The rise and fall of Clubhouse, lessons for investors.

July 21, 2023
Startup Investing

The platform that everybody wanted to be a part of. From Elon Musk to Mark Zuckerberg, we saw everyone being hyped for it.

Yes, we're talking about Clubhouse, the invite-only social media platform that rose faster than a rocket and fell harder than a skydiver without a parachute, allowed users to participate in audio-only chat rooms. In just over a year, Clubhouse went from being as niche as a vegan leather store to one of the hottest social media platforms, with a valuation of $1 billion ūüíį.

But, as the saying goes, what goes up must come down, and Clubhouse struggled to maintain its momentum, eventually fizzling out like a soda left out overnight. It struggled to maintain its momentum and failed to monetize its platform, ultimately leading to a decline in user engagement and a corresponding drop in valuation. While the decline of Clubhouse was undoubtedly disappointing for its founders and investors. Who are the investors and what are some key lessons that investors can learn from Clubouse's rise and fall? 

Clubhouse received investments from several high-profile venture capital firms and individual investors. To list a few:

Andreessen Horowitz: One of Clubhouse's earliest investors who invested $10 million in seed funding in May 2020. Andreessen Horowitz also participated in Clubhouse's Series A funding round in January 2021, which raised $100 million at a reported valuation of $1 billion.

The firm's general partner, Andrew Chen, noted in a blog post that Clubhouse had "cracked the code on serendipitous conversations and user-generated content." Chen also highlighted the app's potential to become a "primary platform for social audio."

DST Global: DST Global invested $100 million in Clubhouse at a valuation of around $1 billion, which was a significant increase from the app's previous valuation of $100 million just a few months prior. The investment made Clubhouse one of the most valuable social media startups in the world.

At the time of the investment, DST Global's founder and CEO, Yuri Milner, expressed his excitement about the app's potential, saying that Clubhouse was "a new type of social network based on voice that is capturing the attention of millions of users worldwide." 

Tiger Global Management: Clubhouse's Series C funding round in April 2021, raised $50 million and reportedly valued the company at $4 billion. And this was led by Tiger Global Management. The firm's managing partner, Scott Shleifer, said in a statement that "Clubhouse is making audio social, and it's changing the way people communicate."

While we do not know the figures and losses, if you observe the user interest in the app over 2020-2021, you'd know how much of a fall the app has seen in a small amount of time. Or as the CEO himself says "it(the app) grew too fast".

Here are 5 lessons that you can learn from the rise and fall of Clubhouse as an investor:

Lesson 1: Be wary of the hype 

One of the main factors that contributed to the initial success of Clubhouse was the hype that surrounded the platform. With high-profile celebrities and industry insiders participating in chat rooms, Clubhouse was hailed as the "next big thing" in social media.

However, this hype was not necessarily sustainable, and as other platforms like Twitter and Spotify began to offer similar features, Clubhouse struggled to maintain its user base. It is essential to trust a product before joining the bandwagon.

Lesson 2: Consider the competitive landscape 

Clubhouse faced increasing competition from other social media platforms, particularly Twitter's Spaces feature. While Clubhouse may have had a first-mover advantage, the company failed to sufficiently differentiate itself from its competitors. A crowded market can make it difficult for even a promising startup to stand out.

Lesson 3: Look for clear monetization strategies 

Clubhouse struggled to monetize its platform, as it did not have any advertising or subscription revenue streams. While investors may be willing to invest in a company with a promising product or user base, it's important to consider how that company will generate revenue and become financially sustainable in the long run. There should be clear and sustainable monetization strategies that are aligned with a company's product and user base.

Lesson 4: What is the potential for long-term user engagement? 

While it experienced a surge in user growth early on, it struggled to maintain engagement over time. Many users downloaded the app but only used it for a short period before losing interest. Many users needed help catching up with the platform and its features. There was less of what people wanted and more of the features that people didn't care about.

Lesson 5: Be prepared for volatility 

As with any investment, failures, and risks are a part of the business and life. There's always the possibility that even a promising startup could experience a decline in fortunes. Clubhouse was a high-risk investment, and while some investors undoubtedly made a significant return on their investment, others likely suffered substantial losses.

In conclusion, the rise and fall of Clubhouse offer a cautionary tale for investors, particularly those considering investments in the social media space. While there are certainly potential opportunities for growth and success, investors should be careful to evaluate companies on several key factors, including competitive landscape, monetization strategies, and long-term user engagement.

By taking a measured approach and carefully evaluating potential investments, investors can increase their chances of success and minimize their risk of losses.

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