The pandemic drove Clubhouse to a $4 billion valuation that never looked sustainable

Social audio platform Clubhouse announced Thursday that it was laying off half its staff in order to “reset” the company. It shouldn’t come as a surprise.

If there was a posterchild for the tech industry’s irrational exuberance during the Covid pandemic, it was Clubhouse.

With the physical world closed for business, consumers looked for other ways to congregate and find entertainment. So did celebrities. So did tech executives. So did venture capitalists.

Back then, capital was still cheap and plentiful. Software was still perceived as “eating the world,” in the famous words of investor Marc Andreessen. It was time for the next great social network. Clubhouse, which allowed people to listen in on discussions about topics including music, technology, fashion, technology and more technology, was on a viral curve. MC Hammer, Oprah Winfrey, and Mark Zuckerberg were there.

In January 2021, Andreessen’s venture firm, Andreessen Horowitz, led an investment in the company at a reported $1 billion valuation, up from $100 million in mid-2020. Three months later, that number swelled to $4 billion, with Tiger Global and DST Global joining the party. As of mid-April of that year, downloads had reached 14.2 million, according to App Annie (now Data.ai), but growth had flattened before a revenue model was ever put in place.

By late 2021, the Covid boom was fading. Economies were reopening and the Federal Reserve was signaling that the extended stretch of rock-bottom interest rates would be coming to an end. Tech stocks peaked in November 2021, just as the last of a massive wave of high-valued IPOs hit the market. Share prices of stay-at-home beneficiaries like Zoom and Peloton got crushed.

The Clubhouse fad evaporated so quickly that Thursday’s blog post, indicating that the company was laying off 50% its staff, seemed as if it should’ve come many months earlier. Davison told Bloomberg in late 2021 that we “grew way, way too fast” earlier in the year.

In Thursday’s post, Clubhouse said the downsizing was necessary to “reset the company,” which, according to LinkedIn, has just over 200 employees.

“As the world has opened up post-Covid, it’s become harder for many people to find their friends on Clubhouse and to fit long conversations into their daily lives,” co-founders Paul Davison and Rohan Seth wrote. “To find its role in the world, the product needs to evolve. This requires a period of change.”

Layoffs have become a central part of the fabric of the tech industry in the past year as companies across software, e-commerce and social media grapple with a sluggish economy. There have been more than 184,000 job cuts in tech this year among more than 600 companies, following almost 165,000 in 2022 at more than 1,000 companies, according to Layoffs.fyi.

Clubhouse’s situation was more precarious than most. Its valuation was viewed as frothy even in 2021, when the market was red hot. Venture capital, particularly at the late stage, has largely dried up since early last year, and even the most promising high-valued companies like Stripe and Canva have seen their valuations dramatically reduced.

Outside of the artificial intelligence boom sparked by OpenAI’s ChatGPT, there’s little action in the world of billion-dollar private tech.

Still, the Clubhouse founders insist they have enough capital to keep going, after reportedly raising hundreds of millions of dollars in 2021.

“We arrived at this conclusion reluctantly, as we have years of runway remaining and do not feel immediate pressure to reduce costs,” the blog post said. “But we believe that a smaller team will give us focus and speed, and help us launch the next evolution of the product.”

For departing employees, Clubhouse said it’s paying salaries and covering health care through the end of August, accelerating equity vesting and providing career support.

Where does the company go from here? The founders addressed that concern as well.

“For those who are staying, we know this is a difficult time for you as well,” they wrote. “Not only are you saying goodbye to people you’ve built alongside, but many of you will be feeling uncertainty about the future. We want you to know that we’re making this change to ensure that our future is strong.”

Davison and Seth said they’re working on “Clubhouse 2.0” to be a “better way for all of us to hear our friends’ voices, have more meaningful conversations and feel connected to the people around us.” 

To succeed, they have defy increasingly long odds. Consumer internet companies win by first attracting huge audiences. Once they’ve reached critical mass, they can monetize their user base through some combination of advertising, subscriptions or virtual goods.

More often than not, though, viral apps are hot for a moment, and then die off either because the novelty disappears or a larger platform creates a copycat. Either way, when the buzz goes away, the momentum rarely returns.

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