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, a well-funded unicorn in the vaping space, is cutting 650 jobs . The cuts are not a surprise. According to the Journal, the layoffs work out to about a 1/6th reduction in its workforce.

The staffing cuts are not the first we’ve seen from popular unicorns, or high-growth private companies worth $1 billion or more. , though recently public, has undergone several rounds of staffing cuts in the last year. is expected to excise a large percentage of its employee base after its failed IPO. has also cut staff. , not quite a unicorn, has also laid off workers.

The cuts come as the private market turns toward profitability over growth; while the public markets are fomenting at the moment for new stock market records, and that greed has once again overtaken fear, private investors are focused on gearing up their best bets for IPOs, changing the game from its former, Vision Fund-flavored bent.

JUUL is controversial. While its products are useful for helping adult smokers switch to a less dangerous method of nicotine ingestion, they have also proved popular with teenagers, causing fear amongst parents who would prefer their children consume fewer substances. That concern coupled with a vaping scare involving a has sharpened the public sentiment against vaping. JUUL has also been accused of marketing to teenagers, putting it squarely in the middle of the storm.

To combat teenage vaping, JUUL is (under pressure) cutting certain vaping flavors, something bound to ding its profitability.

The Money Behind JUUL

As Crunchbase News has reported, JUUL is a company with a time-tested and lucrative business model. Or less politely put, the company’s ability to sell addicting products is as effective as it probably hoped. But its ability to generate gross profit has attracted investors of all sorts:

Juul has raised $14.4 billion in, including debt financing and convertible notes, according to Crunchbase. The bulk of that funding, however, came from tobacco giant .

Nearly a year ago, Juul announced that Altria paid $12.8 billion for a 35 percent stake in the e-cigarette company. Juul knew that having the maker of Marlboro cigarettes be a large stakeholder in a company meant to help adult smokers quit cigarettes was controversial, and it released a statement saying that. But a $12.8 billion investment was huge, and it propelled Juul’s valuation to some $38 billion, according to .

A lot has happened since the investment and the criticism surrounding Juul has intensified. The company’s CEO stepped down and it that it would stop selling the fruity, creme, and mint flavored pods in the U.S. and only sell tobacco and menthol flavors. It’s unclear what percent of its sales are driven by fruit (e.g. mango), creme and mint flavored pods, but those have shown to be popular among high schoolers.

Amid the drama, Altria wrote down $4.5 billion of its investment, according to .

Juul, founded in 2015, grew astronomically fast. It seems to be unraveling at a similar pace.

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While it’s generally agreed that many unicorn companies are healthy businesses, generating winsome gross margin against which they can array operating costs while growing neatly, not all highly-valued private companies are fairing well.

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Two unicorn stumbles are triggering writedowns, showing a slip in faith amidst some of their financial backers. Today, JUUL and WeWork are back in the news for reasons different than they might have hoped. Let’s start with JUUL. Here’s :

Tobacco giant Altria wrote down its $12.8 billion investment in troubled e-cigarette maker Juul by more than a third, recording a $4.5 billion pre-tax charge against its third-quarter earnings, the company said Thursday.

As Crunchbase News reported at the time of the JUUL-Altria deal last December, the deal came after vaping company had raised lots of money from other folks. Its then-attractive economics made it look like a safe bet. Things have gone sideways since, transforming Altria’s JUUL wager from a lucrative hedge against the future to a seeming example of overpriced optimism.

Continuing the theme, WeWork’s never-ending mess slopped onto other companies with a Fidelity fund taking a hit in the process. Here’s :

Fidelity Investments cut the value of Contrafund’s stake in WeWork Companies Inc by 35% in September amid turmoil surrounding the office-sharing startup’s failed initial public offering (IPO).

As Reuters goes on to note, the total value of the writedown is only a hundred million dollars. That’s a large loss, but not when compared to the value of the Contrafund itself which includes .

What It Means

We’ve seen large amounts of capital flooding in recent years, with funding round sizes swelling as investors make big bets on companies that look promising. High profile, seemingly sound companies stumbling so badly could change that in 2020. It could affect future valuations of startups, as investors have learned a hard lesson about what companies are actually worth through the WeWork saga (i.e. they were being far too optimistic with its valuation).

It’s also a lesson that shows just because a company’s economics look good, it doesn’t mean it will be a success. Juul could have healthy economics, but so long as there are outcries about its effect on public health, it will be very hard for them to succeed in the long term.

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Burns will be replaced by K.C. Crosthwaite, an executive from Altria, the tobacco giant that bought a 35 percent stake in Juul for $12.8 billion last year.

The move marks the second high-profile resignation this week. On Tuesday, we reported �ٳ󲹳��� executives and bankers have considered laying off up to 5,000 employees to cut costs, according to a new report from , and that CEO Adam Neumann would step down.

But back to Juul. The development is not entirely a surprise as the company has made headlines (not in a good way) recently with news of “a spate of hundreds of vaping-related illnesses that have spread across the country.” In just the last week, as The New York Times , “Massachusetts announced a four-month ban on the sale of all vaping products; Walmart said it would stop selling all e-cigarettes and the F.D.A. (Food and Drug Administration) announced it had opened a criminal inquiry into the supply chain of vaping products and devices.”

Also, as our own Natasha Mascarenhas reported, the Trump administration earlier this month announced that it would ban the sale of most flavored e-cigarettes, according to many sources. The ban, partially inspired after the slew of mysterious deaths from vaping-related illnesses, has the potential to affect a company like Juul which sells a variety of pods — the cartridges that go inside of a vape — flavors, including mango and Crème Brûlée. According to the New York Times, though, Juul said it would not fight the ban, despite the fact it most certainly “would severely hurt its domestic sales.”

History

Spun out of cannabis vaporizer venture , JUUL launched its flagship nicotine vaporizer product , according to Fast Company, and has since raised a total of about . Its most recent raise was a from in July 2018 that included participation that gave the company a $15 billion pre-money valuation, according to its Crunchbase profile.

In December 2018, we reported that Altria’s plans to put about $12.8 billion in JUUL were expected to take its valuation to about $38 billion. The deal at the time made San Francisco-based JUUL more valuable than Elon Musk’s and , according to Bloomberg.

The actually goes back to 2004 when Bowen and Monsees, as Stanford grad students, begin developing an e-cigarette prototype out of foam. They ultimately formed an e-cigarette company called . Ploom’s ModelTwo product was acquired by Japan Tobacco International in 2015. The duo bought back JTI’s stake in their company and renamed it .

What launched as a device meant to reduce the definite harms of combusting tobacco now faces a global crackdown and the potential for JUUL to go up in smoke becomes a reality.

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As the FDA and Trump Administration crack down on , a San Francisco vaping company, has expanded into China, according to notices posted on two Chinese e-commerce sites: and .

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Juul has not responded to Crunchbase News inquiries regarding its China launch since Monday. One that the company is spending nearly $100 million on brand building and marketing efforts within the region.

The international expansion comes in the wake of domestic turmoil. On Wednesday, the Trump administration announced that it will ban the sale of most flavored e-cigarettes, according to many sources. The ban, partially inspired after a slew of mysterious deaths from vaping-related illnesses, could affect a company like Juul which sells a variety of pod — the cartridge that goes inside of a vape — flavors, including mango and Crème Brûlée.

Flavored e-cigarettes were banned in San Francisco earlier this year.

India, anticipating a similar expansion effort from Juul, is also looking at a crackdown. New Delhi is drafting a proposal that could make the production of e-cigarettes warrant a “jail term up to three years,” .

Juul’s expansion into China makes sense for several reasons. First, China has the world’s biggest population of smokers – roughly . Second, many manufacturing facilities are located in China. Third, China’s (example, ). This expansion and availability could, and would ideally, fight the problem of fake pods.

Juul’s definitely not the first company taking a swing at the market opportunity for e-cigarettes in China. In fact, , a former Juul chemist that helped create the first product, spun out her own e-cigarette startup as a smoking alternative: MystLabs. Its 20-person team is half based in San Francisco, and half based in Shenzhen, . This in mind, Juul is backed by billions in venture capital funding, so competitors may struggle to beat it due to sheer size.

Earlier this month, Juul raised over $780 million in debt financing.

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According to the filing, four investors contributed capital to the private securities offering, which took place earlier this month.

According to Crunchbase data, JUUL Labs has raised over to date, the surpassing majority of which came from Marlboro maker Altria Group, which purchased a 35 percent stake in Juul for .

JUUL Labs is seeking to expand the reach of its nicotine vaporizer products abroad, mostly due to a changing regulatory climate in its home markets.

JUUL Labs isn’t technically allowed to sell its product in the city where it’s based. In June, San Francisco city officials and related products within city limits. The ordinance cites research from the Centers for Disease Control and Prevention (“CDC”) on rising nicotine use among U.S. middle and high school students. The CDC found that the number of underage tobacco and nicotine users “increased 36%—from 3.6 million to 4.9 million students—between 2017 and 2018.”

On a federal level, tobacco and other nicotine products are under the purview of several regulatory agencies. A 2016 from the Food and Drug Administration (FDA) and the Department of Health and Human Services (HHS) expanded the scope of tobacco and nicotine products, “but not their accessories,” that are subject to premarket review by regulators. Nicotine-containing gels and liquids, such as those used in electronic cigarettes, are now subject to premarket review by the FDA.

In March 2019, the FDA, HHS, and the Center for Tobacco Products (an office of FDA) issued draft guidance () on flavored tobacco and other nicotine delivery products. A from former FDA commissioner Scott Gottlieb states that some flavored nicotine products like e-cigarette liquids and tobacco cigars “will no longer be sold” as a result of the new regulations.1 He also stated that new flavored e-cigarette products would be subject to premarket review starting in August 2021.

On an earnings call in January 2019, representatives from Altria told analysts that Juul’s 2018 revenue was $1.3 billion and expects to grow sales by 160 percent through the end of 2019. Altria CEO Howard Willard “anticipates 26 percent of [Juul] sales will come from international customers by the end of this year,” according to .

Nicotine is an addictive chemical that’s difficult to quit. That might be good for Juul’s business, but could lead to negative public health outcomes in a world that was, for a time, seeing declining use of tobacco and its byproducts.

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It appears that reports that Marlboro maker Altria Group Inc. is going to take a 35 percent stake in the San Francisco company , according to JUUL Labs CEO . JUUL’s founders and are thus set to become , according to Bloomberg.

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On JUUL’s , Burns wrote:

“Today, we have been joined by an unlikely – and seemingly counterintuitive – investor in our journey. Altria today announced a minority investment of $12.8 billion into JUUL for a 35% ownership in the company along with services to accelerate our mission. We understand the controversy and skepticism that comes with an affiliation and partnership with the largest tobacco company in the US. We were skeptical as well. But over the course of the last several months we were convinced by actions, not words, that in fact this partnership could help accelerate our success switching adult smokers. We understand the doubt. We doubted as well. We made it very clear that any investment would need to meet demanding and specific criteria to ensure that they are committed to our mission.”

JUUL was just founded , according to Fast Company, and has since raised a total of in venture funding. Its most recent raise was a from in July 2018 that that gave the company a $15 billion pre-money valuation, according to its Crunchbase profile.

Altria’s plans to put about $12.8 billion in JUUL will take its valuation to about $38 billion, , according to Bloomberg. The deal makes San Francisco-based JUUL more valuable than Elon Musk’s and , Bloomberg noted.

The actually goes back to 2004 when Bowen and Monsees, as Stanford grad students, begin developing an e-cigarette prototype out of foam. They ultimately formed an e-cigarette company called . Ploom’s ModelTwo product was acquired by Japan Tobacco International in 2015. The duo bought back JTI’s stake in their company and renamed it , of which JUUL was ultimately spun out.

In July, we reported that JUUL turned in $245 million in calendar 2017, “up from around $60 million in 2016,” . The company also projected revenue of $940 million in 2018, had gross margins of 70 percent, and its “2018 EBITDA projection (was) approximately $250 million,” Primack added.

As our EIC Alex said at the time, it’s kind of shocking that JUUL just might be a better unicorn than most software shops.

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We can’t answer the latter question here as we’re not equipped for it; however, we can take a stab at the former question. After all, it will be amusing if Juul is a better unicorn than most software shops.

Ready? Let’s go.

Economics

Juul’s rocketship growth isn’t new news, really. Back in November of 2017, Business Insider the company’s growth, noting that it generated $224 million in revenue “[o]ver the past year,” and it grew 621 percent in October of 2017 (roughly) compared to October of 2016.

That’s pretty fast growth to a huge chunk of top line. And per , the company’s growth has kept going.

reported that Juul turned in $245 million in calendar 2017, “up from around $60 million in 2016.” Primack went on to note three more metrics that caught our attention: Juul has projected revenue of $940 million in 2018, it has gross margins of 70 percent, and the company’s “2018 EBITDA projection is approximately $250 million.”

Holy hell.

This makes the company’s impending $1.2 billion raise against a $15 billion valuation a bit easier to understand. Here is some quick math on all that:

• Year-over-year revenue growth from 2017 to 2018 (presuming projections are hit): 284 percent.
• Implied end-of-year revenue multiple for Juul (presuming projections are hit and the $15 billion valuation holds): 16.
• ARRG ratio (more on that here): 5.6.

Translating all that into English: the company’s revenue growth from 2017 to 2018 will be staggeringly quick from a roughly quarter billion dollar base. And although the company’s revenue multiple looks steep at the moment, it actually looks quite sane when you factor in growth (ARRG ratio).

Toss in the expected quarter billion in positive EBITDA and the whole company looks healthy.

We’ll have to do a bit more division and what not in the next section, but ask yourself: is there another tech company that can match those growth and revenue numbers �ɾ��ٳ���the same level of profitability? I can’t think of one that fits the bill.¹

Unfair Comparisons

Now we turn to the . The Index tracks a host of public cloud companies, showing their combined performance compared to the various major indices and various financial metrics that it aggregates.

What comes out of the math is interesting. First, the average 2019 revenue projection for the companies in the Index is $951 million, darn close to what Juul is supposed to pull in this year (2018). And the Index companies produce an average gross margin of 72 percent—quite Juul-like, again.

Next, however, things begin to diverge. The average company in the Cloud Index is worth just $7.2 billion, far below Juul’s $15 billion price tag. But by paying more for Juul, investors are getting an expected growth rate of 284 percent from 2017 to 2018, which we can loosely contrast with the Index’s promised 2018 to 2019 growth average for cloud companies of 21 percent.

We are making an unfair comparison by using 2017-2018 numbers for Juul against 2018-2019 numbers for cloud companies. But as Juul is growing at a pace roughly 13.5 times as quickly as the contrasting average, I think that it’s fair to say that the growth gap is material and real.

Finally, the firms in the Index barely generate cash, let alone gobs of EBITDA. So even giving ourselves a bit of breathing room on a revenue multiple comparisons, Juul is far and away a generator of high-quality top line than SaaS and cloud companies. I would wager that’s due to far lower sales and marketing costs, but that’s just a hunch.

To sum quickly: Juul’s economics look great; when growth is taken into account, its revenue multiple looks pretty reasonable; and compared to some leading cloud companies, it’s very healthy as well.

Juul: .

1. Who am I missing? Email me.