Silicon Valley’s Darlings & Unicorn Start-Ups Snapping Under Pressure


DREW BESSETTE: Ever since WeWork’s blown IPO,
the markets and the media I’ve been looking at the venture capital space in Silicon Valley
a little more cynically. On top of WeWork exposed, you have beyond
me, Uber and the rest of the unicorns all experiencing a narrative shift. What’s the impact of all this change in the
Silicon Valley venture capital space? Is this really the end for the unicorns? That’s exactly what we’re going to talk about
on this week’s episode of The One thing. What’s going on, investors? Drew here. AK is on vacation, so for now, you’re stuck
with me. Recently, it seems like the tables are turning
on Silicon Valley. With Facebook in trouble with Congress and
WeWork’s blown IPO, all of these stories of explosive growth seem to be at an inflection. Real Vision recently interviewed Vincent Deluard. He’s the director of global macro strategy
for INTL FCStone. He makes the argument that Silicon Valley
and those unicorns are in for a rude awakening. Delaware points out that the problems facing
Silicon Valley has implications for the rest of the economy and here he is explaining that
problem. VINCENT DELUARD: I think it’s the entire model
of the Bay Area economy of rising asset prices, very high wages, most of that being stock
based and very high real estate prices. It was somewhat of a virtuous cycle for most
of the past 10 years, and with the recent slaughtering of the unicorn, I think we had
the beginning of a massive unraveling of this model. DREW BESSETTE: Deluard had problems with the
entire Bay Area business model, rising asset prices, astronomical real estate costs and
stock based compensation all point to this real concentration of wealth, but according
to Vincent, WeWork is just the tip of the iceberg. I’ll let him explain why. VINCENT DELUARD: I think we had the beginning
of a massive unraveling of this model. WeWork is like the– WeWork is not San Francisco. It is the tip of the iceberg. You see the big public ones that catch everyone’s
attention, but the way Silicon Valley works is almost like a pyramid scheme in a way where
every valuation is based off someone else’s valuation. If one needs to take a ride down, then the
entire chain needs to work its way down and then a lot of this wealth is on paper. It’s very hard to use traditional discounted
cash flow models for companies that don’t have cash flow or have cash flows that are
very negative for as far as the eye can see. You really have to price them off other deals. Most of the bubble that we’ve seen, contrary
to what happened in the late 90s in the private market, but that being said, the IPO remained
the endgame. It’s been longer and longer. You had all these Peter Pan companies that
had been from the byproduct investors for 5, 10 years. When it started, you only had series A, B,
maybe C, now, people are F and all these companies now, basically the road to public listing
is now closed and the laud investors that could bring them the liquidity, typically
division fund are just not doing so well. A lot of them use leverage. I think we are just at the beginning of this
unraveling and I don’t see a happy ending to this. DREW BESSETTE: Deluard points out that as
the deals begin to souring big VC firms like SoftBank, those firms are less likely to write
these blank checks for the unicorns. Because the venture capital pricing models
aren’t based on cash flows, a.k.a. reality, underwriters have to rely on comparable deals
to assign proper valuations to these companies for their series A, B, C, D, you get the point. When those deals start to go belly up, the
Ponzi like aspect that Vincent mentioned starts to rear its ugly head. Back in July, Real Vision had Josh Wolfe of
Lux Capital on to talk about exactly this issue. Here he is explaining. JOSH WOLFE: A marginal buyer on the public
equities who maybe was the corporation buying back its own stock, in my world, the marginal
buyer is two kinds. One, you’ve got SoftBank, which is setting
an irrational price. They have an enormous amount of money to put
to work and have put to work pricing up their own stock. We’ve talked on Real Vision before about this
in the past with Mike. I think that they have created irrational
comps that other people have referenced to that have set artificially high prices that
are almost equivalent to leverage because a 10% or 20% down round wipes out everybody
in that capital structure stack. DREW BESSETTE: It’s a disaster for the valuation
of your company when the valuation of the company that your valuation was based on suddenly
and dramatically decreases. Imagine being the impossible burger guys seeing
beyond meat stock tank right after the IPO. If you don’t have any cash flows or frankly
any other revenues to provide some benefit of the doubt to refute the comparison, what
happens when the pricing model collapse? You revert to the last pricing model. Unfortunately for a lot of these unicorns,
that’s a terrible sign. Just look at WeWork. They went from a $47 billion valuation to
a $7 billion valuation getting bailed out of bankruptcy in like two weeks. Their lifeblood is this access to cheap capital. When that pool runs dry, the industry is going
to change forever. Is this problem contained to Silicon Valley? What does it mean for the broader markets
and economy? Here’s Vincent again. VINCENT DELUARD: Lack of profit is not just
a unicorn started the phenomenon. If you do get there, the Russell 2000, about
a third of Russell 2000 companies do not make profit actually. I counted. There was about 18% of the companies that
lost money in 15 of the past 16 quarters. That’s a significant number and then and not
just tech startup or biotech companies. Again, we have tax rates at the lowest they’ve
been since the end of the war, we had the unemployment rate of the lowest it’s been
for, again, the end of the war, interest rates at about a 5000-year low and still, you have
a third of the market that cannot turn a profit in another circumstances. At the same time, you’ve seen these explosion
in debt per share, three, four x on the Russell 2000 since 2011. You have all the ingredients for a major correction. DREW BESSETTE: 18% of the companies in the
Russell 2000 have lost money in 15 in the last 16 quarters. Despite the cheapest cost of capital in 5000
years, there are still companies that can’t figure out how to get profit. That unprofitability could be the kiss of
death for any new financing and that has major implications for the rest of the economy. I use the word contain because I want to remind
you of the last time a financial issue had to be contained. Remember when Ben Bernanke he said that the
subprime problem was contained? Things are starting to smell a lot like 2008. Now, I’m not standing here telling you that
the sky is falling and that history is repeating itself. What I am saying is that if these pricing
models collapse, like Vincent said, those valuations are in for major corrections. These major corrections will bleed into the
rest of the economy, considering how interconnected the modern financial system is and that’s
a bad sign. If you want help tracking that narrative,
or you just want to learn more about the venture capital space in Silicon Valley, subscribe
to Real Vision. I’ll talk to you next week.

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32 thoughts on “Silicon Valley’s Darlings & Unicorn Start-Ups Snapping Under Pressure

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  2. The sad reason that any of these deadbeat Venture enterprises came to being in the first place was because of easy money. Easy money came about by policies both endorsed by the United States popular government at the time, or implicitly through the aid of the federal reserve and its steering of American Finance. It's a captured system. It has been for years. The only reason the fall of any of these duds has implications for the American economy is because Americans have either been too naive to see how empty the promises are, or who are themselves embedded in this hyper debt-monetized post-profit circus economy.

    The only way American Finance can eject from this joke is by renouncing the policies that lead up to its fruition. We never acknowledged the disaster of the 2008 recession, we just affirmed political bailouts and kicked the can down the road. Well now we're at the can again. And BOY do old bernard and Warren look eager to make the next punt. Soon you'll be hearing how profit doesn't matter, wealth doesn't matter, and hell, Competence doesn't matter! Stop being so anti-social guys, just open up your hearts(wallets)..to the government!

  3. The problem with these unicorn stocks is their valuations are out of control to begin with (this is because of Cheap money and quantitative easing) money has to be invested and has nowhere else to go

  4. I think after UBER and wework, a new era began.

    The investors will think twice to IPO a money losing giant!

  5. Yay, let's wait for a no-deal with China so we can blame Trump for the bear market and everything bad in the world that will follow

  6. The history is just continuing itself. The inevitable could not have been prevented by just throwing money at the problem from people's pockets. Now let's see how many deals to delay it have been cut.

  7. For 5 years they did not make profit… and they are not bankrupt maybe they are just making profit negative to not pay taxes?

  8. The swinging jazz beat is just distracting.. Over produced ;, I don't think the target audience needs all the sound effects and cookie cutter youtube editing BS.. gross

  9. And you can put the oldest start-up in town at the top of this unicorn list. Tesla has been going since 2008, has only shown a small profit for two quarters that entire time and has….wait for it…12 Billion dollars of debt. That's the debt level of a small country. The big (and only) hope is China production and sales. Braaaaahhahaha. I think this channel knows what I'm laughing about.

  10. It simply shifted the meaning of value vs growth. It also shifted the meaning of earning fiat dollars vs true money (bitcoin.)

  11. Pyramid scheme. That is all needed to explain the FANGs, Wall Street, Fed, and the entire debt bubble. Tragedy. The white male is wiped out and replaced by women and minorities pillaging the market place. Sad and tragic.

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