On the current tech listings, irrationality and avoiding the road to systems failure…

15-4-19

Dear Partners in thought,

We read and hear more and more about well-known tech companies such as Lyft, Uber, Pinterest, Slack, Airbnb and others raising billions of dollars via Initial Public Offerings while most have never been profitable. In other words, as already stated in recent days, making them philanthropic organisations that subsidise their services, like transportation, to millions of users while large institutional investors are strangely happy to fund them as if there was no tomorrow on the basis of “first scaler advantage” that has replaced “first mover advantage”. Uber founded in 2009 never made a profit in a decade and reported a loss of USD 1.8bn last year while now raising USD 10bn and contemplating a stock market valuation of USD 120bn. By doing so “we” are leaving sound financial principles aside and entering the world of Las Vegas or faith-based betting however the brand and its appeal involved. There is something wrong with this even if many stakeholders enjoy the game and indeed win big from it at times.

Having worked with start-ups and Venture Capital and Private Equity funds for years I am fully aware of the benefits of backing start-ups and indeed valuing them through many investments rounds at levels that are not linked to their profitability, when indeed they can show some. This is one thing and arguably the only way to get those young companies to grow. It is another to tap the public markets with its many institutional investors, including pension funds, that back these huge loss-making machines, however impressive and brandnames, at outlandish valuations at IPO times as would seem the flavour of the day. One of the pitfalls of history is that memory vanishes with passing generations allowing the rising one to repeat mistakes of the old ones. Memories of the tech bubble of the turn of the century are distant or non-existent, not to mention the tulip bubble of old.

Even if today listing tech companies are older, showing far more revenues and already winners in their sectors, it does not change the fact that a USD 120bn valuation for a company that never made profit and “may not achieve profitability” is lunacy and against all the sound principles of finance. The fact that there is too much money around should not lead to such valuations, knowing that the dividends of such tech companies will never be forthcoming any time soon if ever while their stock performance is unlikely to be stellar, which should make institutional investors now virtuously priding long-termism vs. short-termism to “justify” their investment decisions ponder them a bit more if only in view of their underlying pension members or clients.    

Arguably such irrational developments may also hurt the growth prospects of much smaller start-ups which, even if they do not show unicorn features, are perfectly viable as potentially great companies but may not attract the same natural interest from some venture capitalists as they are not first scaler material. There is a need to ensure funding is sound at all levels the process from seed stage to IPO stage which should eventually produce an even greater number of attractive listing candidates for the institutional investment community in a win-win for all.

On a more macro-level such recent tech listing developments do not strengthen the viability of the financial system and may lead to systemic risks also at time when capitalism is under attack, often wrongly, from various segments of society. These tech valuation features carry the seeds of anti-capitalism promoted by extremist populism at a time when reforming capitalism should be much needed as recently and rightly suggested by the likes of Ray Dalio and Jamie Dimon so our Western liberal and capitalist model of society can survive and indeed thrive at this challenging juncture.    

Warmest regards,

Serge                     

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