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Can Tech Unicorns Cash Out before the Bubble Bursts?

January 28, 2019 By Jeremy Jones, CFA

By Apl56 @ Shutterstock.com

In a piece in the Financial Times, Rana Foroohar discusses today’s tech valuations, and whether or not companies thinking about IPOs can cash out before the next bubble bursts in the tech sector. Foroohar explains the messy dynamics of tech investing today, and how that is hurting the sector’s prospects. She writes:

There were many disconnects between last week’s World Economic Forum and the real world. One of the most notable was the techno-optimism displayed by many participants, which was in sharp contrast to what the markets themselves are expecting from the technology sector this year.

The coming spate of initial public offerings in particular looks shaky. Uber’s chief executive Dara Khosrowshahi was all over Davos, talking up the company’s forthcoming initial public offering. But the talk had a whiff of desperation. Uber, along with Lyft and a host of other large, still-private tech companies such as Slack and Airbnb, are likely to try to go public sooner rather than later — not only because of worries about a coming recession and volatile markets, but because they have grown so fat on private funding, it is unclear whether the market will be able to sustain their valuations. (Uber’s, for example, is pegged at $100bn.) They want to get their money while the getting is good.

It is a situation that is both similar, and not, to the dotcom boom and bust that occurred at the turn of the century. Back then, I was working in venture capital in London. Companies like the now-defunct, LVMH-backed online retailer boo.com — the pets.com of Europe — were spending millions on glossy ads, and would-be entrepreneurs were trolling for easy money at First Tuesday networking events. Remember those little red-for-investor or green-for-talent lapel dots everyone had to wear?

Then, as now, we were at the late stages of a credit cycle, with too much money chasing too little value. And then, like now, investors were counting on a spate of hot IPOs to pour a little more kerosene on markets that were clearly over-inflated. We all know how that ended, on both sides of the Atlantic.

That is not to say that there wasn’t value created then, as there has been now. For every unsuccessful dog food retailer or expensive T-shirt purveyor that went out of business in the dotcom bust, there were miles of broadband cable laid, which created the infrastructure that companies such as Google now capitalise on. Today, the sharing economy has markets and conveniences where before there were none.

The real difference between the two eras is in the capital markets themselves. Venture money collapsed post-2000, came back up, fell again after the financial crisis, then rebounded to record levels after 2014. The number of new start-ups has proliferated. Yet the number of IPOs has fallen. This is due to a paradox — while technology has made starting a company cheaper, becoming a success is now more expensive. That is because of an arms race to build the next “unicorn” start-up, one with a market capitalisation of over $1bn.

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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