“They’re smart as hell and massively talented” is how one agency CEO described it.
Be that as it may, Undercurrent, the 8-year-old strategic consulting and advisory firm, officially closed its doors last Friday, only a few months after a much-hyped sale to crowdsourced product company Quirky. It caused, as expected, an outpouring of affection on Twitter for founders Josh Spear, Rob Schuham and Aaron Dignan. The shutdown of Undercurrent is being taken by both agency and startup world as a cautionary tale for what happens when you stop being independent — especially poignant considering Undercurrent had been, by most accounts, successful.
The company, which billed itself as a business and strategy firm, was born out of founding partner Josh Spear’s “trendspotting” blog. The strategy firm billed itself as “born digital,” filled with young people expert at connecting with their peers. At its peak, Undercurrent worked with big brands like Pepsi and Ford. It garnered credit (alongside ad agencies) on work like the award-winning “Refresh” campaign for Pepsi and the relaunch of the Fiesta for the auto brand where 100 young people test-drove the car and posted reviews directly on social media. Its shtick was a decidedly modern, born-on-Twitter one: It said it could provide recommendations to companies to improve the bottom line, and help with team structure and organization to grow productivity. Founders were often seen speaking in Davos or telling companies how to reach the digital-first, mobile-savvy, 21st century generation. The New York Post once called Spear “arbiter of all things hip.”
Fast forward seven years later, and the company had evolved into creating its own platforms like Pulse, which let companies see how they measured up in organization efficacy. When Quirky bought Undercurrent in April, the idea was to now become a service organization for Quirky — products that Quirky’s online community would create will get released by big brands like GE, which Undercurrent could then advise and consult with. Those products would release under the company’s name and be “Powered by Quirky.”
It wasn’t as if Undercurrent wasn’t making money; it’s just that it wasn’t making enough to keep Quirky going. In April 2015, Undercurrent’s revenue was just over $919,000, the company’s biggest month ever. There were 35 employees. The company measured its progress in “trimesters” instead of quarters as it doesn’t think three months is a long enough period to tell a story. As of April, the average revenue-per-head (an important metric in consulting) was $296,970 when calculated as an average from the trimester.
It’s not clear what plans Undercurrent’s founders have for the future — or if the company can regroup and rebuild.
Spencer Wright, who headed strategy at Undercurrent, wrote in a blog post that he and many of Undercurrent’s team had “real doubts” about Quirky and its product development. Quirky had a round of layoffs the first week Undercurrent was in its office. It didn’t affect Undercurrent much, but “it wasn’t going well, and everyone knew it,” wrote Wright. (Quirky and Undercurrent’s founders did not respond to requests for comment.) But employees say that Quirky had a complicated ownership structure that made that impossible.
4/ We spent months trying to unwind the sale when we learned how bad things were to get the people out safely
— Josh Spear (@joshspear) August 4, 2015
Undercurrent, according to employees, was and continued to be profitable. But Quirky wasn’t: Reports about its financial woes circulated in the press for months. Quirky reportedly burned through $185 million in investor money and laid of 20 percent off its staff in the past eight months alone. It also ran into problems with Wink, its highly publicized connected home platform, which also wasn’t making money. A former Undercurrent employee said that for Quirky to keep Wink, possibly its only product with some growth potential, it had to get rid of some of its other operations. In the end, Quirky got rid of Undercurrent, which while profitable, was still fledgling, bringing in about $10 million a year.
In a series of tweets on Aug. 4, Undercurrent co-founder Spear said that his team tried to back out of the sale once it figured out how bad things were.
Undercurrent was Quirky’s first acquisition, described as a “one of those things that’s hard to explain until you see it in action” by Quirky’s Ben Kaufman. The idea was that Undercurrent would act as the service piece to Quirky’s manufacturing chops so it could become more attractive to corporate brands. Undercurrent would become the “rocket fuel” corporate partners could leverage, Kaufman said at the time.
Quirky and Undercurrent also had a relationship before the deal: Co-founder Spear was a Quirky investor and a “longtime friend and advisor” to Kaufman. At the time of the deal, Dignan lauded Quirky as “the invention platform that will power every company on the planet someday.” So it was surprising to outsiders that saw the shuttering of Undercurrent three months after its acquisition. Rather than competing with agencies, Undercurrent chose to provide brand strategy only, without delivering actual work.
For creatives like James Cooper, head of creative at Betaworks, that is one reason for why it didn’t work out: It didn’t make anything. “In the last few years, clients have placed more emphasis on partners who can make things. It is now cheaper to make a site or app or film and launch it and get live feedback than to do a long strategy or think piece that raises certain hypotheses,” he said. “Undercurrent suffered somewhat from the ‘what do they actually do?’ question.”
It was also in the spotlight for its management style. (After all, it said it could help brands improve internal processes, so often used its own success as a case study.) The company was run as a holacracy — an organizational style that favors, essentially, no managers and operates on near-full transparency — for much of its existence. Over 60 percent of its employees disclosed salaries as part of the management structure. Clay Parker Jones, who was managing partner, released a “transparency report” right after the Quirky sale divulging revenue, headcount and other metrics. He also compared growth before and after Undercurrent decided to become a holacracy and found that self-management actually created more sustainable and consistent growth and engaged employees. Many of those employees are now working with clients, while others, like Wright, have gone freelance and are open for assignments.
11/ A lifetime of lessons were learned here, and many more will be realized in the weeks, months and years ahead. — Josh Spear (@joshspear) August 4, 2015
This story has been updated: An earlier version reported April revenue was $837,000. It was actually $919,000.