Eighteen months ago, online used-car retailer Carvana had such great prospects that it was worth $80 billion. Today, it’s valued at less than $1.5 billion, a 98% drop, and it’s struggling to survive.
Many other tech companies are also seeing their fortunes reversed and their dreams vanish. They are shedding employees, downsizing and seeing their financial valuations shrink dramatically, even as the broader economy holds up with low unemployment and a 3.2% annualized growth rate. in the third trimester.
Here’s a largely unrecognized explanation: An unprecedented era of very low interest rates has come to an abrupt end. Money is no longer practically free.
For more than a decade, investors looking for yield sent their money to Silicon Valley, which injected it into a wide range of start-ups that might not have received a nod in times past. less exhilarating. Extreme valuations made it easy to issue stock or take out loans to expand aggressively or offer tempting deals to potential customers to quickly increase market share.
The end of cheap money
It was a boom that seemed never to end. The technology has racked up the wins, and its competitors have faltered. Carvana built dozens of car “vending machines” across the country, marketed tirelessly, and offered great prices for trade-ins.
“The entire tech industry for the past 15 years has been built on cheap money,” said Sam Abuelsamid, principal analyst at Guidehouse Insights. “Now she is hit with a new reality and she is going to pay the price. »
Cheap money has funded many of the acquisitions replacing organic growth in the tech sector.
Two years ago, as the pandemic raged and many office workers were confined to their homes, Salesforce bought office communications tool Slack for $28 billion, a sum some analysts said was too high. Salesforce borrowed $10 billion to complete this transaction. This month, it announced it would lay off 8,000 people, or about 10% of its staff, much of it at Slack.
Even the biggest tech companies are affected. Amazon was willing to lose money for years to acquire new customers. It is now taking a different approach, laying off 18,000 office workers and shutting down businesses that are not financially viable.
The example of Carvana
Carvana, like many start-ups, took inspiration from Amazon’s old playbook to try to become big business quickly. Used cars, he believed, were a very fragmented market, ready to be reinvented, just as taxis, bookstores and hotels had been. It has strived to outperform any competition.
The company, headquartered in Tempe, Arizona, wants to replace traditional dealerships with, as Carvana puts it, “technology and exceptional customer service.” In what seemed to symbolize the death of the old way of doing things, she paid $22 million for a 6-acre site in San Diego that a Mazda dealership had occupied since 1965.
Where traditional dealerships were literally flat, Carvana built multi-storey car vending machines that became memorable local landmarks. Customers used to collect their cars from these towers, which now number 33. A company video about building a vending machine has over 4 million views on YouTube.
In the third quarter of 2021, Carvana delivered 110,000 cars to customers, up 74% on 2020. The target: 2 million cars per year, which would make it, by far, the largest car retailer second hand.
Then, even faster than she grew, society collapsed. When used car sales increased by more than 25% in the first year of the pandemic, it created a supply problem: Carvana needed many more vehicles. The retailer acquired a car auction company for $2.2 billion and took on even more debt at high interest. And he paid customers handsomely for the cars.
But when the pandemic subsided and interest rates started to rise, sales slowed. Carvana, who declined to comment for this article, made a round of layoffs in May and another in November. Its CEO, Ernie Garcia, referred to the higher cost of funding, saying, “We couldn’t accurately predict how this would all play out. »
Some competitors are even worse off. Vroom, a Houston company, saw its stock fall to US$1, down from US$65 in mid-2020. Over the past year, it has laid off half of its employees .
“High rates are painful for almost everyone, but they are especially painful for Silicon Valley,” said Kairong Xiao, associate professor of finance at Columbia Business School.
I expect more layoffs and investment cuts unless the Fed reverses its tightening.
Kairong Xiao, Associate Professor of Finance at Columbia Business School
For now, there is little chance of that happening. The market expects two more rate hikes by the Federal Reserve (Fed) this year, to at least 5%.
Amazon’s expansion into the physical world
The era of easy money was well established when Amazon decided it had mastered e-commerce well enough to take on the physical world. His plan to expand into bookstores had been fueling the rumor mill for years and finally came to fruition in 2015. The media went wild. According to a well-circulated story, the retailer planned to open up to 400 bookstores.
The company’s idea was that the stores would operate as extensions of its online business. Reader reviews would guide the potential buyer. The titles were presented upside down, so there were only 6,000. The stores were showrooms for Amazon electronics.
PHOTO KYLE JOHNSON, THE NEW YORK TIMES ARCHIVES
The now-closed Amazon bookstore at the University Village mall in Seattle in May 2016
Being an internet showroom is expensive. Amazon had to hire booksellers and rent storefronts in popular areas. And making rave reviews one of the selection criteria meant stocking up on self-published titles, some of which were inflated by reviews from the authors’ friends. These were not the books readers wanted.
The retailer closed 68 stores in March. Not only bookstores, but also pop up and so-called “four-star” stores. It continues to operate its grocery subsidiary Whole Foods, which has 500 locations in the United States, and other food stores. Amazon said in a statement that it is “committed to building great, long-term physical retail experiences and technologies.”
The traditional bookstore, where expectations are low, might have an easier way out now. Barnes & Noble, a chain of brick-and-mortar stores recently considered all but dead, moved into two former Amazon locations in Massachusetts, putting about 20,000 titles in each. The chain said stores were doing “very well”. She is looking for other old Amazon sites.
“Amazon has created a very different bookstore than ours,” said Janine Flanigan, director of store planning and design at Barnes & Noble. “We focus on books. »
This article was originally published in The New York Times.