This is an incredibly poorly written and just straight up incorrect article. The entire premise is based on the idea that:
1. Investors will cash out at IPO (very false).
2. These unicorns are overvalued and playing just to get to IPO (also false).
Most VCs will hang on to significant equity post IPO and as evidenced by every tech company ever, the IPO is just a start. Amazon wasn't profitable for years but look at it now. This is how investing in innovation works, sadly the Guardian has no clue as evidenced by this passage in particular:
"In that quest, you need to be both ruthless and profligate, because those incumbents are normal firms that have to make profits – a tiresome obligation that does not trouble you. So the deal you offer to investors is this: you give us shedloads of money and stick with us until we get to be the winner that takes all. And then you can cash out."
EDIT: Also yikes at the comments on this article. It looks like the Guardian knows their audience because those are some super tech hostile readers!
Ugh. This article has virtually no content. Pretty similar to most other shallow coverage of tech in mainstream media (eg NYT).
Same claims of being overvalued/never drawing a profit we’re made about FB, Amazon, etc. too. And even if you actually believe current startups are overvalued, at least provide some kind of analysis.
It also discounts how much companies like Uber and Airbnb have changed the way people live their lives in big-dollar ways. Uber might be overvalued, but there's still tremendous value in the leading global taxi company. Compare it to what Amazon did; it's that level of impact.
I personally agree that uber has had the same impact as amazon... I don't have a car, and for the monthly TCO of a nice luxury car, I get driven everywhere. It's pretty great.
The problem is twofold, for uber. First? they're losing money. If they raise prices to solve that problem, it's possible that a lot of people like me will... just buy cars again. I mean, I certainly prefer to be driven over driving, but I'm pretty price sensitive on the subject. Much more price sensitive than I am for most of the things I get from amazon.
Uber's second problem is that the difficult to compete with advantage they have, that is, that they are global, only matters to me when I travel. When I'm somewhere I've been a while, it totally makes sense to install the local taxi apps and take what is best, and most of my car hire use is in places where I am often enough to know the market. This week? Lyft is having a 25% off sale, which makes them cheaper than uber even counting the uber loyalty program and prepay discounts. Once the Lyft sale is up, I'll probably go back to Uber.
I suppose both the problems uber has come down to the same thing; the only difficult thing about replicating their business is that they are willing to lose money doing it. They just don't have a whole lot of a moat.
The hope is that the hegemony of the S.J-W unicorns, with their filtering algorithms to provide a "safe space" that avoids and blocks dissenting voices, get overtaken by companies that provide content platforms for general society, not just the SV left.
>And for that you need money, tons of it, which you have to spend like water to undercut incumbent firms that you plan to disrupt and eliminate. In that quest, you need to be both ruthless and profligate, because those incumbents are normal firms that have to make profits – a tiresome obligation that does not trouble you. So the deal you offer to investors is this: you give us shedloads of money and stick with us until we get to be the winner that takes all. And then you can cash out.
Reading between the lines: after the cash-out, the company is now vulnerable to exactly the same tactics. However, not mentioned is that the "predatory" pricing is a combination of (a) burning VC money to operate at a loss and (b) operating more efficiently than the competition.
The market seems to be wisening up to startups that are only gaining market share due to (a)[1]. Valuations and the payday from the cash-outs should reflect this. Rather than a rupturing bubble, I expect a contraction, especially as rates rise and VC cash flows less freely.
Some startups will end up being worthless, but a bunch will just end up being worth less. As long as a startup has some benefit from (b), its raison d'etre remains. And the ones with the strongest cases-- tech companies that bring efficiency gains to the market-- will be absolutely fine.
And Snap. I still have anxiety that we're in a bubble (VC investment is up 200%+ since the 2008 peak), but seeing markets behave rationally around stagnant and unsustainable businesses makes me think we've just gotten used to looking at rapid growth and saying "bubble."
There is a kernel of truth here, as not every IPO becomes an Amazon or Google - just see Snapchat and Blue Apron. Some of these companies are overvalued based on expected future profits that never materialize - in which case the markets will stop pricing them at a premium.
What is different this time is that private companies can raise huge amounts of capital that previously required being public. Early investors often cash out their shares in new equity rounds, keeping pressure off the company to IPO.
The deflation of Snapchat and Blue Apron stock is proof that the markets eventually become rational. I don't see the need to be concerned.
I remember Google and Facebook valuations called a bubble many times around the time of their IPOs. The truth: We never know (guess what? They weren't).
14 comments
[ 2.8 ms ] story [ 49.7 ms ] thread1. Investors will cash out at IPO (very false).
2. These unicorns are overvalued and playing just to get to IPO (also false).
Most VCs will hang on to significant equity post IPO and as evidenced by every tech company ever, the IPO is just a start. Amazon wasn't profitable for years but look at it now. This is how investing in innovation works, sadly the Guardian has no clue as evidenced by this passage in particular:
"In that quest, you need to be both ruthless and profligate, because those incumbents are normal firms that have to make profits – a tiresome obligation that does not trouble you. So the deal you offer to investors is this: you give us shedloads of money and stick with us until we get to be the winner that takes all. And then you can cash out."
EDIT: Also yikes at the comments on this article. It looks like the Guardian knows their audience because those are some super tech hostile readers!
Same claims of being overvalued/never drawing a profit we’re made about FB, Amazon, etc. too. And even if you actually believe current startups are overvalued, at least provide some kind of analysis.
The problem is twofold, for uber. First? they're losing money. If they raise prices to solve that problem, it's possible that a lot of people like me will... just buy cars again. I mean, I certainly prefer to be driven over driving, but I'm pretty price sensitive on the subject. Much more price sensitive than I am for most of the things I get from amazon.
Uber's second problem is that the difficult to compete with advantage they have, that is, that they are global, only matters to me when I travel. When I'm somewhere I've been a while, it totally makes sense to install the local taxi apps and take what is best, and most of my car hire use is in places where I am often enough to know the market. This week? Lyft is having a 25% off sale, which makes them cheaper than uber even counting the uber loyalty program and prepay discounts. Once the Lyft sale is up, I'll probably go back to Uber.
I suppose both the problems uber has come down to the same thing; the only difficult thing about replicating their business is that they are willing to lose money doing it. They just don't have a whole lot of a moat.
Reading between the lines: after the cash-out, the company is now vulnerable to exactly the same tactics. However, not mentioned is that the "predatory" pricing is a combination of (a) burning VC money to operate at a loss and (b) operating more efficiently than the competition.
The market seems to be wisening up to startups that are only gaining market share due to (a)[1]. Valuations and the payday from the cash-outs should reflect this. Rather than a rupturing bubble, I expect a contraction, especially as rates rise and VC cash flows less freely.
Some startups will end up being worthless, but a bunch will just end up being worth less. As long as a startup has some benefit from (b), its raison d'etre remains. And the ones with the strongest cases-- tech companies that bring efficiency gains to the market-- will be absolutely fine.
[1]https://www.moviepass.com/
What is different this time is that private companies can raise huge amounts of capital that previously required being public. Early investors often cash out their shares in new equity rounds, keeping pressure off the company to IPO.
The deflation of Snapchat and Blue Apron stock is proof that the markets eventually become rational. I don't see the need to be concerned.
-greater fool theory of investing