a 28-foot pod to 192 miles per hour in a few seconds.

Source: Virgin Hyperloop

‘Growing from lessons learned’

Hyperloop One is another far-out idea that never made it to fruition.

The company, originally called Virgin Hyperloop, raised more than $450 million from its inception in 2014 until its closure this month. Investors included Sir Richard Branson’s Virgin Group, Russia’s sovereign wealth fund and Khosla Ventures.

But Hyperloop One was unable to secure contracts that could take it beyond a test site in Las Vegas, adding to years of struggles that involved allegations of executive misconduct. Bloomberg reported the company is selling off assets and laying off the remaining staff members.

Even for the segments of emerging technology that are still flourishing, the capital markets are challenging outside of AI. Hardly any tech companies have gone public in the past two years following record years in 2020 and 2021.

The few tech IPOs that took place this year stirred up little enthusiasm. Grocery delivery company Instacart went public in September at $42 a share after dramatically slashing its valuation. The stock has since lost more than 40% of its value, closing Wednesday at $23.93.

Masayoshi Son’s SoftBank, which was the principal investor in WeWork and a number of other companies that failed in the past couple years, took chip designer Arm Holdings public in September at a $60 billion valuation. The offering provided some much-needed liquidity for SoftBank, which had acquired Arm for $32 billion in 2016.

Arm has done better than Instacart, with its stock climbing 46% since the initial public offering to close at $74.25 on Wednesday.

Many bankers and tech investors are pointing to the second half of 2024 as the earliest opportunity for the IPO window to reopen in a significant way. By that point, companies will have had more than two years to adapt to a changed environment for tech businesses, with a focus on profit above growth, and may also get a boost from expected Fed rate cuts in the new year.

For some founders, the market never closed. After exiting WeWork, where he’d been propped up by billions of dollars in SoftBank cash in a decision that Son later called “foolish,” Adam Neumann is back at it. He raised $350 million last year from Andreesen Horowitz to launch a company called Flow, which says it wants to create a “superior living environment” by acquiring multifamily properties across the U.S.

Neumann’s WeWork experience isn’t proving to be a liability. Rather, it drove Andreessen’s investment.

“We understand how difficult it is to build something like this,” Andreessen wrote in a blog post about the deal. “And we love seeing repeat-founders build on past successes by growing from lessons learned.”

WATCH: WeWork’s end, Neumann’s return?

WeWork's end, Neumann's return? Who's left holding the bag, and what comes next

Technology

From ‘Cockroach Award’ to the Big Board: Hinge Health’s unlikely path to IPO

Published

53 mins ago

May 5, 2025

admin

From 'Cockroach Award' to the Big Board: Hinge Health's unlikely path to IPO

Hinge Health co-founders Gabriel Mecklenburg (left) and Daniel Perez (right).

Courtesy of Hinge Health

At digital physical therapy startup Hinge Health, CEO Daniel Perez used to recognize hard-working employees with the “Cockroach Award,” a distinction that brought with it a “cockroach squad” t-shirt and a cash payout.

References to the insect were abundant at the company’s old headquarters in London, where a picture of a cockroach was prominently displayed on the wall. For much of Hinge’s 10-year history, the cockroach was the unofficial mascot. Staffers named it Flossy after the viral dance move “the floss.”

Perez relishes the symbolism. In his determination to build a company that will push through adversity, he’s encouraged employees to think of themselves like cockroaches, due to the creature’s grimy resilience and noted ability to survive harsh conditions.

“It was the identity of every individual in the company,” said Joshua Sturm, a vice president at Hinge from 2019 to 2024 and now chief revenue officer at cancer prevention startup Color Health. “We are all in this together, and no matter what happens, we are going to survive together.”

Perez and his 1,400-person workforce now face the ultimate test of their mettle. Hinge, which moved from London to San Francisco in 2017, is trying to go public at a time of such extreme economic uncertainty and market volatility that several companies, including online lender Klarna and ticket marketplace StubHub, have delayed their long-awaited IPOs.

Hinge filed its prospectus on March 10, announcing plans to trade on the New York Stock Exchange under the ticker symbol “HNGE.” Three weeks later, President Donald Trump announced a sweeping tariff policy that plunged U.S. markets into turmoil after tariff concerns had already pushed the Nasdaq to its worst quarter since 2022.

But Hinge. led by its 39-year old co-founder and CEO, appears determined to power through the chaos. Hinge declined to comment or make Perez available for an interview.

Lightning Round: I can't play enterprise software, too much money being lost, says Jim Cramer

Going public was already going to be a risky endeavor for Hinge. The IPO market has been mostly dormant since late 2021, when soaring inflation and rising interest rates pushed investors out of risky assets. Within digital health, it’s been almost completely dead.

Health-tech companies have struggled to adapt to a more muted growth environment following the Covid pandemic, and many once promising business models haven’t panned out as planned.

The starkest example is virtual health company Teladoc, which has a market cap of just over $1 billion less than five years after buying digital health provider Livongo in a deal that valued the combined companies at $37 billion. Teladoc’s BetterHelp mental health unit has been a particularly troublesome business as paying users dropped off in the years following the pandemic.

Over time, Hinge’s Cockroach Award transitioned from a monthly prize to a quarterly distinction. The company phased it out entirely about a year ago in preparation for its next public-facing chapter, but the survive-at-all-costs mentality persists, according to current employees. Now, staffers are recognized with the “Movers Awards,” a nod to the company’s focus on movement.

“We have many decades of work ahead,” Perez wrote in a letter to investors in March. “We hope you join us on this journey.”

CNBC spoke to 13 current and former Hinge employees, investors, and people close to Perez for this story, some of whom asked not to be named in order to provide candid commentary.

‘I gave him terrible advice’

Hinge uses software to help patients treat acute musculoskeletal injuries, chronic pain and carry out post-surgery rehabilitation remotely. Large employers like Target and Morgan Stanley cover the costs so their employees can access Hinge’s app-based virtual physical therapy, as well as its wearable electrical nerve stimulation device called Enso.

The company says its technology can help users manage pain, cut down health-care costs and reduce the need for surgery and opioids. Revenue increased 33% to $390.4 million last year, while its net loss narrowed to $11.9 million from $108.1 million a year earlier, according to the prospectus.

Hinge’s roster of clients expanded by 36% last year to 2,256, and the number of individual members jumped 44% to over 532,300, the filing said.

Hinge has raised more than $1 billion from investors including Tiger Global Management and Coatue Management, and it boasted a $6.2 billion valuation as of October 2021, the last time the company raised outside funding. The biggest institutional shareholders are venture firms Insight Partners and Atomico, which own 19% and 15% of the stock, respectively, according to the filing.

Daniel Perez, CEO of Hinge Health

Courtesy: Hinge Health

Perez and Gabriel Mecklenburg, Hinge’s executive chairman, started the company in 2014. The pair met while they were both pursuing PhDs in the U.K. — Perez at the University of Oxford and Mecklenburg at Imperial College London. They were distracted students, according to Perez’s twin brother, David.

By the time they launched Hinge, Perez and Mecklenburg had already co-founded two other ventures together. One was the Oxbridge Biotech Roundtable, an organization that connected academics and industry experts. The other was Marblar, which worked to commercialize academic intellectual property.

Perez took a leave of absence from Oxford while working on Marblar and never returned. His brother wasn’t a fan of the decision initially.

“I gave him terrible advice,” said David Perez, a graduate of Yale Law School and partner at Perkins Coie in Seattle. “I was like, ‘I think you’re an idiot, I think you should focus on your PhD. Only an idiot would not finish a PhD at Oxford.'”

The twins have two older siblings. Their mother immigrated from Cuba in 1968, followed 12 years later by their father. Their parents met in Miami, got married after just three dates, and are still together after more than 40 years.

The family moved from Miami to Salt Lake City, Utah, in 1990. Perez’s mother was a substitute teacher and his father worked at restaurants as a dishwasher and busboy. David Perez said their father “worked around the clock” and used to call out orders in his sleep.

“It wasn’t a lot of money, I think combined they made about $19,000 a year,” David Perez said. “But they stitched it together and raised four kids.”

The twin boys were competitive, particularly when it came to academics and playing basketball in the driveway. David said his brother got “great grades” and always had an inclination toward science and medicine, graduating from high school at age 16 and then starting college at Westminster University, a small liberal arts school in Utah.

“I swear,” David Perez said, “there were times where the only punishment that my mom could issue that would have the sting was restricting our ability to do homework.”

Hit by a car

Perez was a student in the Honors College at Westminster, and he graduated with a degree in biology. Richard Badenhausen, dean of the Honors College, described Perez as an independent thinker and an ambitious student, especially for his age.

“He didn’t care too much what people thought about him, which is a strength in my book,” Badenhausen said in an interview.

When Perez was 13, he was hit by a car. He broke an arm and a leg, and had to be airlifted to a nearby hospital. After three surgeries and 12 months of rehab, he had a newfound interest in orthopedics and physical therapy.

Mecklenburg had a serious injury of his own, tearing his anterior cruciate ligament (ACL) during a judo match, which also required a year of rehab, according to Hinge’s website.

One day in October 2014, the pair put their heads together and outlined the tools they wished were available while undergoing physical therapy. Musculoskeletal conditions affect as many as 1.7 billion people worldwide, according to Hinge’s prospectus, so there was no shortage of opportunities.

They had the early concept of Hinge within hours and a prototype ready by December of that year.

In Hinge’s early days, Perez and Mecklenburg would meet every Saturday morning to talk shop. Now, as they’ve aged and started families, they meet on Wednesday nights, according to colleagues. Perez welcomed his first child with his wife late last year.

“Seeing the growth over the last six, seven, eight years has just been unbelievable,” said Jon Reynolds, a tech founder who contributed to Hinge’s seed funding round. “That comes down to the quality of Dan and Gabriel as leaders. They complement each other really well, and they’ve obviously got that mutual respect.”

Perez is a hands-on CEO who expects a lot from his staff.

He’s direct, detail-oriented, opinionated, competitive and can be intense, according to current and former employees. But he’s committed to the mission and the wellbeing of his employees, they said.

“He’s one of those rare founder CEOs who I think can go all the way,” said Paul Kruszewski, a former Hinge employee who joined the company after it acquired his Canadian computer vision startup, Wrnch, in 2021.

Hinge Health’s Enso product.

Courtesy: Hinge Health

Employees say Perez is a voracious reader, often finishing two to four books a month. That includes books about business and leadership, an important source of information given that Hinge was his first real job. He’s a fan of “The Innovator’s Prescription,” by Clayton Christensen and others, “Crossing the Chasm,” by Geoffrey Moore and “The Long Fix,” by Dr. Vivian Lee.

He also likes his staffers to read. Executives will often prepare to discuss chapters from a book in their meetings.

“I’d come home and there’d be a package from Dan, and it’s a book,” said Sturm, who led partnerships and new market development at Hinge. “That was just the norm.”

Sturm, who has worked in the health-care and benefits space for around 30 years, said Hinge was very deliberate with hiring, so there wasn’t a lot of turnover among senior executives. He said Hinge’s recruitment process was the hardest he’s ever experienced.

Another “Dan-ism,” as Sturm called it, is Hinge’s philosophy around writing. Perez has employees write memos, typically up to six pages long, instead of preparing slide decks or other materials ahead of meetings. Perez was inspired by a similar practice at Amazon, according to current and former employees, and sees it as a way to force employees to think through what they want to say instead of hiding behind bullet points.

Hinge’s memo culture can be an adjustment, particularly for new employees. Sturm said he thought the practice was “insane” at first, but ultimately came to appreciate it and said it improved his pitches.

“When you sort of sit back, you go, ‘You know actually, he wasn’t wrong,'” Sturm said.

Hinge has come a long way since venture firm Atomico led the $8 million Series A investment in 2017. The London-based firm said in a blog post at the time that it was “extremely impressed by Daniel and Gabriel, and their determination to tackle a big problem in society.”

Carolina Brochado led the round, though she left Atomico a year later and now works at investment firm EQT Group. She said that getting Hinge to the brink of an IPO was a “one in a million chance,” but noted that the company has managed to build a sizable business in digital health despite having so many odds stacked against it.

“Lots of learnings along the way, of course, like a big tech correction in the middle,” Brochado said in an interview. “But it really is one of those rare examples of just an enormous market that was under penetrated.”

For David Perez, whose firm now serves as Hinge’s outside counsel, watching the startup grow has been “fascinating,” he said.

“I’m a partner at a major law firm,” he said, “and I am only the second most successful twin. But I think I’m okay with that.”

WATCH: IPO market likely to pick up near Labor Day

The IPO market is likely to pick up near Labor Day, says FirstMark's Rick Heitzmann

Technology

Hims & Hers brings former Amazon executive into C-suite

Published

2 hours ago

May 5, 2025

admin

Hims & Hers brings former Amazon executive into C-suite

Bringing nearly 20 years of global experience at Amazon, Nader Kabbani is joining the executive leadership team to help the company further innovate on the delivery of affordable, seamless personalized care in the U.S. and globally.

Courtesy: Hims & Hers

Hims & Hers Health on Monday announced Nader Kabbani, a former Amazon executive who helped establish many of its health-care offerings, will join the telehealth company as its chief operations officer.

Kabbani spent nearly 20 years at Amazon, where he oversaw the launch of Amazon Pharmacy, the company’s acquisition of PillPack and its global Covid-19 Vaccination Task Force. He also helped stand up Amazon Kindle, Amazon Logistics, Amazon Music and Prime Video services.

Hims & Hers offers a range of direct-to-consumer treatments for conditions like erectile dysfunction and hair loss. The company, which saw revenue increase by 69% last year, said Kabbani will help the company continue to grow and scale.

“Nader’s experience scaling operations at the highest level makes him uniquely qualified to help us build the future of healthcare,” Hims and Hers CEO Andrew Dudum said in a statement.

In addition to his experience at Amazon, Kabbani also held executive leadership roles at the supply chain logistics company Flexport and the warehouse automation company Symbotic.

Stock Chart IconStock chart icon

Hims & Hers shares over six months.

Hims & Hers shares had a volatile start to the year, notching several double digit moves over the last few months. Investors have been paying close attention to the company’s weight loss offering, which was thrown into question after the U.S. Food and Drug Administration announced changes to the medication supply environment earlier this year.

Shares of the company closed up 23% on April 29, for instance, after Novo Nordisk said it would offer its weight loss drug Wegovy through telehealth providers like Hims & Hers.

The stock was down more than 1% on Monday but was up more than 70% year to date.

Hims & Hers is slated to report earnings after market close.

WATCH: Hims & Hers shares rise as company adds Eli Lilly’s Zepbound

Technology

Trump set to raise millions from crypto and memecoin this month

Published

3 hours ago

May 5, 2025

admin

Trump set to raise millions from crypto and memecoin this month

Jonathan Raa | Nurphoto | Getty Images

President Donald Trump has two crypto-focused dinners on the calendar this month — one aimed at deep-pocketed political donors, the other at memecoin millionaires. Both are poised to help him rake in millions.

The first event, a $1.5 million-per-plate fundraiser set for Monday, is among the priciest political fundraisers in recent memory. The second, on May 22, offers access to Trump’s inner circle not for cash — but for holders of the $TRUMP token.

Hosted by MAGA Inc., the “Crypto & AI Innovators Dinner” on May 5 features special guest David Sacks — who has been helping to rewrite the country’s crypto and artificial intelligence rules.

The committee receiving the funds, MAGA Inc. is a super PAC that supports Trump, but the president is constitutionally barred from running for a third term. It’s unclear how the PAC plans to spend the millions of dollars it is raising this spring at a series of dinners.

The crypto community has cheered Sacks’ growing influence in Washington, crediting him and other Trump-aligned appointees with a sweeping policy shift that’s already delivered a spate of regulatory wins across multiple federal agencies — in what many industry executives are describing as a 180 pivot from President Joe Biden.

The second gala dinner will be held at Trump National, the president’s private club in the Washington, D.C., area, later this month. The guest list will be decided by a blockchain-based contest run by the creators of the $TRUMP memetoken. Instead of cash, entry is based on how many tokens a user holds, with the top 220 promised dinner with Trump himself. The contest runs through May 12.