WeWork filed for bankruptcy on Monday. Allbirds is a penny stock. Companies like these are why I invest in pure software — only.

The Penny Stock Parade

WeWork peaked at a valuation of $47 billion. It was once the most valuable startup in America.

Now, it’s a penny stock.

The same goes for Allbirds, the once celebrated shoe company. Despite being on every foot in Silicon Valley, Allbirds too is a penny stock — 95 pennies, to be exact.

In the boom times, countless companies raised venture capital by spreading a thin veneer of tech to their old school businesses. Venture capital, which used to back software, began to invest in coffee, eyeglasses, you name it.

Now, those companies are circling the drain.

Even the Biggest Successes Are Struggling

It’s hard to think of a bigger darling in D2C than Warby Parker. As a lifetime glasses wearer, I have to admit, they look cool.

But you know what doesn’t look so cool? Their stock chart.

Warby has avoided penny stock territory, but it’s still down over 80% from its 2021 IPO.

A couple of years ago, you couldn’t ride the NYC subway without seeing a Casper ad. Often, the entire inside of the train was covered in them!

But Casper also turned out to be a flash in the pan.

The company IPO’d in 2020 far below its last private valuation. The stock continued to fall, dropping over 75% before being bought out by a private equity firm for peanuts.

Why Are These Businesses Doing So Poorly

None of these companies should’ve ever raised a dime of venture capital.

Venture capital is meant for highly scalable businesses. Adding one more user to a software product like Salesforce costs basically nothing.

Since high margins kick in at scale, it’s okay for these companies to lose money in the beginning.

The fixed costs of building a product are high. But once software businesses reach a certain size, they become money machines.

Indeed, Salesforce is worth over $200 billion, orders of magnitude higher than any of the other companies we just talked about.

Businesses involving “stuff” like offices or mattresses aren’t easy to scale. And the margins stink.

I don’t blame the founders of WeWork, Casper, or any other company for taking venture capital. Founders get money where they can.

I blame the VC’s for handing it out.

What I Look For Instead

I like businesses that are pure software.

Salesforce makes a CRM it sells to businesses. There is no stuff — just code.

There are no supply chain issues. Adding another user is trivial. And it’s pretty hard to knock off.

You can’t say the same for a mattress.

What’s more, many pure software businesses are winner take all.

If Salesforce is the best CRM for large companies, that’s what you’re going to use. Since it scales easily, there’s no reason the entire Fortune 500 can’t use it.

And indeed, 90% of them do.

Wrap-Up

I want a portfolio full of Salesforces, not WeWorks.

So I look carefully at a startup’s business model. Is it pure code? Is it scalable?

If not, it’s a pass.

There are other forms of financing that can work for old school businesses. Bootstrapping and bank loans are a few options.

But they should never raise venture capital.

What do you think of WeWork and Allbirds? Leave a comment and let us know!

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More on tech:

WeWork’s Bankruptcy: A New Beginning?

Super Pumped (Part Three): What Uber Can Teach Investors

Super Pumped (Part Two): The Rise and Fall of Travis

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Photo: “WeWork Büro Außenansicht Glaseingang” by verchmarco is licensed under CC BY 2.0.