September 20, 2023
Mr. Jun "Joe" Yan
Chief Executive Officer
ContextLogic Inc.
One Sansome Street, 33rd Floor
San Francisco, CA 94104Dear Mr. Yan,
I am sorry that you canceled our video call scheduled for September 15. I do not believe that conveying the following by email is as effective or polite as in person or via video.
Since becoming a publicly traded entity in late 2020, ContextLogic Inc has generated abysmal results. Between February 1, 2021, and today $18.2 billion in market value has evaporated. During the preceding ten quarters it has burned $1.6 billion in cash flow from operations alone while insiders sold about $234 million. In the recent quarter alone, it burned $88 million. This is not sustainable. If not the most egregious example of wealth transfer and breach of duty of service to owners, it certainly is amongst the most egregious.
You are not going to remediate the business of WISH. I am not alone in this view. Spending $1 on this effort is $1 too much and breaches your fiduciary duty and further sullens your reputation and that of the Board.
WISH trades at a negative enterprise value of $430 million today. I believe the only viable path forward is for the Board to immediately announce and run a strategic review process with a credible advisor which process would, in my opinion and hope, result in the cessation of all operations and the return of cash to its owners which, as of June 30, 2023, would be $22.33 versus the current stock price of $4.25.1
I expect, nay demand, the Board to address my concerns and move quickly to take the right steps on behalf of all shareholders. I will wait until 5 PM MDT on Wednesday September 27 for you to evidence action after which I, or others, reserve the right to form a Concerned WISH Shareholder Group to hold you and other directors accountable. Should such a group be formed we would, amongst other things, demand, and then disseminate select sections of the minutes from the Board meetings chronicling the historical destruction and accompanying self-enrichment by management and the Board.
Sincerely,
/s/
J. Carlo Cannell
Managing MemberCannell Capital LLC
ContextLogic ( WISH 0.00%↑ ), known for its popular shopping app Wish, is burning cash like there’s no tomorrow. As shown in the letter above, the company lost $1.6B in the past 10 quarters. That’s $1.77M a day. The company is unlikely to survive after they spend through the final cash pile. The activist shareholder wants to liquidate the company and return the cash the company hasn’t burned to shareholders. But it’s unclear how much cash will really remain after the company buys out all the employees, terminates the leases and pays off all the legal expenses and contractual obligations. It’s a mess. But how did Wish get to this point today? Why did investors put so much money into it? This company is not a fraud. Wish had decent dedicated founders early on and a reasonable executive team when they started scaling the business. But the company never actually made a profit. They perpetually exist on the promise that one day they will turn a profit and their profit will grow exponentially. But that promise never materialized and as they run out of cash, the reality gradually sets in. There’s only so much low quality junk one can buy and competitors like Shein and Temu are offering similar apps with better user experience and a lower cost structure. At the end of the day, their Wish of becoming the next Google or Facebook did not come true.
ContextLogic was founded by Piotr Szulczewski, a talented technologist who was an early Google search engineer. After leaving Google in 2009, he spent six months at home writing code for an ads recommendation platform that analyzed a person's browsing behaviors to predict their interests. He officially started ContextLogic in 2010 based on the recommendation system he built and raised $1.7 millions from prominent angel investors such as Yahoo! co-founder Jerry Yang and Yelp CEO Jeremy Stoppelman. The platform Szulczewski and his team built evolved to become Wish. Szulczewski said that with Wish his primary aim is to create "the largest, most convenient and most affordable shopping mall in the world" and to target low-income households. By 2016, Wish raised more than $1B of venture capital , spent $100M a year on Facebook Ads and has 5M+ daily visitors. Szulczewski stated in a Fortune interview that he predicted his company will be a trillion-dollar-a-year marketplace, and has publicly stated he won’t sell his company for less than $10 billion.
In total, Wish.com raised $1.6B of venture capital and another $1.1B at their IPO in December 2020. The company was not profitable at the time of the IPO as they were still on the growth mode so they intentionally lost money to *invest* in growth. But what really happened was the more revenue they generated, the bigger losses were posted. Their revenue actually peaked in 2020 at $2.5B, the year Wish went IPO. But the staggering losses were not sustainable. They had to stop setting cash on fire at some point.
Wish had been spending around $1.5B a year from 2018 to 2020 on sales and marketing to invest in growth. Theoretically, they could switch from the *growth* mode to *profit* mode by reining in the marketing costs and focus on retaining the existing users and trying to make a profit from existing users’ purchases. They finally started cutting the marketing budgets in 2021 but as a result, the sales plummeted. Annual sales dropped almost 80% from $2.5B in 2020 to $571M in 2022. Founder/CEO Szulczewski announced his resignation in November 2021 and officially stepped down in February 2022.
Before we go down the rabbit hole about Wish.com’s financials. I would like to take a step back and talk about the app itself. I installed the Wish app once on my phone and browsed around. The app was very engaging. Or, shall I say very addictive? If you like something, it would go crazy on sending me notifications and emails for things I need to see and buy. It’s like Facebook but the engagement is not merely liking, commenting or sharing a post but actually buying something. The items listed on the app are unbelievably cheap but I was really annoyed by the aggressive notifications so I deleted the app on my phone after a few days. I did order a few really cheap items basically for free from the initial promotional offer but I never received them. I could see how shoppers who love bargains will end up buying a lot of cheap trinkets on the app. But I am really not sure if the Wish app is net positive for the world given the app’s manipulative nature and the amount of stuff they sell that will quickly land in a landfill.
I watched a good number of review videos for Wish for this article. Wish is structured as a marketplace so Wish itself doesn’t hold inventory. When you buy something from Wish, you are actually buying from an e-commerce seller who lists their products on Wish. The sellers are mostly from China so when shoppers order something on Wish, it could take weeks for the shopper to receive the item. But there are a lot of incredible bargains on the app. When I scrolled through my Wish feed, I found most of the items were under $10. Unfortunately, these incredible bargains often turn out to be false advertising, scams or of very poor quality.For example, this YouTuber thought he purchased a $12 mountain bike but it turns out to be a bike light! He tried again with a $20 purchase of a 1000-piece tool set and he ended up getting a single wrench. He was refunded for the $12 *mountain bike* after going back and forth with Wish’s customer service. But he had to eat the cost for the 1000-piece tool set as he didn’t pay full attention to the fine print. These videos are hilarious and one can argue the experience is like a treasure hunt, which could be kind of fun. But I imagine Wish was having a lot of customer service and moderation issues with this marketplace model and how do they really make money by taking commission from $2 items? Well, the answer is they don’t.
So why did prominent VC funds invest so much money ($1.6B to be exact) into Wish? It’s easy to see the pitfall in retrospect. But Wish had most of the magic elements VCs look for: a visionary founder, phenomenal early growth and tens of millions of highly engaged users. Their gross margin is low, customer acquisition cost is high and the market-place asset light model is challenging operationally. But well, Uber, Instacard and Doordash had the same issues. The assumption was that Wish could address these issues over time. In addition, Wish already generated a lot of revenue back in 2015/2016 when Pinterest, Reddit and Snap had the same magic elements but had very little revenue. Pinterest and Snap have since gone public and are cash flow positive with billions of dollars of annual revenue. It’s worth noting that Pinterest, Reddit and Snap didn’t rely on paid user acquisition. These apps grew organically and then virally. I could still see how VCs rationalized the Wish investment to be the next big consumer shopping app based on its phenomenal user growth. But there were really quite a lot of warning signs: heavy dependence on paid user acquisition through Facebook ads, aggressive sales promotions, low user retention and negative contribution margin. It’s only when Wish had to cut ad spending, investors were willing to confront the fact that Wish is a commodity app with very little user royalty. By the time that happened, VCs already cashed out from the IPO and moved on.
After burning through $2B+ dollars of cash, it appears that Wish’s fate is either liquidation or bankruptcy at this point. If I were to summarize why this is happening, I would say here are the three reasons. First, unlike Uber, DoorDash or Instacart, Wish is not an essential app. After trying out Uber, DoorDash or Instacart, I think a good percentage of people (like myself) will come back and use these apps over and over again. These apps are time savers and for many people, it’s not just convenience, it has become necessities. Wish, on the other hand, is not an app people actually need. It’s a nice-to-have shopping app but it doesn’t really cross people’s mind when they need to eat or get from point A to point B. Paid user acquisition works for Uber, DoorDash and Instacart because users will return to the app organically out of convenience or necessity. But I doubt a lot of people would proactively buy a big bag of junky trinkets from Wish on a regular basis.
This actually brings out the second reason for Wish's downfall. Wish has an unprofitable business model. If you look at income statements published by Wish from 2018 to 2022, Wish’s gross profits were almost always higher than its sales and marketing costs except for 2021 when gross profit was $6M or 0.5% higher than the $1.108B of sales and marketing costs aka Facebook ad spending and special offers and discounts. Wish started cutting sales and marketing costs in 2021, and the revenue fell accordingly. Basically, Wish behaves more like an arbitrage engine. Wish spends a lot of money buying Facebook ads to acquire customers and makes the money back by taking a cut of customers’ purchases. The problem is that on average, the lifetime value a customer generates before (s)he stops using the app is actually lower than the money Wish spends on acquiring the customer. The 2021 Apple privacy changes made the customer acquisition cost rise across the board and it torpedoed Wish’s plan to make the arbitrage profitable.
Finally, Wish is not the only game in town. Wish’s popularity inspired competition. Two big competitors, Shein and Temu, emerged. These two apps are not too different from Wish. I haven’t used Shein yet but I have ordered a couple of times from Temu. It’s a bit more expensive but the quality of merchandise is pretty decent. Instead of paying $6 for a dress for my daughter, I had to pay $12 but the dress was pretty good and would have cost at least double if it was purchased from Target or Amazon. AFAIK, people who frequently use Wish will also use Temu and Shein. The switching cost is basically zero. There’s only so much junk a person can buy and if the quota is distributed across three different apps, it’s hard for Wish to fend off competition and grow revenue.
Beside the fundamental business flaws, the new post pandemic macro environment also didn’t help Wish. The era of easy money is long gone and it’s unrealistic for Wish to raise more money. This article is written in October 2023. There isn’t really much the company can do to save the business at this point. It’s either liquidation or bankruptcy. I try to come up with the moral of the story for Wish. Wish is ultimately a business failure but I feel the founders, investors and the management team acted mostly rationally. Its business model was fundamentally flawed but it’s not obvious until after the fact. I personally wouldn’t have invested because the app was too manipulative and the merchandise on the app was too junky but that’s just my anecdotal observation. The investment hypothesis was that Wish’s user base is sticky enough to yield a profit at scale. But that hypothesis turned out to be false and now it’s well established that paid user acquisition with low user retention/value is a recipe for disaster. It took a company once worth $14B with $2.7B of invested capital being wiped out to teach us this very expensive lesson.
Author Note: Dead Unicorn Series is a collection of stories I am working on by deep diving into the stories of once high flying tech unicorns that flamed out. In tech we celebrated successes. But success is a lousy teacher. In my opinion, lessons learned from failures are more valuable and these cautionary tales are more interesting. Hence, the Dead Unicorn Series.
All the stories I share here have no villains. They are just failed (expensive) experiments that advance our knowledge. I hope I made these stories entertaining enough for beach reads and the plan is to have enough of them to turn the stories into a book at some point.