Not only are valuations 25% lower than they were six months ago, but fundraising cycles are longer than they used to be. Dropbox was down 20%; Snapchat, down 25%; Zenefits halved; Mongo halved; Etsy, which has lost 70% of its market value since it debuted in April, has been slapped with the shoulder.
Tech workers in San Francisco recently went to see a movie called the Big Short. The movie features a gorgeous ensemble cast that makes girls scream, including Brad, Gosling, and Christian Bale, but that’s beside the point. Focusing on the global finance in 2008, the film tells the story of several discerning investors on Wall Street who saw through the false appearance of the bubble before the CREDIT storm in 2007 and made huge profits by shorting the subprime CDS, becoming one of the few investors who made huge profits in the financial disaster. This story reminds entrepreneurs that capital is a shameless little bitch. While tech companies don’t experience the ups and downs of real estate, changes in the industry can make it easy to go from being a high-flying teenager yesterday to an old castaway today.
The unicorn’s magic is wearing thin
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In the past few years, venture capitalists have been circling young entrepreneurs like flies, especially those wearing university LOGO hoodies. Even some conservative fund managers invest in tech companies. Today, there are 144 “unicorns” with a combined valuation of $505 billion, five times more than just three years ago. And the vast majority of them — they don’t make any profit.
But capital markets are valuing startups less than they did six months ago. On November 25th Jet, an Amazon rival, announced a new $350m funding round, a lot for an e-commerce firm that makes no money and is losing money, but less than it had initially expected. Airbnb recently raised $100 million, but at the time of the report it was still valued at $25 billion, rather than rising with each new round of funding. Late-stage startup valuations are reportedly 25% lower than they were six months ago, and fundraising cycles are longer than they used to be.
In the third quarter of this year, some mutual funds, including Fidelity, joined in lowering the valuations of the startups they own. The list is a bit long, but when you see these names, everyone will say: “I have heard so much about them, like thunder.” Dropbox was down 20%; Snapchat, down 25%; Zenefits halved; MongoDB cut in half and so on. The valuations of these erstwhile unicorns are just as depressing as I was looking at the stock market in June.
The mutual funds don’t have an exact answer as to why. There is speculation that this round of lower valuations is because the growth of these start-ups has not met fund managers’ expectations. Volatility in the stock market may also be another major cause. Simply put, when investors value these start-ups, they usually value similar public companies, and if the stock market falls, they are not guilty of being linked.
Investors are increasingly aware that the high pre-IPO valuations of startups do not necessarily guarantee their future success (for some reason I think of Version 35 of Storm). Square was valued at around $4 billion when it went public, which sounds like a lot, but less than a third of its valuation in its last round of funding. Many companies experience being “undervalued”. Worse, but not worse. Etsy, an e-commerce maker of handmade goods, has lost 70% of its market value since its April debut, essentially taking a beating.
Investors in these unicorns bet that these start-ups will revolutionize society, that they will disrupt the established order, but it’s not happening as fast as they expected. While those already big tech giants like Amazon, Google and Facebook are growing like stars, they are also actively stepping into new markets (the so-called oligarchs, just like BAT, have basically taken all the explicit and implicit opportunities in China’s Internet market). Facebook has taken on Snapchat by acquiring or developing its own IM software, and Dropbox is competing hard with Amazon in cloud storage. And their valuations are not ridiculously high compared with those of most unprofitable startups, which may suggest that investors are not only overestimating the value of unicorns, but also underestimating the growth prospects of these great startups.
Investors, once loyal fans of start-ups, are now more cautious, and only a few tech experts will put pen to paper on TS. That’s when deep-pocket investors like hedge funds, asset managers, oligarchs, princes and princesses, and sovereign wealth funds stepped in to take over, but have recently gone out of style. But the unicorns’ bad habits, such as burning through cash to gain market share, are not easy to change. Lyft, Uber’s rival, lost $130m in the first half of the year on revenues of less than $50m; Instacart, a food delivery company, has been teased for losing $10 on every delivery. This pernicious competition is likely to stop only when markets turn cold and their access to finance dries up, or is corrected by investors.
It’s time to reevaluate startup valuations
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Source: Dow Jones VentureSource and The Wall Street Journal
The recalibration of these unicorns’ sky-rocketing valuations will change the vc world in three ways:
The first point, no diamond enterprises can no longer get porcelain work, the real cattle will be highlighted.Before this, when capital poured blindly into the market as if it were free of charge, truly great entrepreneurs or good ideas could not stand out in the context of “every house is a unicorn”. Companies’ crazy spending of money covers up the deficiency of their business model. DoorDash, Postmates, Caviar, Munchery and other catering O2O companies are losing money to acquire users, which not only increases their own costs, but also causes the seller to offer an inflated price during the acquisition. When capital turns cold, there are only two kinds of companies that can survive the cold: either they can stock up on the capital feast, or they can find a clearer, more workable profit model.
Second, it is hard for fake companies to maintain their unicorn image.In the past, ceos have colluded with investors to sell them privileges in exchange for fake valuations in order to get their hands on the unicorn brand. These privileges include giving late-stage investors preferential treatment when a company goes public, such as giving them more shares if the valuation falls short of expectations. That means that for the really desperate founders, the early employees, the early investors, there will be very little reward. So the recalibration of valuations will teach these entrepreneurs a lesson: less bragging and more doing.
Third, these companies will be valued closer to their post-ipo market value. The advantage of the private market for entrepreneurs is that the longer they stay, the more choice they have about how to run their companies. That’s a good thing. However, due to the nature of the public market, its strict regulatory mechanism makes the company more transparent, and high liquidity makes the market value of the company closer to its true value. If a fall in investment due to the cold winter of capital brings unicorns closer to their valuation when they list, the result will only be more disciplined unicorns. The unicorn was a true god.
Who will suffer from unicorn overvaluation
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It’s an open secret in venture capital circles that unicorns have a habit of inflating their valuations to mask their true value. To do this, startups strike special deals with investors when they raise money. If an investor pays $100 for 10% of the company, that means the company is valued at $1,000, but in fact, the investor will add additional agreements to the contract that guarantee the investor’s rate of return or priority, which indicates that the company is not really valued at $1,000. In this way, the investor’s income or investment has been guaranteed, I care about your valuation is 1000 yuan or 10000 yuan. In latter-stage capital raisings, many investors add a “Liquidation Preference” to ensure they get at least their original investment back first, sometimes with a return attached. In other cases, entrepreneurs offer investors a “Ratchet” that guarantees additional stock compensation if the company goes public and is valued below its valuation. Late-stage investors in Square, for example, are protected by this anti-dilution clause, and they still make a lot of money even if Square doesn’t go public as quickly as expected.
But the employees of these startups are the ultimate victims, and they don’t realize how high valuations hurt their own interests.
Once the preferred shares and liquidation preferences entered the terms, their common stock holdings became less valuable.These unicorns do their best to spin tales of high valuations to attract unsuspecting recruits to work for them.
There are bound to be some artificial carbon packets fishing in troubled waters amid the star-studded diamond unicorn. Some of them, though, are well valued, though they are expected to be among the winners. But the truth is, not all of them are hidden. These less-than-stellar companies have fed on the capital feast, but their business models are hard to sustain against their competitors, and hard to cut costs and raise revenues. Of capital turn cold bring create cast circle, will be a new round of precipitation, go its dregs, take its essence. The really great companies don’t worry about raising money, like Uber, whether it’s as cold as the Northeast or as cold as the South Pole. The hard ones are those that have grown on the back of other tech startups. The Bay Area and Silicon Valley, for example, are home to food delivery companies, catering companies, travel services, online-monitoring companies, app recruiters, and even giants like Twitter and Facebook that rely on tech firms’ advertising revenues.
Say so, “undervalued” in the company, capital to turn cold, and only those who are good, rich company will benefit, when Google Internet bubble in 2000 as “rubbish” will include numerous excellent engineers, or like someone whose with $2 billion in cash, but only cost $100 million each year. If there is one thing real estate has taught Silicon Valley, it is that “prosperity will soon return”. In the winter of this capital, the precipitation of high-quality enterprises, accumulated infinite energy, waiting for the arrival of spring!
Translation | FanYan punch line
Source | the economist on November 28, 2015
The view | “The rise and fall of The unicorns” & “Gored”