Stark irony? Well, what we have just witnessed is a company’s demise as a result of overfunding. Jawbone, a wearable tech-company was valued at US$ 2.3 billion in 2014 in its peak and right now, the company is in liquidation. It is deemed the second largest failure since solar energy firm Solyndra went into bankruptcy in 2011.

Background

Jawbone started out in 1999 as AliphCom, a company that was selling various bluetooth headsets and speakers. In 2011, the company changed to Jawbone and entered into a new business line: the fitness industry. They were able to source high amounts of funding – almost US $900 million raised from venture capital firms, Sequoia, Andreesen Horowitz, Khosla Ventures, Kleiner Perkins Caufield & Byers and the Kuwait Government’s sovereign fund.

The primary issue is that hype-driven investors were poolling money into and artificially raising the valuation of a business that was fundamentally failing. As Sramana Mitra, a tech entrepreneur said, such a valuation simply does not ‘compute with the revenue.’ The hype was so inflated that even the Kuwaiti sovereign fund was lured into making a US$165 million funding round, despite domestic investors starting to feel concerned as to Jawbone’s diminishing market share.

Jawbone Implications

Experts say that such a colossal failure nonetheless, would not dent startup funding in the future. According to Rich Wong, a partner at Accel Venture, technology startups would still be the biggest appeal for investors as long as technology remains to be the forefront of the future. An aura of caution though now exists. A number of startups have had their valuations downgraded significantly by investors who deem their performance as struggling including HR software firm Zenefits, food subscription company, HelloFresh and ride service provider, Ola.

For You Entrepreneurs: The Takeaway

Beyond this being just another interesting story to talk about with your friends, try taking a lesson out of it. Some entrepreneurs become so focused on obtaining investment funding, that their judgment of how well their company is fundamentally doing is clouded. This is even more so when they successfully obtain funding. Therefore, good advice is to keep disciplined and not lose sight of your business.

Let us know your thoughts on the Jawbone case by tagging us at #lawpath or @lawpath.

Tony Zhen

Tony is a legal Intern at LawPath who is working with the contents team to provide legal insight for SMEs. With an interest in contract and business law he is currently completing his Finance and Law degree at the University of New South Wales.