One of the most successful VC investors, Masayoshi Son, has commented that “startup winter” will be here for a while.
Interestingly, he thinks so, not because there is a shortage of VC, but because entrepreneurs don’t accept lower valuations for potential unicorns. According to Son, one of the companies he financed (Klarna) has accepted a new financing round with a valuation of $6.7 billion, compared to $45.6 billion in a previous round. And leading fintech firm Stripe has also accepted a lower valuation.
Son’s point is that the vast majority of companies are unwilling to accept lower valuations based on the new reality. According to Son, “Unicorn company leaders still believe in their valuations, and they wouldn’t accept that they may have to see their valuations [go] lower than they think.”
Clearly, many of these entrepreneurs think the good times will return soon and their VC-seeking ventures will return to the glorified valuations of the pandemic boom. Will the good times return? Will company valuations return to their pandemic highs?
Or do these entrepreneurs live in a fool’s paradise? Will they pay the price for believing the recent inflated valuations? Should they now accept capital to afford a longer capital-losing launch, grow with more expensive and dilutive capital, and try to dominate their emerging markets?
Perhaps the real question is whether companies like Peloton, Posh, and LoanDepot were ever worth their stratospheric valuations? Or were they prematurely forced upon a gullible public by the foam on the stock exchange?
Are these destroyed appraisals the latest manifestation of the Greater Fool Theorynoting that investors can make money buying assets at any price if they can sell them to another “fool” at a higher price.
The current high valuations that have just been destroyed seem to be the result of the stock market boom. When the underlying foundation of cheap money crumbled, the market did the same.
So, who is the biggest fool in the current unicorn chain unraveling?
• Is it the entrepreneurs who think their companies are worth billions even when they lose money, have negative cash flow, have to rely on inflated valuation formulas and hopes – and are unwilling to accept lower valuations when the outlook changes, and investors hesitate to pay a high premium? Is it the entrepreneurs with little cash in the till who risk a bankruptcy valuation when legitimate investors leave, the buzzards arrive and the smell of failure is in the air?
• Was it the VCs who invested at high valuations expecting a quick IPO in a floating market, hoping to quickly win over the company to a hungry audience? And the IPO carousel stopped and the tide went away? As Buffett so eloquently put it:it’s only when the tide goes out that you learn who swam naked.”
• Is it the investment bankers who sell everything to anyone when there’s a chance for compensation – and produce compelling justifications at any price, until the market collapses and they’re caught with egg on their face but profit in the bank?
• Is it the experts who appear on talk shows to sell their ‘appraisal expertise’ to a gullible public after they have already invested for their portfolio or informed their paying clients?
• Is it the public who believe that tulips are worth thousands and that they come in at the bottom and come out at the top?
MY TAKE: It’s hard to pinpoint exactly one biggest fool when there are so many “smart-money” investors in the chain. A cynical view would be that the fool is the cog in the chain attached to the turkey when the music stops. In this chain, my award would go to the entrepreneurs who are not willing to raise capital at lower valuations – if they really need the capital to achieve their goals. After adopting the capital-intensive strategy and seeking VC, these IPO-hunting, capital-guzzling ventures cannot afford to lose momentum, unlike financially savvy unicorn entrepreneurs like Joe Martin who grow on cash flow. If they do, they risk losing their growth and potential to dominate – and are taken aback by their fickle investors who smell a loser. VC is available when VCs think there is unicorn potential. If the enterprises are overtaken by others with more capital and the only differentiation is capital, entrepreneurs risk the enterprise. The good times may return, but the former unicorns may not.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.