Oh to be a heedless startup founder in an unregulated space. To tromp on legacy players, ignore norms and rules, and generally move fast and break things, as Mark Zuckerberg put it a decade ago. To be not just part of a new company, but to lead a mission, a movement. And, not incidentally, become insanely rich.
Only, what happens when regulators show up, losses pile up — or people start, quite literally, dying?
We are watching a sudden perp walk of aggressively blithe founders who, fueled by chutzpah, raw conceptual genius, and a promise to shatter paradigms, have dominated the last decade of technological history with eye-popping valuations.
WeWork’s Adam Neumann, accused of self-dealing and power-grabbing, has had to vastly curtail the ambitions of his planned IPO, punching a hole in the company’s $47 billion valuation, and offering shares at a reported value of $10 billion to $20 billion. Investors may not even be prepared to buy shares at the lowered valuation, but they suddenly have more time to think about it: Late last night, the Financial Times reported that Neumann is postponing the startup’s IPO roadshow which was set for this week, for some time later this year. Uber, still suffering the hangover of past slash-and-burn behavior, has been ordered by California to start assuming the greater cost of treating its drivers like real employees. And Adam Bowen and James Monsees, co-founders of Juul, are facing a potentially existential threat to their $38 billion company after the deaths of six people and the illness of some 380 who used vaping pens.
But this is not really a story about the much-chronicled unicorns — the approximately 150 U.S. companies valued at a billion dollars or more, many of which are very much alive. Instead, it’s about an apparent reckoning for the Daredevil Unicorns, a rarefied subset of these companies that have stood out for their unabashed readiness to cross boundaries that almost everyone else observes.
A market correction disfavoring the Daredevils and their utter disregard for the societal rubble they leave behind is underway.
In a blog post last week, Aswath Damodaran, a valuation expert at New York University’s Stern School of Business, called them “story companies”— startups whose valuations are based on the founder’s account of what the company will do in the future. That might be how it will change the world of work, for instance, of personal transportation, or of staying overnight in strange cities, all while making a ton of money. “The story […] drives the numbers, rather than the other way around,” he wrote. He went on, “There is a dark side to story companies and it stems from the fact that value is built on a personality, rather than a business and when the personality stumbles or acts in a way viewed as untrustworthy, the runaway story can quickly morph into a meltdown story, where the ingredients curdle.”
One way to understand the Daredevils is to block out who is not one. Steve Jobs, for instance, may be Silicon Valley’s most famous enfant terrible, but he was not a Daredevil. He aggravated a lot of people, and bullied some of them too, but that is only a necessary trait without being sufficient. Ultimately, Jobs was all about designing breakthrough products, not imitating Marlon Brando.
Nope, the Daredevil archetypes are Zuckerberg, who has only displayed some public modesty since faced with the combined ire of the United States and much of Europe, along with the threat of a Standard Oil-style breakup; Uber’s Travis Kalanick, who was forced out of the company he co-founded so it could survive an uprising; and Theranos’ Elizabeth Holmes, who goes on trial next year for alleged fraud in the blood-testing company. Airbnb’s milder co-founders, Nathan Blecharczyk, Brian Chesky, and Joe Gebbia, too, face serious pushback, with major cities around the world putting up roadblocks, like forcing hosts to register, pay taxes, and limit the number of nights that they rent out a room. What qualities do all share? A talent for tapping an apparently primal investor hunger to run roughshod over a legacy industry. As long as you are promising that, all kinds of personality quirks and pathologies are accepted.
A market correction disfavoring the Daredevils and their utter disregard for the societal rubble they leave behind is now underway. Several people told me that Silicon Valley and Wall Street have simply lost their appetite for money-losing companies with no apparent prospect of turning things around. As of June 2019, WeWork had 12-month revenues of $2.6 billion, losses of $2 billion, and $47 billion in lease obligations over the next 15 years. Uber, too, is burning through $1 billion a quarter, just announced a layoff of 435 people, and faces trouble in California, which last week raised costs for app-based companies by telling them to start pay their workers as employees (true to personality, Uber announced that it would disregard the order because driving is “outside the usual course of Uber’s business.”). Uber’s share price has tanked by 26% since its $45-a-share IPO in May. “Investors are putting up a white flag for companies lacking profitability,” says Dan Ives, managing director of equity research for Wedbush.
But it’s something bigger — the Daredevils are another, scrappier species of Big Tech. At a time we are conflicted over love or hate for our free social media, they are forcing a realization — that something has to change. “We are renegotiating our terms of endearment with technology,” said Paul Roehrig, head of digital strategy at Cognizant, the consultant firm.
A Martian could have told Juul’s founders to expect adversity if they carved out an unregulated slice of one of the most intensely scrutinized and litigated industries on the planet. Doctors have not concluded what precisely killed the six people over the last month. But authorities are already clamping down hard: Last week, President Trump said the administration may outright ban sale of flavored vaping cartridges, a move that, if carried out, could at minimum put Juul’s U.S. operations at existential risk.
The idea behind the company goes back to founder Bowen and Monsees’ days as Stanford product design students, both with physics degrees. In their joint graduate thesis, recorded in this 2005 video, they describe an interest in creating social change, and seeing smoking as an “easy target,” since people are generally conflicted about their tobacco habit. They set out to see if they could devise a way “to make smoking as healthy and socially acceptable as possible,” Monsees says in the video.
The result was the “Juul,” their idea of what an e-cigarette should look and taste like. In summer 2018, the one-year-old startup raised $1.25 billion in funding from hedge and mutual funds, which increased its valuation to $16 billion; less than six months later, it received $12.8 billion from Altria for 35% of the company, tripling Juul’s valuation to $38 billion. The two rounds of fundraising notably left out Silicon Valley, which was now shunning Juul as an odious fellow traveler of hated Big Tobacco.
Today, Juul dominates a $2.6 billion-a-year industry, a colossus that controls more than 70% of the vaping market. It reported $2 billion in revenue last year, some 85% of it from the sale of its flavored cartridges in the U.S., such as mango, cucumber, crème, menthol, and mint.
But last year, Juul became the target of harsh criticism for those flavors. Critics said its ads and the flavors themselves were a transparent effort to attract young people, especially teens, by making vaping seem cool. Government data showed a 75% increase in teenage vaping from 2017 and 2018, growing from 11.7% to 20.8% of high school students, which then-FDA Commissioner Scott Gottlieb called an “epidemic.” This year, the number reportedly passed 25%.
Under much pressure from Gottlieb, Juul last November stopped selling flavored cartridges in stores, while keeping them on its website. Then, starting in April, reports of lung illnesses began trickling out of six states. In August came the first reported death. The pulmonary condition from which survivors are suffering is usually Acute Respiratory Distress Syndrome, in which fluid builds up in the lungs.
Either way, Juul is a Daredevil — because good intentions don’t get you dismissed. It just makes you callow.
Most of those hospitalized vaped THC alone, or along with nicotine. That has created uncertainty as to what caused the sudden outbreak — nicotine liquid, THC, or both. Some states such as New York, California, and Oregon, permit THC vaping, and prefilled THC cartridges sell for roughly $20 to $40 each. PAX Labs, from which Juul was spun out, for instance, now makes cannabis vaping devices. In states where they are not legal, black market operators inject a half or full gram of THC liquid into vape pen cartridges and can sell them for roughly $20 each. Often they use vitamin E acetate as a thickening agent.
Speaking to USA Today, Arnaud Dumas de Rauly, CEO of Blinc, a THC vaping manufacturer, blamed the black market for the problem. Among the theories is that a bad batch of vaping liquid got out and that the vitamin E may be at fault. A factoid backing up the bad batch theory is the concentration of many of the cases is in three states — Wisconsin, Illinois, and Michigan.
In July, Maxwell Berger, a Connecticut man, filed suit against Juul, saying he had suffered a massive hemorrhagic stroke after heavily vaping during his last year of high school in 2015. He said he had undergone three brain surgeries and today has “catastrophic and permanent injuries,” including paralysis on his left side. The suit accuses Juul of wrongful conduct and misrepresentation of the risks of vaping.
I spoke with Berger’s lawyer, Sarah London, who is based in San Francisco. “Juul had folks who saw an incredible opportunity to recreate the magic of smoking, repackage, and redesign it, and work around the regulatory system built over 60 years,” London said. She alleged that Juul intentionally marketed at youths. “It’s so insidious because of the recklessness toward the health of an entire generation that should have been nicotine-free.” She said, “It is a story of immense greed, self-aggrandizement, and fraud.”
In response, Juul said in a statement, “Juul Labs was founded by former smokers with the goal of improving the lives of the world’s 1 billion adult smokers by eliminating cigarettes. We envision a world where fewer people use cigarettes, and where people who smoke cigarettes have the tools to reduce or eliminate their consumption entirely, should they so desire. We do not want or need non-nicotine users. Our market is adult smokers worldwide who should have the opportunity to switch to vapor products if they so desire.” Juul declined to make anyone available to speak to Marker for this story.
Now, not just Washington, D.C., but the states smell blood. Two weeks ago Michigan barred flavored vaping products, and on Sunday, New York Gov. Andrew Cuomo said he would seek an emergency ban. In May, North Carolina filed suit against Juul for “deceptively downplaying the potency and danger of the nicotine.”
One of my wisest former bosses admonished his underlings to ask hard questions, but always assume good intentions. So what is it — is Juul in the get-people-off-cigarettes-in-a-healthy-way business, or the make-a-boatload-of-money-with-a-good-story-regardless-of-the-consequences trade, in the way that Damodaran explained? Either way, Juul is a Daredevil — because good intentions don’t get you dismissed. It just makes you callow.
Against all this, the company is positioning itself to survive. On August 29, it said it was stepping up its program to discourage youth vaping. It reportedly wants to cut a deal with the government in which it is permitted to continue to sell its mint and menthol flavors, since those mimic how tobacco is sold, and without flavors, vaping is far less of an attractive alternative for adult tobacco smokers. It is also expanding abroad. It now sells its pens in 19 countries, including a launch last week in China, where it created an online presence on Alibaba and JD.com, the two big e-commerce sites.
Dante Disparte, founder of Risk Cooperative, an insurance brokerage, said a thread running through the Daredevils is a high valuation and a heavy weighting of financial risk on investors if something goes wrong. Now, the risk is being recalibrated, with more onus on the companies: Uber’s share price could plunge further if its defiance doesn’t stand up in California, or, worse, if other states copycat the legislation; WeWork’s Newmann may get his IPO, but at a shadow of the price he sought, and with much less power to decide, and absent dynastical features; Juul could end up as mostly an overseas play if its product line is decimated by regulation in the U.S. “Liabilities were inherent in the business model,” Disparte said. “Now they need to own them.”
Some people told me that an era is over — the Daredevils came of age when “being a risk-taker was equated with being innovative, and that formulation was wrong,” said Erica Volini, head of human capital at Deloitte. But logic and history tell you that this comeuppance, too, shall pass — that while Silicon Valley may have lost its head, ultimately it’s all about making money. And, as one venture capitalist told me, “The era of devil-may-care unicorns will end when the capital dries up.”