Daniel Payne — October 30, 2019 Last week The Atlantic published a piece about the bursting of the “not-come bubble”. They refer to the unicorn companies like Uber, Lyft, WeWork and Peloton which became overvalued by masquerading as tech firms. A few years ago, two major trends happened that in my mind, caused this bubble and necessitates this course correction of the startup ecosystem.
First, media and investors bought into private money valuations giving rise to the “unicorn startups”. For privately held companies valuations are set based on how much investors paid to buy in at the last funding round. As a caricature of an example, if a company issues 10 million shares and sells one share for $ 100 they are now worth a billion dollars, and have won the prize of fastest unicorn. That is exaggerated, but is it really farther from reality than WeWork being worth $ 47 billion?
Second, every company became a tech company, because tech companies trade at a multiple of revenue. Meaning that by adding some tech or the illusion of tech just about any company could get that sweet, sweet inflated valuation, even without the scalability of technology. As NYU professor Scott Galloway put it; “Find the hottest sector, and if you don’t have the insight, IP, genius, capital, code, skills, human capital, or a clue, then just borrow the words. SAAS firms trade at a multiple of revenues (yay), vs. real estate firms, which trade at a multiple of EBITDA (boo). So, We isn’t a real estate firm renting desks, it’s a Space as a Service (SAAS) firm. I know, use the word “technology” over and over, despite having little R&D and computers and stuff, and voilà … we’re Salesforce.”
The media was all too happy to become the hype machine on both fronts. Op-eds and journalist alike started cheerleading unicorns like they were a good sign for the economy. Dozens of articles saying that now “every company is a tech company” were published, spoiler alert, not every company is a tech company.
The way Uber was presented to the public was as detached from reality as an instagrammer using fake weights to sell protein powder. The company was propped up by billions of dollars in losses and claims that it was a tech enterprise with near infinite scalability. When Uber IPOed, it was losing about $ 3 billion a year, the last pre IPO valuation for the firm was $ 82.4 billion.
?????Even with the massive IPO failures of Uber, Lift and Peloton, true tech firms are doing just great. Zscaler, Anaplan, and Smartsheet are all pure software companies and trade at double their IPO price. It’s the firms masquerading as SaaS by adding a mobile app to a taxi service that are crashing into a wall at the speed of billions of dollars evaporating.
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