A Blog by Jonathan Low


Dec 3, 2019

As $100 Billion Evaporates, Silicon Valley Adjusts To New Reality

Reversion to the mean strikes again. JL

Heather Somerville reports in the Wall Street Journal:

Silicon Valley’s highest-flying  have collectively lost about $100 billion in value this year. The magnitude of value destruction has cast uncertainty over the venture-capital industry. It has prompted soul-searching and calls for stricter corporate governance. Deals for consumer-technology companies that  six months ago would have closed in a week or two are taking a month or longer. Startups planning on raising $80 million to $100 million are being told they should expect $20 million to $30 million. “We are in dot-com bubble 2.0, except it’s not happening in  public markets but in private.”
Once Silicon Valley’s highest-flying darlings, companies from WeWork to Uber Technologies Inc. have collectively lost about $100 billion in value this year, prompting some startup executives to talk up profitability over growth as venture-capital investors grow more cautious about spending.
In recent weeks, car-subscription company Fair and software company UiPath have downsized. Scooter-renting company Lime has rejiggered its operations to prove to investors it can turn a profit.
“We’ve been in the middle of a rollicking party that’s gone on for five years and someone has snapped on the light switch,’’ said Chris Douvos, whose firm, Ahoy Capital, invests in venture-capital firms and startups. “We are all adjusting our eyes and no one has any idea how the rest of the night is going to go. That’s how Silicon Valley feels right now.”
The startup industry remains awash in cash, and with interest rates staying historically low, any further steep decline in the private markets is unlikely, investors say. Still, the magnitude of the value destruction has cast a level of uncertainty over the venture-capital industry not seen in years. It has also prompted some soul-searching and calls by investors for stricter corporate governance.
Financing deals are taking longer, say entrepreneurs, venture capitalists and startup advisers.  Deals for consumer-technology companies that just six months ago would have closed in a week or two are now taking a month or longer, say venture capitalists. Startups that were planning on raising $80 million to $100 million are now being told by investors they should expect closer to $20 million to $30 million, said Adam J. Epstein, who advises startup CEOs and their boards.
WeWork’s downfall—ignited when the shared-office company’s parent We Co. filed to go public, revealing in detail its steep losses, lax corporate governance and multiple conflicts of interest—was particularly stunning. By the time it was rescued by majority investor SoftBank Group Corp. last month, it was valued at about $8 billion, compared with $47 billion in its latest private funding round.
Uber’s market capitalization is about $32 billion below its valuation at its May initial public offering, and Lyft has lost about $10 billion in market cap since it went public in March. E-cigarette company Juul Labs, which once ranked second behind WeWork in private-market valuation, said earlier this month it is cutting about 16% of its workforce. Its largest investor slashed Juul’s valuation by $14 billion after the company shelved its best-selling vaping products amid a regulatory crackdown.
“Every few years something happens to smack people on the head,” said Mr. Epstein. “The impact of WeWork on the funding marketplace has been material. I have seen that in real time.”
At meetings with venture-capital firms over the past two months, some limited partners voiced fresh concerns about making their money back, according to investors. The number of U.S. IPOs—one way limited-partner investors get paid—fell by more than a third from the second to the third quarter this year, according to fund manager and IPO research firm Renaissance Capital. The number of funding rounds raised by so-called “unicorn” startups—or those valued at $1 billion or more—and the average dollar value of those rounds, fell in the third quarter this year to their lowest level since the second quarter of 2018, according to data firm PitchBook.
In cases where investors have chosen to impose stricter controls or tougher demands on companies, the effects have been swift.
San Francisco-based Lime was pushed to focus on turning profitable in cities after its cash burn, competition and regulatory challenges caused so much investor skepticism that the company’s last funding round, which closed in the first quarter this year, took about double the time to raise than Lime executives had planned for, a person familiar with the matter said. Lime has gotten to profitability in some cities in part by making its scooters more durable and repairs quicker, the person said. Company executives gave doubtful shareholders tours of their warehouses to showcase new efficiencies, according to the person.
Lime is fundraising again, seeking a couple of hundred million dollars by December or January, the person added. Beyond that, the company plans to rely more heavily on debt to fund its scooters. Lime says it expects to be profitable on an adjusted basis, excluding certain expenses such as taxes, in 2020.
Vitaliy Katsenelson, chief executive of Investment Management Associates Inc., likens the current moment to the correction in internet stocks two decades ago.
“We are in the dot-com bubble 2.0, except it’s not happening in the public markets but in the private markets,” he said. Mr. Katsenelson’s Colorado investment firm sold its stake in SoftBank in October over concerns about the Japanese investor’s plans for a second tech megafund.
Even subtle signs of restraint are notable in an industry that has been on a tear for the past decade, with annual U.S. venture capital investment jumping from $27 billion in 2009 to $138 billion in 2018, according to PitchBook.
New York-based startup UiPath, which sells automation software to businesses, laid off about 400 employees in October amid a new focus on profitability, according to a company spokeswoman, although she said UiPath is still hiring. The layoffs came after the company missed certain targets its investors had been expecting, said people familiar with the matter.
Fair, based in Santa Monica, Calif., laid off about 290 people last month with a month of pay and a week of health insurance. It also replaced its CEO, after spending most of a $380 million funding round in less than a year on marketing, hiring, real estate and other growth initiatives. Fair, backed by SoftBank’s nearly $100 billion Vision Fund, buys cars and leases them to consumers as well as drivers for ride-hailing company Uber, another Vision Fund investment.
Fair shows the risk of a growth-focused strategy that many investors enthusiastically supported. At Fair’s Florida operations, high dealership fees weren’t properly calculated into the cost of the cars and led to about a $300,000 loss in a single quarter, former employees said. Nearly 60% of Fair’s car leases were underwater because Fair overpaid for the cars, leased them out cheaply and didn’t always collect them when customers stopped paying, they said.
When Scott Painter, the ex-CEO of Fair, went to SoftBank to ask for more money around the time WeWork pulled its IPO, SoftBank dispatched a team of auditors to Fair’s headquarters for a joint review of its finances, according to former employees.
In the wake of WeWork’s collapse, SoftBank is pushing for a shorter time to profitability and seeking tighter governance standards for the startups it backs.
Mr. Painter, who remains chairman of the board, is seeking more capital to keep Fair running, less than a year after SoftBank valued the company at $1.2 billion.


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