
Tech Startups Face Fresh Pressure on Valuations - prostoalex
http://www.wsj.com/articles/tech-startups-face-fresh-pressure-on-valuations-1451817991?=e2fb
======
ChuckMcM
Summary, given the challenge some companies have had keeping ahead of their
last private round when it comes to public markets, large funding sources are
pulling back from their irrational exuberance of the last couple of years.

That is an entirely expected and reasonable thing for them to do. And it's
going to force some IPOs on companies that are not ready for it, and it will
cause some companies that used to be "golden" to start dismantling. And that
too is entirely expected.

And some people, perhaps a quite a few, who thought they were "set for life"
and perhaps even thought their kids were set for life, will find that maybe
they aren't really yet. That certainly happend to me during the dot com crash
and it was a sobering experience.

But like the 1,000 sea turtles that crawl out of the sand and into the surf,
the 100 that survive may do so for over a hundred years. Sadly there isn't any
easy way to figure out which are the survivors until they are the last ones
left standing.

~~~
roymurdock
How fair is it to compare this round of late-stage devaluations with the dot-
com bubble? From what I've read/heard, "irrational exuberance" is an apt
description of the scene in the late 90's and early 2000's. But it seems like
this latest tech business cycle has taken on a different flavor.

Coming off the tails of the financial crisis and great recession rather than
an era of relative peace and prosperity in the 90's, this latest round of tech
investing has been surrounded by a lot more vitriol and fear than the accounts
I've heard of the dot-com bubble, where almost everyone was benefitting from a
booming stock market and strong economy, optimistic about the future of the
internet, the country, and the world.

A prime example that really struck me the other day was PGs article on
inequality. [0] In it he expressed that he felt like he was a wild animal
being _hunted_ \- one of the most successful, famous, and well-respected VCs
in the world feels threatened by macroeconomic rumblings? And he's expressing
it publicly? Did this ever happen during the dot-com bubble? [1]

Perhaps this fear is a good thing, a tempering agent. It seems large, late-
round pension funds and institutional investors (who probably manage a great
deal of this country's retirement/savings accounts) are being cautious and
performing due diligence on these tech investments, rather than simply going
along with the crazy valuations and riding the bubble for higher management
fees and bonuses.

[0] [http://www.paulgraham.com/ineq.html](http://www.paulgraham.com/ineq.html)

[1] "I feel rather like a wild animal overhearing a conversation between
hunters. But the thing that strikes me most about the conversations I overhear
is how confused they are. They don't even seem clear whether they want to kill
me or not."

~~~
nostrademons
I think a major difference is that in the late-90s bubble, everyone felt like
they were winning. Stock market valuations were rising, many ordinary
Americans held stock in dot-coms, high-paying jobs were being created that
were being filled by ordinary middle-class people. Ordinary people could look
at their brokerage account and think "Wow, I'm rich now!"

The only problem was that it was all fictional. Having your portfolio worth a
million dollars now is useless when it's only worth $2000 when you go to sell.
Getting six-figure salaries at a dot-com when you just have six months HTML
experience is kinda ridiculous (okay, we have a variant of this today as
well).

In many ways, this boom is a lot more honest, and a lot more real. It has
winners and losers, many (but not all) of the winners put in years of hard
work to get there, and people generally have a sense of where they stand. The
problem is that there are far more losers than winners. That doesn't make for
a positive mood, or a stable society.

~~~
uniclaude
In the SV, it's not uncommon for iOS and Rails developers to be paid six
figures after only a little training.

This is exactly what you said was happening in the dotcom era: middle class
people put in high paying positions.

The point about the stock market stands though. It is the strongest difference
the current era has with the 90s.

~~~
Hydraulix989
Without disparaging iOS or Rails developers, I assume that's what nostrademons
meant when he said, "Okay, we have a variant of this today as well."

~~~
abalashov
I would have thought he was referring to something more steps down on the
totem pole. To do iOS or Rails development you actually have to know a
programming language somewhat well, especially in the case of Objective C. Or
so I would have thought; perhaps I'm in unaware of IDEs and tool chains that
can cover for a lack of fundamental software engineering expertise.

The variant I'd have in mind is web designers masquerading as backend system
developers. That's something Node has made possible. CSS and HTML experts
usually know just enough JavaScript to be dangerous--JS is table stakes these
days for UI work. Node creates the illusion that they can write backend
middleware, APIs and services, too. Some of them surely can, but for every one
of those, I've seen ten JS "rock stars" copy-and-pasting Angular and Express
code from Stack Overflow, cargo cult style, at six figures.

~~~
nostrademons
It was as Hydraulix said, specifically graduates of coding bootcamps. Many
(not all) of those programs are very reminiscent of the "web development is
hot - you can make lots of money with few qualifications!" meme that was
popular in the dot-com era.

I don't actually think that web developers of today moving down the stack is
all that problematic. For one, a number of them can - modern web development
is a lot more intricate than it was in 1997, and if you get beyond the
Bootstrap stage, it usually requires that you actually understand fundamentals
of how your browser works instead of just cargo-culting some code. People who
can do that usually do well in any programming language. Beyond that, Node
won't really let them - it will break pretty quickly if you don't understand
callbacks, async patterns, modularity, etc.

The contemporary JS world has a lot of problems, but IMHO incompetent devs
isn't actually one of them. (Going out on a limb, I'd argue that all its
problems actually stem from devs that are _too_ competent in one specific area
not understanding what's important and what's not in the larger context of the
software industry.)

------
steven2012
2016 is the year when Silicon Valley feels the wrath of Buffett's "when the
tide goes out" old saying, and probably most haven't been wearing swimming
trunks in a long time.

The stupidity, of course, is the media and the rest of the Valley using VCs'
own valuation as some sort of data, instead of the self-interested BS that it
is. VCs are the greater-fool theory in action, and the greatest fool are the
retail investors. Look at Groupon that somehow IPOed, and the only ones that
lost money were the mutual funds and retail suckers that bought in.

VCs are considered great if they are right 1 out of 10 times. The only reason
why they don't go belly up is because they stack the deck in their favor
through liquidation preferences, onerous funding terms, etc. So why on earth
would we believe them when they say companies like Lyft are worth 5B or
Snapchat is worth 20B?

When the Revaluation of 2016 hits, it will be harsh and immediate. VCs act
like a flock of birds and it's binary. Either they are in feeding frenzy mode,
or they are cowards on the sidelines. When a couple of VCs start getting cold
feet, they all get cold feet, and when that happens, unicorns start dying.
Companies like Dropbox that have a real business model but whose maximum
prospect of profits have been critically injured by Box's IPO, will probably
get destroyed by either horrible funding terms or a Square-like IPO. Lyft will
probably be dead by the end of 2016, and people will be wondering how they
burned through 1.5B in funding.

My bet is that 2/3 of the unicorns are acquihired for terrible terms, dead or
on life-support by the end of 2016. If only I could short them, I would, but
since I'm living in the Valley, I'm probably going to be negatively affected
by this unfortunately.

~~~
jedberg
> If only I could short them, I would, but since I'm living in the Valley, I'm
> probably going to be negatively affected by this unfortunately.

Hey it's not all bad. The last time this happened, traffic on 101 got really
great for a few years and you could get a reservation at any restaurant you
wanted to (assuming you could afford it).

~~~
donkeyd
Could be good for real estate prices too... If you're on the buy side.

~~~
romanhn
Didn't happen last time, as capital fled the imploding tech sector and flooded
into real estate, causing the prices to balloon rapidly compared to prior
years.

~~~
donkeyd
That's very interesting, do you know if there are any articles about that?

~~~
romanhn
There is a small blurb here:
[https://en.wikipedia.org/wiki/Causes_of_the_United_States_ho...](https://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble#Dot-
com_bubble_collapse). It leads to an article by Robert Shiller called "The
Bubble's New Home" (Google it to get around the paywall) as well as his
classic book "Irrational Exuberance".

~~~
donkeyd
Thank you!

------
hluska
It strikes me that if the WSJ ran an article with the headline, "Hluska to
earn a billion dollars in 2016" both my odds of earning a billion dollars and
my realized earnings in 2016 would go up astronomically, regardless of any
market or business conditions.

In other words, it is hard to quantify the extent to which coverage about how
the IPO market is going to stink, and how valuations are going to hit the
toilet actually cause IPO markets to suck and valuations to hit the toilet.

~~~
riggins
I don't know why your comment is being down-voted. George Soros based his
entire career on this dynamic and even coined the term 'reflexivity' to
describe it.

Here's where and why I think the disconnect happens. Most of our possessions
in day to day life tend to have a relatively stable value. Your iPhone 6 is
worth $600 dollars, oranges are $2/lbs, a t-shirt is $20. Markets for non-
capital goods (i.e. goods that are consumed with 1 yr or so) are very
efficient most of the time. However, the claim that 'markets are efficient'
(and the kinda-corollary that there's some stable intrinsic price) gets
applied to all markets all the time. But markets for capital goods are not
efficient all the time (by capital goods I mean something where the lifetime
is greater than 1 year ... e.g. houses, airplanes, financial investments like
stocks & bonds). Because most things in our everyday life have some 'true'
value its seems wrong that there are assets that don't have an 'intrinsic'
value or whose value is determined by perception.

However value is determined by perception. A great example of this is GE. A
little history ... up until the early 90's GE used to fund itself almost
entirely with short term debt. GE was able to do this because everyone
considered GE a AAA credit risk. This 'AAA' expectation from the market
actually meant huge additional profits for GE because GE could continually
borrow short term debt at short term rates (say 1%) and turn around and lend
their customers money at longer term rates (say 5%) picking up spread. In the
early 1990's Bill Gross came out and basically said 'this is crazy ... there's
no way a company that is financed almost entirely with short term debt is a
AAA credit'. Subsequently, GE was forced to term out their debt and this
coincided with GE no longer outperforming the market (I haven't followed that
closely but I think that GE has slowly been winding down GE Finance). The
point here is that expectations (specifically that GE was a AAA credit) had a
huge impact on the 'intrinsic' value of the company.

~~~
devonkim
GE spun out GE Capital entirely and is divesting from it. Even Synchrony is
separate from GE as well now. It's also selling off its appliances division to
anyone that is willing to handle it long-term (seems that the sale to
Electrolux fell through). This is all consistent with the strategy to return
GE to an "industrial" company.

------
nstj
There's a great podcast with Sam Altman discussing these "valuations" a couple
of weeks back[0]. He describes how the valuations everyone talks about in the
press often come from preferred stock financing rounds (ie: classes of stock
which come with a caveat limiting both their upside and downside). As a
result, the numbers betray what many people think to be the company's
"valuation" come IPO time (Square, which possessed a 'ratchet' was an example
of this apparently). As a result he said it's possible to largely disregard
many of the stated "valuations" in the press for these $1bn+ companies as
their financing rounds have been closer to debt than equity. One key upshot of
this also was that people holding common stock (employees who have exercised
options, e.g.) may be caught with their pants down as they made choices based
on a stated valuation which differed from that of their shares.

[0]: The Jay & Farhad Show: The Tech Industry: Tech Bubble or Tech Bust?
[https://overcast.fm/+DcD5EhUGs](https://overcast.fm/+DcD5EhUGs)

------
staunch
There are legit tech companies and there are shitty VC-backed hype machines.
The former are unconquerable forces of nature and latter should be culled
before public investors are harmed.

~~~
insidethewebb
Were the VC hype machines this big around the 2000 bubble? I was only 10 years
old back then, don't know much about the industry before the crash.

~~~
nostrademons
Relative to the intrinsic value of the organization, they were _much bigger_.

The majority of companies funded back then were e-commerce plays focused
around selling the same items you buy offline for less money and making up the
difference with VC money. As a consumer, it was pretty awesome. I remember
signing up for AllAdvantage.com in high school (that was a startup that would
pay you to view ads, and pay you for referring friends to view ads),
installing the toolbar, pocketing about $50, and then uninstalling the toolbar
once they crashed & burned and were no longer paying out money. My sister
(newly arrived at college) fell in love with Kozmo.com, which would deliver
groceries to your door at about 20% under supermarket prices.

The whole thing was a pyramid scheme designed to prop up valuations by
incentivizing early adopters with discount prices, subsidized by VC dollars,
who would unload the shares on the gullible public markets for higher
valuations. The early adopters got some nifty conveniences at bargain basement
prices; a few lucky founders & VCs got massively wealthy; most of the unlucky
founders & employees wasted about 5 years of their life; and the gullible
public lost their life savings.

There's some of that now, but it's much more muted. My wife and I ate very
well this summer off delivery startups that were offering FaceBook deals with
VC money for prices under supermarkets. However, most of the giant companies
this time around actually have solid business models that operate more
efficiently than existing incumbents. AirBnB takes advantage of surplus
housing capacity. Uber breaks local laws that enforce inefficiency. WhatsApp
ran a really lean organization so they could offer text-messaging services at
a fraction of the cost of a telecom giant. Instacart charges more than the
supermarket, and people pay it. Slack has made office messaging fun. SnapChat
at least realizes that its lack of revenue is a major problem, and they're
heads-down trying to fix it.

The public markets are not as gullible now as they were then, and so the
"unload on the unsuspecting public" strategy doesn't work as well. Companies
that are based on nothing but hype & investors dollars often flame out around
the C round now; we saw some of that with Secret and Homejoy.

~~~
timr
Not for nothing: Uber is subsidizing most of their markets like crazy in a
Kozmo-esque growth gamble (particularly in China), and there was this story
about Instacart making the rounds the other day:

[http://www.fastcompany.com/3055033/instacart-raises-fees-
and...](http://www.fastcompany.com/3055033/instacart-raises-fees-and-lays-off-
recruiters-as-its-frenzied-growth-slows)

It isn't 1999 again, but I wouldn't go so far to assume that "most" of the
giant companies are solid businesses just yet. As Buffett said, you don't know
who is wearing swim trunks until the tide goes out. Even if companies aren't
obviously subsidizing their customers' purchases (as in the first boom),
there's a lot of bubble money sloshing around, making everyone's revenue
numbers look better.

~~~
morgante
Uber offers good signup discounts and low rates when they enter a market, but
they're also making huge profits in mature markets.

They have a business model. It just takes capital to spin up new markets.
(They run a market at a loss initially, until its mature enough to take profit
from.)

~~~
timr
Unless you have access to some current insider financial data that you're
leaking here, you're _assuming_ that they're making "huge profits" in mature
markets, and you're further assuming that those mature markets can cover
everything else.

What we _know_ from observable evidence is that they're raising tons of money,
and funneling it into growth. We also know that there are lots of subsidies,
on both sides of the market -- even in San Francisco, the most mature of
Uber's markets, I regularly see and hear of driver referral bonuses.

It could well be that without the easy money, the Uber story becomes a lot
less compelling. Time will tell.

~~~
nostrademons
I think he's referring to financials that were leaked a year and a half ago,
covering SF, DC, and other market-by-market breakdowns:

[http://www.businessinsider.com/uber-revenue-rides-drivers-
an...](http://www.businessinsider.com/uber-revenue-rides-drivers-and-
fares-2014-11)

~~~
timr
Yeah, I figured, but that's pretty old information by now. In particular, it
predates the company's massive spending in China, and increased competition in
the mature markets that have been effectively deregulated (e.g. NYC).

One of the ironic things about Uber is that after they overcome regulatory
hurdles in new markets, they make business dramatically easier for their
competitors. Taxi service without regulatory capture is a commodity product.

------
paulpauper
The author mentions the worst companies that even I, web 2.0 bull, would never
invest in [http://greyenlightenment.com/billion-dollar-startup-club-
pic...](http://greyenlightenment.com/billion-dollar-startup-club-picking-
winners-from-the-losers/)

He mentions box.net but ignores dropbox. No mention of Air BNB, Uber,
Snapchat, Slack. Although these aren't public, there is an investor bias
against hardware, but such a bias is warranted given the storied history of
once high-flying hardware companies eventually soaking investors due to profit
margin compression, competition, or becoming fads or obsoleted, examples being
Sony, Atari, Garmin, Nintendo, Sega, Fitbit, Nokia, Motorola, Gopro, Jawbone,
Skull Candy, Research in Motion, and many more.

Yeah, there is valuation pressure, but for companies that aren't very good.
This is evidence investors are becoming smarter and more selective, whereas in
the 90's a company like Fitbit would have had a PE ratio of 500 instead of 50,
which is what it is right now.

~~~
praneshp
Gopro is obsoleted? Just curious why you think so.

~~~
drited
I have an opinion on this and will take a shot at it, would be interested to
see further discussion. In a recent conference call GoPro's CEO commented that
most video shot with GoPro cameras are home videos, not action videos. GoPro
may have become less relevant because smartphones can now shoot 4k video at
30+ fps. Why spend $400+ for a GoPro when you have a device that is perfectly
good for what you will be using it for already? Yes they're doing VR now but
as we've seen from the limited uptake of their 3d kits, that won't be big
enough to justify GoPro's valuation.

~~~
frik
Beside action videos, every other device is better suited for family
videos/photos. A current gen smartphone can shot 4k videos and 20+ megapixel
photos just fine (and some of them are dust and water proof) - and all with a
very easy user interface.

------
dawhizkid
My guess is that Pinterest will have the most to prove in 2016 among the
Unicorns. By far the biggest social network in terms of valuation with the
least proven source of revenue.

~~~
malandrew
Pinterest can at least insert itself between you and products you might buy to
earn referral dollars. My understanding is that for certain markets it has a
lot of eyeballs like wedding planning.

Personally, I think Snapchat has the most to prove.

~~~
boomzilla
I think the novelty for Pinterest will wear off. There is only so much
gratification in viewing beautiful pictures put together. I don't see any
other value Pinterest is providing.

Snapchat, on the other hand, at least provides a communication channel for a
very active demographics. Yes, it has to compete with a lot of big guys in the
space, but the utility is there in the product.

~~~
jedberg
You must not hang out with middle aged women much. My wife is on there all the
time, planning my daughter's birthday party or getting ideas for her next
craft project. My sister-in-law is the same.

I think someone said it elsewhere in the thread, they're replacing all those
magazines suburban housewives used to read, and they can advertise more
efficiently than those magazines because they have better data about you and
can get between you and the transaction.

------
Animats
Box. Uh oh. Maybe they shouldn't be building that second big building in
downtown Redwood City.

Could be worse. [1] That impressive building complex on the San Francisco bay
was built to be the new headquarters of Excite@Home, which went bust in the
first dot-com crash. Those buildings were empty for most of a decade.

[1] [https://goo.gl/maps/DbJevhk55wA2](https://goo.gl/maps/DbJevhk55wA2)

~~~
nickpsecurity
Excite. Oh darn, I guess I had finally forgotten they existed until you said
that. Curious, did you ever use metasearch solutions like Turbosearch that
showed top results from all those crappy engines?

~~~
Animats
No, I'm just aware of them because those buildings are near me. There's a
public jogging trail around that big complex.

~~~
nickpsecurity
Your answer is still unreal to me given I expected them to be ancient history
by now.

~~~
Animats
Excite@Home is long gone. The buildings remain.

~~~
nickpsecurity
Oh OK. That makes a lot more sense to me. :)

------
antiviral
Stock prices are often volatile the first few months after an IPO . Remember
Mark Zuckerberg's 'disappointment' in FB's stock price?
[http://www.forbes.com/sites/tomiogeron/2012/09/11/live-
faceb...](http://www.forbes.com/sites/tomiogeron/2012/09/11/live-facebooks-
mark-zuckerberg-at-techcrunch-disrupt/)

~~~
boomzilla
Actually the price tracked FB expected revenue very well. For some time after
IPO, there was serious doubt on FB mobile ad revenue (as the desktop ad was
not growing enough). They somehow grew the mobile add very well and that's
when the stock price made the U-turn. Whether the mobile ad is a proven
business or not is still the 100B dollar question.

~~~
sjg007
App installs which is like yahoo banner ads of dotcom 1.0. Re targeting is
effective though.

------
paulpauper
The one for Square is off just 20% from the private round vs. Dec. 31st close.
It hasn't really moved that much. Way too soon to assume it's under pressure.
Most of the valuations gains were made in the years leading up to the IPO, as
companies are going public later and later. That could explain why some of the
post-IPO gains seem stunted.

