In Focus: Unicorns Vs. Public Markets
Unicorn valuations are not reality, and cancel culture may be a good thing after all. Last week, WeWork's IPO got cancelled, and it may have saved retail investors millions of dollars in losses and the headache that comes with it.
Overblown Valuations and Hype
On December 3, 2015, news that Uber was looking to raise another $2.1 billion was all over the internet. The ride sharing company that upset the taxi industry was eyeing a valuation of $62 billion with the new round of funding. Four months prior, when the company was being valued at $50 billion, a leaked internal document revealed that Uber's net losses were getting larger. By April 2019 when Uber would go public, the company's valuation would be north of $80 billion. With wider net losses than it had in 2015, and more regulatory issues surrounding the company and its business model, Uber's valuation increased by 60% between 2015 and 2019. The hype surrounding the investment aspect of the company continued to build.
The hype machine, it includes our favorite writers, analysts, investors, blogs, and vlogs. That group that seems to get a dopamine hit every time they discuss the dealings of a disrupter or a new Silicon Valley billionaire. To a nation struggling to save $1,000, the hype machine continues to remind you of the billionaire entrepreneur, billionaire investor, and the multibillion-dollar company.
Uber was an easy story for the Wall Street/Silicon Valley hype machine to sell. In 2015 the company operated in multiple countries around the world, so it had broad appeal. At the same time most urban area dwellers knew of or heard of Uber. Also, it was tech but it wasn't techy, which made it easy to understand. It was the old taxi business with a nice slice of convenience added by way of an app. Uber was a business model that the most novice of investors or business examiners could understand. Every headline highlighting Uber's rising valuation left retail investors waiting for the day when they could get a piece of the ride-sharing pie.
As the everyday investor sat and patiently waited for their chance to ride the unicorn, they were given quarterly updates on the venture capitalists and accredited investors who were able to invest early. The VCs and investors who were able to secure their piece of the $80 billion pie when it was worth less than $1 billion.
The average investor was waiting for their day to make 20x or 30x on their money. The investor that missed out on Facebook, Amazon, Netflix, and Google. The ones that missed out on Apple after the stock split in 2014. This investor needed a win, a big win, and not for a new iPhone or Louis Vuitton bag that their big profits could buy, but to get their savings and investments on track. Uber, with its simple business model and its track record of increasing valuation while losing money could be a big win for the little guy.
Then it happened, Uber announced and filed for its initial public offering. As the date of the IPO got closer, earlier Uber investors made the media rounds. They explained to the public when they invested in Uber. They explained why they loved Uber, and why Uber would accomplish their mission statement of igniting opportunity by setting the world in motion.
Then the day comes, Uber is a public company. The investors looking for their big win take the bait and buy shares of Uber. Soon after investing in Uber the unicorn turns into a mule faster than Cinderella's horses turned back into mice.
Uber is down 38% from it's pre-IPO value, and is being valued by the public markets at $51 billion. But Uber is just one of several examples. Small investors who bought into the unicorn hype are experiencing losses in Lyft, which is down from its pre-IPO value, and Slack, another unicorn which is down from its pre-IPO value.
The Hype Machine Flips Sides
After several underwhelming IPOs the public markets had seen enough. It was time for companies or their early investors to answer serious questions about their businesses, their business models, and the future of the company. The first shot from the be skeptical and question everything gun hit WeWork, and it's been a nightmare for the company ever since.
In the case of WeWork, the hype machine used its influence for good. After studying WeWork's IPO filing, analysts, journalists, TV personalities, YouTube personalities, and others made their issues with the WeWork filing known. The hype machine posed questions that WeWork couldn't answer or wasn't willing to answer. Questions like, why does WeWork's CEO Adam Neumann lease properties he owns back to WeWork? Why did WeWork change its name to the WeCompany, and have to purchase the rights to the "We" name from Adam Neumann? Why did Neumann cash out $700 million worth of stock prior to the IPO? All red flags that I think would have been ignored before the Uber and Lyft IPOs.
After one week of serious questioning, and a weekend to contemplate its next move, WeWork decided to move forward without Adam Neumann as it's CEO. With pressure coming from SoftBank, one of WeWork's largest investors, Adam Neumann stepped down as CEO. There was also news that the company would delay its IPO, and that SoftBank would inject some much needed cash into WeWork to help it move past this rough patch.
The hype machine may have saved millions if not billions of dollars of capital from being lost by the average investor looking for their big win from a unicorn.
The WeWork debacle has proven to me again that money is no proof of superior intelligence or know-how. And that isn't a knock on Adam Neumann, it's a knock on the venture capitalist and investors who have money tied up in WeWork, and also WeWork's board of directors.
For all the issues the public uncovered on WeWork, it appeared WeWork's investors were okay with them, or were they? Besides SoftBank, Goldman Sachs, J.P. Morgan Chase, T. Rowe Price, and the Harvard Management Company are some of WeWork's early investors. These institutions are known to hire the best and the brightest and yet none of them questioned the governance of WeWork. Or is it now the job of VCs and seed investors to over exaggerate the greatness of bad companies they've made bad investments in? Is this the approach needed to secure a 30x return, all while leaving the small retail investor to hold the bag on a company going nowhere? It does feel that way after watching WeWork over the past several weeks.
Cancel Culture and What Unicorns are Missing
I'm not a fan of cancel culture. The exercise where someone finds a mistake from someone else's past and brings it to the public's attention in an attempt to get that person in trouble or cancelled. But in the case of WeWork, cancel culture may have done some good for the small investor.
I have stated in the past that investors, big and small have given too many companies the privilege of attempting the Amazon strategy of business building. The business model of not worrying about profits and focusing on user growth, subscription growth, customer growth, and revenue growth. Investors looking for the big win have not come to the understanding that it isn't Amazon's business model that grew the company to a trillion dollar valuation, it's Jeff Bezos. The current unicorn company's trading well below their hyped valuations have decent if not good ideas, but they don't have a Jeff Bezos, and that is the difference.
This is where I leave you, with the hype machine saving the day and using cancel culture for the good of the small investor.
P.S. I expect investors will see Adam Neumann again, better, stronger, wiser and I look forward to it. I'm rooting for the guy. Being asked to step down as the leader of the company you founded has to be extremely difficult. Also, I'm a believer that Uber and Lyft will be good companies in the future. I think there is a place in the market for both. Thanks for checking out this week's In Focus.