Great article in the financial tomes today .... https://www.google.com.au/amp/s/amp.ft.com/content/43d5e972-2098-11e9-b2f7-97e4dbd3580d
Are we heading for another tech bubble with too much money chasing too few deals in the late stages of a credit cycle?
The financial times has an interesting article written by Raba Foroohar warning that 2019 may hit financial reality, and that the sustainability of the current funding model, will be subject to some much-needed testing.
Some of the new crop of hyped-up companies may eventually turn into Cheshire cats, disappearing and leaving behind only the grins of those who got out before the bubble burst.
Back in the dot com crash - the then investors were counting on a spate of hot IPOs to pour a little more kerosene on markets that were clearly over-inflated. It didn’t end well!!
Today there are many unicorns with massive valuations like Uber, Lyft, Dropbox and Airbnb looking to list at massive valuations to enable venture cap funds to “cash out”. They tend to lose money hand over fist, and yet still continue to grow in valuation. Indeed, it is all part of the new business dynamic. (Look at Amazon as a success story and role model)
Are these private companies and Billion-dollar venture funds bloated ? Last year, Sequoia raised an $8bn seed fund, and SoftBank a whopping $100bn fund.
Big, of course, begets big. As more and more heavyweight VCs bid up the value of start-ups, others have to follow. It’s up or out. The result has been not only a new bubble in IPO markets, but the undercutting of a host of public companies that actually have to worry about profits. The classic examples would be Uber’s disruption of the taxi industry, or Airbnb’s of hotels.
Massive debt financing of unprofitable firms to create monopolies might benefit some entrepreneurs and investors, but does it distort capital and labour markets and is it anti-competitive?
As long as investors are willing to accept growth as a metric for value, the music can keep playing.
University of California academics Martin Kenney and John Zysman put it in a forthcoming paper on the shifts in start-up funding, entitled “Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance” - To become a unicorn - “start-ups are each trying to ignite the winner-take-all dynamics through rapid expansion characterised by breakneck and almost invariably money-losing growth, often with no discernible path to profitability”.
They are of the view that , “unicorns are mythical beasts”.
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