Is Silicon Valley’s Business Model at Risk? Is Instagram Losing What Made It Successful?

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SILICON VALLEY

All of a sudden, Wall Street cares whether a company is making money, and Silicon Valley’s business model is at risk: “This was supposed to be the year when America’s biggest startups would finally make their triumphant debut on the stock market. Billionaire Silicon Valley investors, sneaker-clad founders and button-down bankers all expected enormous stock sales to turn companies like Uber, Lyft and WeWork into a new generation of corporate giants. It hasn’t quite turned out that way. Last week, WeWork postponed its planned initial public offering. Uber and Lyft sold shares earlier this year only to see their prices collapse. Investors took a look and backed away, seeing overpriced companies with no prospect of making money any time soon, in some cases led by untested executives. On Thursday, Peloton joined the list with a disappointing first day of trading.

“The rejection threatens Silicon Valley’s favored approach to building companies. The formula relies on gobs of money from venture capitalists to paper over losses with the expectation that Wall Street investors will eventually buy shares and make everybody rich. If mutual funds and pension funds are no longer willing to buy once the companies go public, fledgling companies are unlikely to find funding in the first place.”

Meanwhile, WeWork has put its private jet up for sale: “WeWork parent We Co. is selling the $60 million Gulfstream G650 that the company bought last year for Neumann to use for travel and meetings, according to a person familiar with the matter, who asked not to be identified because the plans are private. …WeWork is also planning to sell three businesses acquired in recent years: event organizing platform Meetup, office management startup Managed by Q and marketing company Conductor, according to the person. There is interest already in buying Conductor, the person added. In addition to the potential sales, WeWork may also turn to job cuts, which one person familiar with the matter said could number in the thousands for a staff of more than 12,000. WeWork declined to comment for this story.”

And some of the startups that sold to We for stock are now worried they got nothing for their companies: “We has acquired 15 venture-backed startups since 2014, according to VentureSource. That is on par with the number of acquisitions made by public companies such as Twitter Inc. and International Business Machines Corp. during that period. We’s acquisitions over that time exceed the nine startups bought by Airbnb Inc., the second most active among private venture-backed acquirers, the data show. ‘For a lot of these acquisitions, the shareholders and founders that got stock as a big part of the consideration are definitely not happy,’ said Ben Sun, general partner at Primary Venture Partners.”

MARKETING

Are content factories ruining Instagram? “The platform has grown so big, so fast and so commercial that it risks losing the stylish and intimate aesthetic that made it wildly popular. In its rise from a picture-sharing app buoyed by photography buffs to a slick world of celebrity endorsers and influencers, Instagram has spawned a behind-the-scenes industry that brokers content and followers to sell sponsored posts. Meme factories—creators of posts designed to go viral—are reshaping how Instagram content is made, following social media’s basic formula: More shareable content yields more followers, which makes more money. … 

“Advertisers on these sites pay by the eyeball—an estimated $373 million on influencer marketing in the US and Canada in the first quarter of 2019, according to Instascreener, which tracks marketing on Instagram. About $265 million of that was on Instagram, up 62 percent from the same period a year earlier. Done well, the marketing appears more authentic than glossy media campaigns on TV or in magazines. Done poorly, it comes across as mass-produced, tarnishing the platform’s appeal and driving away users.”

STARTUPS

Subscription-based EV startup Canoo unveils its first vehicle model—a utilitarian mini bus that rethinks the passenger experience: “[Y]ou won’t find regular rows of seats behind the driver and passenger. Instead, Canoo has designed a bench seat that curves around the whole rear end of the vehicle. This creates a more communal experience that could make for a [fun] time if you’re, say, traveling with friends in a ride-hailing setting. … The inside of each door is even lined with a peg board-style surface, which Canoo thinks will offer people a way to non-destructively personalize a vehicle that they may only subscribe to occasionally. There are jump seats that fold down on both of the rear doors, as well as two more that fold down from the backside of the two front seats. 

“Like many of its fellow startups (and now, Volkswagen), Canoo has designed an all-in-one ‘skateboard’ platform that houses the battery pack, the electric motor, inverter, and everything else that helps power the vehicle and make it go. That approach is what helps give the vehicle such a spacious interior. Canoo says it’s comparable to the interior space found in a large SUV, all in a total package that’s only six or seven inches longer than a Volkswagen Golf.”

ZenBusiness says it helps entrepreneurs launch companies worry-free: “The company launched with a product that was essentially an automated registered agent for new entrepreneurs. Under state incorporation laws, companies must designate a so-called ‘registered agent’ to receive official notices from regulatory agencies, and so ZenBusiness chose this strategic point for entry into the market. … Since that time, the company has expanded its product to help entrepreneurs get beyond merely incorporating to actually building out their business by recommending services like banking, lending, tax preparation, website building, and more. The hope is to provide a ‘worry-free’ guarantee to entrepreneurs so that they can get those early critical logistics out of the way and back to actually operating and growing their business.

“[ZenBusiness CEO Russ Buhrdorf] is particularly focused on keeping the product very self-service and automated to allow it to focus on these smaller customers. ‘Many of the companies that you cover that are in the enterprise space, who provide solutions for medium-sized businesses, they have to charge, they have to have sales forces, it’s very competitive there,’ Buhrdorf said. ‘What we’re after is the segment that’s underserved.’”  

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 CUSTOMER SERVICE

Hundreds of Rent the Runway customers are reporting horror stories of canceled deliveries on social media: “Cheri Cohen, a 43-year-old attorney, was one of the disappointed would-be customers. She had reserved a rental dress in August for a special event this past weekend. The dress was supposed to arrive on Thursday. It didn’t. On Friday, Cohen called customer service but was told there was a two-hour wait. She then resorted to contacting the company on Twitter, where a rep for Rent the Runway promised the dress—though in a larger size—would be delivered to her hotel Saturday afternoon. Once again, the dress never arrived.

“‘Their entire reserve business is based on getting people clothing for a specific day—that is the entire point,’ she wrote in a message to Recode. ‘The order is useless if it doesn’t arrive in time. So many people were disappointed this past weekend, and we still don’t have any explanation. Maybe I am naive, but when the customer service rep promised me my dress Saturday early afternoon, when she told me she was looking across the room at [Rent the Runway CEO] Jenn Hyman right now making the same phone calls, I believed her. But it is hard for me now to think that they weren’t just lying to everyone.’ In response to inquiries from Recode on Friday, Hyman acknowledged the disruption and blamed it on a new warehouse system.”

TRADE

The US is looking for ways to retaliate against the EU for illegal subsidies paid to Airbus: “The office of the US Trade Representative has already compiled a list of possible goods it will target once the World Trade Organization publicizes the amount of damages it suffered due to illegal European Union aid for Airbus SE. But instead of choosing a static list of products, the US may rotate them to create uncertainty and hit as many industries as possible, said the people who asked not to be identified because the plans are private.

“Following a 14-year dispute between the US and the EU over illegal subsidies provided to Boeing Co. and Airbus, the WTO ruled this year that the US could retaliate against European products. The specific amount of trade that the Trump administration is allowed to target will be made public by the Geneva-based body as soon as next week. The so-called carousel retaliation allows a country to regularly shift around the targeted goods, which increases trade uncertainty for the receiving party and causes the most pain. … In about eight months, the EU is expected to be authorized to hit back at American goods in its own case challenging illegal subsidies for Boeing. That gives both parties some time to settle the matter, if there’s enough political will to do so.”

VENTURE CAPITAL

Balto Software, a developer of a live call guidance software designed for sales representatives to close deals, raised $4.2 million in Seed funding.

Beyond Pricing, a provider of a pricing platform designed to offer pricing for vacation rental properties, raised $42.5 million in a Series A round.

Mercury, an operator of a technology-enabled bank intended to offer services to small and medium-sized businesses, raised $20 million in a Series A round.

MANAGEMENT

In Los Angeles, LaRayia’s Bodega sells everything for five dollars or less and offers employment opportunities to veterans and the homeless: “‘The price point is the activism, the price point is the focus,’ said LaRayia Gaston, 31, who opened the shop last month in the neighborhood of Westlake, just east of Koreatown. Over a $5 lunch of kale and arugula salad with a carrot ginger dressing, served with a Caribbean-style potato coconut soup, Ms. Gaston said the bodega is ‘an ode’ to activist-driven community programs, like the free breakfast program run by the Black Panthers in the late 1960s. It’s the latest venture of Love Without Reason, the nonprofit she founded four years ago. Her organization runs a meal program, Lunch On Me, that serves 10,000 meals to the homeless per month in Los Angeles, and provides similar services in Hawaii and New York City, where Ms. Gaston is from.”

LITIGATION

The FTC is suing Match Group, which owns OKCupid and Tinder, for allegedly tricking customers into paying for using the site, Match.com: According to the complaint, ‘hundreds of thousands of consumers subscribed to Match.com shortly after receiving a fraudulent communication.’ … The FTC claims that Match.com applied a looser standard for preventing non-subscribers from seeing messages from potentially fraudulent accounts than it did for its paying customers. As a result, these non-subscribers could be encouraged to sign up for paid accounts on the service due to this extra inbound interest. But upon signup, customers would either see a ‘fraudulent communication’ or a notice that the profile that expressed interest is ‘unavailable’ depending on where the company was at in its fraud review process, the complaint said.”

And that’s what’s ahead.

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