Irrational Exuberance Fueled Quibi's Downfall

As investors, we naturally gravitate toward stories and ideas that may generate superior returns on our hard-earned money. Particularly during the pandemic, individuals in search of outsized returns have crowded into technology names while fueling a frenzy of billion-dollar initial public offerings in businesses with no earnings.

When psychological factors like “fear of missing out” mix with blind optimism, irrational exuberance is born. The term was made famous by former Federal Reserve Chairman Alan Greenspan during a 1996 speech relating to then-budding internet companies and is as relevant today as it was then. You may know someone who has done well trading in a few technology names, or discussing an initial public offering, but the music does not go on forever. 

While some of the technology companies can justify high valuations, individuals looking to invest in new companies should exercise caution and prudence when making purchase decisions. When money begins to circulate at an increasing velocity, largely caused by irrational exuberance, companies will be eager to take advantage of the funding opportunity.

Famous investors are celebrated for their ability to outperform specific benchmarks, identify an idea before the majority catches on or see trends that might not be so obvious. Yet even they fall prey to bad investments, misjudgments on timing. It is difficult to repeat one-off successful investing decisions that were not based on fundamentals.

The story of Quibi provides a cautionary tale of blindly allocating capital to ideas that lack sound footing. 

How was Quibi the embodiment of 2020’s technology runup?

We might look back a decade from now (or not) and remember the soon-to-be defunct mobile streaming startup Quibi as “peak 2020.” On paper, Quibi had the ingredients of a successful technology startup.

Founder Jeffrey Katzenberg was former chairman of Walt Disney Studios with deep ties to all production studios. Chief Executive Officer Meg Whitman grew eBay from a company with $4 million in revenue to $8 billion. Investments of more than $1 billion were secured from nearly every one of Hollywood’s media powerhouses including Warner Media and Disney. Off to the races.

Katzenberg’s vision was to offer a unique video streaming platform that ran short-form, 10-minute episodes designed for mobile devices. The initial marketing campaign, loaded with celebrity talent, touted the ability to watch videos in landscape or portrait orientation – perfect for cellphones.

Was Quibi destined for failure?

Despite support from nearly all the Hollywood establishment, only six months after launch, Katzenberg and Whitman announced the platform would shut down. With industry titans at the helm, powerhouse movie studios funding the initial investment and a market trending toward streaming services, how could it fail?

The answer to why Quibi failed might have been cemented even before the first user signed up. In many ways, the idea was rushed to market likely because Katzenberg was enticed by irrationally exuberant investors willing to invest money without a sound fundamental plan or proper testing at smaller scale.

For all its promise, Quibi faced dozens of obstacles. An attempt to reinvent the video streaming wheel made Quibi look like the next Netflix, but when the target audience failed to materialize in a market already approaching oversaturation, it became only the most recent in a long line of technology startups to fall as quickly as they rose. In the end, all that will remain of Hollywood’s latest flop is a group of advertisers and investors on the hook for nearly $2 billion dollars.

What can you do to protect yourself?

Being aware of the risks when investing in a hot sector is most of the battle. Investors should set reasonable and realistic expectations and remember that however good an idea might sound, the price you pay for what you get and ability of management to execute on a plan are just as important.

The Quibi theme is currently running rampant, from other tech startups to electric vehicle companies attempting to capture some Tesla magic for themselves. Proceed with caution. Registered investment advisors stand by to assist if you need help thinking through these ideas.

Grant E. Stark, CFA, is director of research at CapWealth Group. Mr. Stark has experience in finance, investing, operations, due diligence and management assessment, as well as transaction sourcing and execution across both private and public sectors. He co-manages CapWealth’s investment strategies and develops the firm’s investment policies.