Tolstoy didn’t write about Silicon Valley. But his most famous line is as applicable to young companies as it was to Russian families. The annals of venture capital are full of startups that shot for the moon and missed. And for every one of them, the freefall back to Earth is a slightly different journey.
Nikola and Quibi were two much-hyped startups with sky-high ambitions. But for both, the bloom is off the rose, for two very different reasons. And that’s one of 10 things you need to know from the past week:
1. Going downhill
Let’s start with the similarities. Nikola and Quibi were both young companies led by charismatic founders rapidly rising to the top of somewhat established but still relatively nascent industries—electric vehicles in the case of Nikola, streaming and short-form video in the case of Quibi.
Both raised piles of cash to fund their early development, and both convinced some of their respective industries’ biggest names to join the cause. For Nikola, that was a partnership with GM. For Quibi, it was drawing reported funding from Disney, Sony Pictures and other Hollywood heavyweights.
Just a few months ago, all their dreams were intact. In April, Quibi pulled off a high-profile launch against the backdrop of a global crisis. In June, Nikola went public through a reverse merger and became a day-trading darling, with its market cap at one point exceeding $34 billion.
But the good times didn’t last for long.
Earlier this month, activist investor Hindenburg Research put out a scathing assessment of Nikola and its founder, Trevor Milton, alleging they perpetrated “an intricate fraud built on dozens of lies,” misleading investors about the depth of Nikola’s proprietary technology and the status of its electric trucks. The company and its founder denied the claims, but Nikola’s stock has since dropped nearly 50%, and on Monday, Milton resigned as executive chairman.
Quibi, meanwhile, has been caught in a slow-motion disaster ever since its launch. Download and subscription numbers have fallen far short of expectations. Quibi hasn’t produced a hit, nor much buzz on social media. It faces a patent-infringement lawsuit. And this week, The Wall Street Journal reported that the company is exploring a potential sale, a move that was gently described as “a sign of strain” for Quibi.
Precisely what happened at Nikola is still a mystery. Both the SEC and the Justice Department are investigating the matter. For now, I’ll just say this: Milton’s decisions to resign (reportedly forfeiting $166 million) and then delete his Twitter account don’t inspire a ton of confidence.
If the allegations are true, then Nikola is the latest in a line of companies that took the concept of fake it ’til you make it a bit too far. There’s a long history in Silicon Valley of trying to speak a new reality into existence. But it’s one thing to get overly optimistic on sales projections or timelines for new product development. Blatant lies about intellectual property are another.
In one vivid example, Hindenburg alleged that a teaser video entitled “Nikola One In Motion” that purported to show an electric truck that “fully functions” was an elaborate ruse: The vehicle wasn’t moving under its own power, but was instead simply rolling down a hill. In a statement earlier this month, Nikola admitted as much, offering this underwhelming defense: “Nikola described this third-party video on the company’s social media as ‘In Motion.’ It was never described as ‘under its own propulsion.'”
Perhaps Milton genuinely believed the breakthroughs he promised were right around the corner. But Nikola, like the augmented reality company Magic Leap before it, now finds itself hoping that new leadership will be able to salvage a successful business after a founder’s pledges of game-changing technology haven’t quite panned out.
It’s a very different story at Quibi. Co-founders Jeffrey Katzenberg and Meg Whitman produced exactly what they promised. It’s just that consumers didn’t really care for movies and TV shows chopped up into 10-minute chunks that can only be watched on a smartphone.
Quibi pitched its shows and movies as something to watch during the downtime of everyday life—while commuting, or while waiting to meet a friend for drinks. The pandemic made that use case impossible, much to the chagrin of Quibi’s executives. “I attribute everything that has gone wrong to coronavirus,” Katzenberg told The New York Times in May.
There might be something to that. But I would argue Quibi’s struggles suggest a simple misreading of the market.
By initially restricting its content to mobile devices, Quibi forced users to watch on a six-inch iPhone screen rather than a 60-inch flatscreen. They also made it extremely difficult to watch something with another person—because, again, the small screen. That was a tough way to break into a market packed with other, easier alternatives. Two months after the launch, Quibi reversed course and offered streaming capabilities for certain smart TV providers, but the early damage was done.
Quibi’s launch also came just as another short-form video app was taking over the US market, one that caters much more effectively to the tastes of young consumers: TikTok. Quibi’s decision to go mobile-only put it in competition with social media services in the battle for user attention. But nothing about Quibi is participatory—at first, the company even banned screenshots of its content, making it impossible for viewers to share it on social media or create memes that could have been vital to building early interest. The stars Quibi chose to showcase its content are another reflection of a misunderstanding of teenage tastes: Better to build a show around Charli D’Amelio, not Queen Latifah.
The stories of Nikola and Quibi are still very much unfolding—both companies may still snatch victory from the jaws of defeat. But for now, at least, they’re looking like two of the latest cautionary tales of what can happen when a startup flies too close to the sun.
2. Gores goes big
A special-purpose acquisition company backed by The Gores Group lined up the largest reverse merger on record this week, agreeing to combine with mortgage lender United Wholesale Mortgage in a $16.1 billion transaction. The biggest winner from the deal may very well be Gores Group founder Alec Gores, whose reported 0.6% stake in the combined business will be worth about $96 million, equating to a profit of some $80 million.
3. Game theory
With an eye toward locking down content for its new Xbox consoles, set to launch in November, Microsoft struck a deal to pay $7.5 billion for the parent of Bethesda Softworks, a game developer behind wildly popular franchises such as “The Elder Scrolls” and “Fallout.” The deal generated a six-fold return on investment for Providence Equity Partners, according to a person familiar with the move, a lucrative exit that was a long time coming: Providence first backed the business back in 2007.
4. Electric autos
California Gov. Gavin Newsom signed an executive order this week calling for a ban on the sale of all gas-powered cars in the state beginning in 2035, the latest move in the state’s fight against climate change. Meanwhile, WM Motor, a Chinese electric vehicle startup, raised 10 billion yuan (about $1.47 billion) in new funding. Those two developments make it a good week to read PitchBook analyst Asad Hussain’s latest look at how electric vehicles are poised to reshape the auto industry.
5. IPOs for KKR
Academy Sports + Outdoor, a sporting goods retailer backed by KKR since 2011, set initial terms this week for an IPO that could raise $250 million. Another of the firm’s portfolio companies, German defense supplier Hensoldt, went public in Germany, pricing its IPO at the low end of its range. And KKR was also busy this week backing new businesses: It acquired a stake in India’s Reliance Retail and agreed to pay a reported $3 billion to purchase 1-800-Contacts from AEA Investors.
6. Kiddie fintech
Does your kid need a debit card? Greenlight Financial thinks so. And this week, the Atlanta-based startup raised $215 million at a $1.2 billion valuation to support its efforts, including a flagship platform that allows parents to manage and limit spending, pay allowances, and carry out a range of other tasks geared toward improving children’s financial literacy. Another startup that aims to bring financial tools to younger (although still adult) users also brought in new backing this week, as stock-trading platform Robinhood added a $460 million extension to its Series G round.
7. Marketing mega-rounds
A startup called Attentive has a solution for retailers hurting for business during the pandemic: personalized text messages to potential customers. The New York-based company’s platform got a big vote of investor confidence this week in a $230 million round led by Coatue. It was also a big week for a different kind of ecommerce company, as Mirakl, a French startup that helps retailers launch and manage their own marketplaces, raised $300 million at a $1.5 billion valuation.
8. Insurance mega-rounds
Two more of the week’s biggest VC fundings went to startups in the insurance sector. Bright Health, which offers various health insurance products, hauled in $500 million from Tiger Global, Blackstone, NEA and other big names. And Next Insurance, which caters to small businesses, brought in $250 million in a round led by CapitalG.
9. Grabbing Grail
When Grail filed for an IPO earlier this month, it appeared the cancer detection startup might be the next well-funded unicorn to conduct a public debut. Not so fast, my friend: Genetic sequencing giant Illumina agreed this week to pay $8 billion for Grail, confirming earlier reports that a deal may be imminent. Illumina should be quite familiar with the company’s operations: Grail launched in 2016 as a spinout from Illumina.
10. Buying the scrip
GoodRx, a private equity-backed company that helps patients find the best prices for and fill their prescriptions, raised more than $1.1 billion in an IPO this Wednesday. Its shares climbed even higher the rest of the week, giving GoodRx a market cap of nearly $20 billion by the week’s end. Another prescription management company was also in the news, as Bloomberg reported that UnitedHealth is in talks to purchase startup DivvyDose for some $300 million.