Eero's fire sale

April 8, 2019 (1178 words) :: The seemingly singular story of a distressed startup's acquisition which inadvertently reveals the con embedded within capitalism.
Tags: startups

This post is day 98 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

In last night’s newsletter, I linked to a Mashable article investigating Amazon’s $97 million acquisition of hardware startup Eero:

It’s an extreme example of a typical Silicon Valley startup success story: multi-million payouts for execs; much less for everybody else. Employees who exercised their stock options may have actually lost money (the share price dropped to less than 1% of its high), and those who didn’t exercise in time got nothing. Even some investors had to take haircuts, though I’m less inclined to feel sympathy for them, since it’s either not their money, or they’re rich enough to not care. The whole thing was basically an acqui-hire, because Amazon really wanted the execs. Not an atypical outcome in SV, but this was a little unusual in the starkness of the unequal distribution of rewards. Usually, if the payout is big enough, it’s a “rising tide lifts all boats” scenario - founders become zillionaires, investors make 100x their investment, a few early employees get to retire early or start their own company or whatever, and maybe some later employees get to pay off their student loans. It’s still unequal, of course, but less dramatically so. In this case, the execs come off as mercenaries, not even pretending that they’re on the same side as the workers who got nothing. In the future, Eero may well be a useful case study for demonstrating class interests in Silicon Valley.

Forgive me for quoting myself - I’m too lazy to write something entirely new, and in any case I wanted to add some more thoughts on the topic. Now that I’ve had some time to think about it, Eero’s fire-sale acquisition seems like an excellent distillation of how power works in Silicon Valley. It is [Slavoj Žižek voice] a purer reflection of startup success than actual successful acquisitions. Here’s what happened, in short:

  1. startup gets a ton of its attention on account of its promise of novel technology, a garage-like origin story and the fact that the founders went to Stanford;
  2. buoyed by its momentum, it manages to raise a massive round based on wildly optimistic premises, like the idea that it will somehow have a monopoly over the market (in this case, a Series C of $50 million a mere three months after its product is released, bring the total pre-money valuation to $227 million);
  3. as anyone could have predicted: more established companies, eyeying this new market opportunity, and manage to lure away potential customers with cheaper offerings;
  4. startup embarks upon massive layoffs and spins its wheels for a while;
  5. another established company swoops in to acquire the startup.

Now, depending on the duration and intensity of 4, and the generosity of the acquirer in 5, the outcome could vary greatly: the acquisition could be deemed a success, or it could be deemed a failure. In Eero’s case, it is, weirdly, both. It is definitely a failure for the company - the Mashable piece reports that the sale price of $97 million was less than they raised. Imagine putting all this work into a company (literally a vehicle for capital accumulation) only for it to actually decline in valuation at the end of it. That’s just sad. Even investors lost money, though in a pretty unfair way, with the latest investors (who put in the most money) recouping disproportionately more of their investment than early-stage investors.

And yet it is a success for some of the employees. Not all of them, mind. As Mashable reports:

Ten executives are getting the majority of that money [remaining after paying back investors]. The three co-founders — Nick Weaver, Nathaniel Hardison, and Timothy A. Schallich (who goes by Amos) — plus other company executives and affiliates, will collectively receive ~$3.7 million in cash as a “transaction bonus.”

The ten executives will also receive between ~$29 and ~$23 million in salary increases, retention and yearly bonuses that vest over three years (for a potential total of $32.6 million). These are all financial incentives for what Amazon apparently views as the core Eero team to stay on and build the product.

So: soft landings for the execs, because Amazon has decided that they will be “worth” that much in future internal thought leadership, despite having run this company to the ground. Nothing for the other workers, because they’re deemed to be interchangeable and not worth keeping. There is an open question as to whether the execs are truly the best people for the job ahead, or whether the company’s other employees could do just as well, but in a way it doesn’t really matter, because Amazon gets to bestow its money on whoever it likes, really. There isn’t even a pretense at meritocracy here.

The reason I say (not entirely seriously, mind) that Eero’s acquisition represents “startup success” is because it tells us a lot about the functioning of contemporary capitalism. Remember how the investors all lost money? You might be wondering, how is that in any way typical of capitalism, since capital is supposed to make a return? Ah, well, it only has to make a return on the aggregate. The mode of capitalism that predominates in Silicon Valley is casino capitalism: bet on a bunch of companies, knowing that most of them will be a loss, but at least one of them will be a major win.

So the investors who lost money in the acquisition might not be super happy, but functionally, they don’t have to really care. They expect to lose money on most of their investments, after all. And you don’t get ahead in the industry by dwelling on your losses - instead, you have to increase the frequency and intensity of wins. Because there will always be another win, just around the corner. And who knows, maybe one of the execs will leave Amazon after a few years to build something new, embolded with experience, savings, and an ostensible win under their belt; what investor wouldn’t want to get in on that?

The other notable aspect of this acquisition is the way the valuation seemingly came out of nowhere. I mean, sure, all monetary valuations are somewhat arbitrary, but usually there’s some sort of feedback loop in which they make sense. In this case, though, the $97 million figure was completely detached from any sort of material value produced by the startup. Instead, it’s all based on Amazon’s confidence in how much they want the team.

The startup, then, ended up being nothing more than the exec’s audition tapes for their Amazon gig, unbeknownst to the other workers who spent their own money exercising stock options which turned out to be basically worthless. And really, isn’t this what most work is under capitalism? You work your ass off and maybe even believe in the company all so your boss can drive their Tesla through a homeless encampment and throw their old iPhones at poor people? The inequality of material reward in Eero’s case might be especially stark, but it’s really nothing new.

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