Valued at $4 Billion. Sold for $40 Million. This Is What Went Wrong with Allbirds.

A 99 percent drop in valuation—it’s every entrepreneur’s worst nightmare. For footwear and apparel company Allbirds, it was no bad dream.

Valued at $4 billion during its 2021 initial public offering, Allbirds agreed to a sale for $40 million late last month. Its downfall? For starters, it was a combination of expanding before becoming profitable, says Babson College Associate Professor of Practice Peter Cohan, who teaches both strategy and entrepreneurship

Cohan shares his thoughts on the once-trendy brand, and the important lessons it teaches for entrepreneurs, with Babson Thought & Action.

What lessons can aspiring entrepreneurs take away from this dramatic fall in valuation and acquisition?

“First lesson: Don’t skip the second stage of scaling. Make sure you have a profitable business before expanding—something I stress on the first day of my Babson College class Scaling Strategy: Mastering the Four Stages from Idea to $10 Billion, drawn from my book, Scaling Your Startup.

“In my course, I point out that the availability of too much capital enables companies to go public even though they skip the second stage of scaling—building a scalable business model. Instead, they go from winning their first customers (Stage 1) to sprinting to liquidity (Stage 3).

“Allbirds burned (through) $471 million without ever demonstrating a path to profitability at scale. Each new store, category, and channel should prove its profitability in a controlled pilot before a full rollout.

“The second lesson: Ignore customers at your peril. To be sure, Allbirds’ sustainability branding made the company popular with its Silicon Valley tech bro customers. However, once incumbents realized how easy it was to copy that messaging, customers moved on to rivals offering them better performance.

“If you want to expand into new product lines, you have to offer customers a product that delivers what I call a quantum value leap—far more benefits for the money than competitors do. Instead, Allbirds scrambled to develop new products without viewing those offerings through the lens of the customers it hoped to serve by providing a quantum value leap.”

Why is it better to focus on creating one excellent product rather than a handful of products?

“In the first stage of scaling, you are trying to win your first customers. To do that, you must offer customers a solution to pain that no other company is relieving. To do *that*, you must co-create a new product in partnership with an early-adopter customer—someone who wants to help create leading-edge new products.

“Once that first customer is extremely happy with your product, they are likely to recommend it highly to others. And, if you can win many customers with your first product and have saturated the market, you may grow by identifying and filling those customers’ other unmet needs.”

How else do you regularly incorporate real-world moments like this into your curriculum?

“Some examples include Apple’s electric vehicle, why Circuit City, Bed Bath & Beyond, and Silicon Valley Bank went bankrupt; and why Gartner Group stock lost half its value—among many others.”

Any closing thoughts on this news?

“Years ago, I would walk past the Allbirds store in the Prudential Center in Boston and wonder how they could afford to pay the rent. Evidently, they could not.”