Opinion: Venture capitalists can be subject to the same bubbles and group think as ordinary investors.
FROM WIRED | OCTOBER 3, 2019
It would be an understatement to say that it’s been a disappointing few months for some high-profile Silicon Valley darlings. Shares of Uber, Lyft, and Peloton are trading below the prices of their initial public offerings. WeWork and Endeavor have postponed plans to go public.
Of course, venture capital investors who bet early on these companies have made many times their initial investments. But later private investors haven’t fared so well, and those who bought shares after the IPO have done worse. The cold response of the public market to what had been lauded as success stories raises questions about the health of both markets and the viability of many companies that survive the arduous culling from startups to public companies.
Those questions should be asked, not just now but always. Is the market at peak and about to fall? Are Silicon Valley venture investors overestimating the value of their companies? If so, are both private and public markets out of whack because years of cheap capital allowed venture funds to slide into carelessness? The recent high-profile flops would seem a cautionary tale, but there are also reasons not to take these stories as a leading indicator.
Of those stories, Uber and WeWork stand out. After a delay that saw its founder Travis Kalanick removed and a new management attempt to instill more professionalism, Uber did eventually go public in May, at a less than expected valuation. But the process was bruising, as institutional investors questioned the company’s viability, which received even more scrutiny when the company announced a $5 billion second-quarter loss in August, much of that due to charges for employee stock compensation. Its shares have bounced around but are now more than 35 percent below the offering price.
Compared with WeWork, however, Uber looks like a success. Like Uber, WeWork had a charismatic founder, Adam Neumann, who imbibed the Silicon Valley Kool-Aid of move fast and break things. Neumann presented WeWork as a disruptor par excellence, branding his office-sharing company a technology platform rather than a real estate company, just as Kalanick characterized Uber as a technology platform and not a ride sharing company. Like Kalanick, Neumann was forced out, but only after it became apparent that the company’s private market valuation of nearly $50 billion was a mirage bolstered by an astonishingly misguided $10 billion investment by Japanese billionaire Masayoshi Son and Softbank’s Vision Fund. The fund, with more than $100 billion in assets, bolstered by Son’s early stake in Alibaba and a considerable chunk from the Saudis, has more than enough cash to withstand the loss, which may explain why Son was willing to take such a gamble.
Following the sudden collapse of WeWork’s IPO plans, Peloton—an innovator in personal fitness that is bleeding hundreds of millions of dollars and does not see profitability for at least three years—went public and promptly sank, while the Endeavor Group, which has been attempting to rebrand itself as a multiplatform media company, took the temperature of the markets and decided it was best to shelve its own IPO plans, long in the making. And then there is Palantir, which barreled into data mining and built a significant business in both the private and government sectors but whose attempts to justify a $25 billion or more valuation in public markets have not borne fruit.
This string of high-profile stumbles has raised questions about the health of the broader market, and the economy—and given rise to clashing theories of impending doom. Some say the ability of money-losing companies to go public is a sign that the market is about to peak, on the theory that venture capital investors are trying to get what they can while they can. Others say the weak performance of these supposed giants is a sign that the market is about to crash, on the theory that if even the smart money can’t make money, then it’s clearly the end of the line. Both theories reach the same conclusion; like most theories about the market, neither has a great track record of predicting anything.
Stepping back from the noise, perhaps this is another case of bad news dominating the headlines. The tech version of the newsroom’s “if it bleeds, it leads” would be “the IPO market is broken” and “IPOs say market is poised for plunge.” But are these stories a pattern, or are we making one? Softbank has been throwing billions around. Son, its founder and CEO, has an inconsistent track record.
The rise and sudden fall of WeWork may say more about Son and Neumann and the vulnerability of private tech investors to the Steve Jobs-bad boy digital disruptor image than about public markets per se. The other IPOs misfires are worth noting, but they may be less a sign of public market trouble than a warning about private market exuberance or desperate needs for a cash exit. Given how smug venture investors can be about their ability to gauge value compared with public markets, it might be healthy for them to recognize that private markets are as susceptible to bubbles and group think as public markets.
In fact, looked at more broadly, the public markets—and tech IPOs—have done rather well this year, at least until the past few weeks. Zoom and Pinterest both had wildly successful debuts and are trading well above their initial price, as are Beyond Meat and Crowdstrike, now at the center of President Trump’s conspiracy theories surrounding servers, Russia, Ukraine, and the 2016 election.
What we have, then, is a story line that is more “tech is dead, long live tech” than one of “the end is near.” That doesn’t mean that all is well in public markets, only that these stories of IPO overreach do not in themselves point to systemic problems. It would be so nice if financial markets offered reliable tea leaves, but that would spoil all the fun.