After a series of “super clarifying” meetings with shareholders, Uber CEO Dara Khosrowshahi said, emailed Staff on Sunday night with a captivating message: “We have to show them the money.”
Khosrowshahi garbled his metaphors, declaring that the market is experiencing a “seismic shift” and the “goalposts have changed.” The ride-hailing and food-delivery company’s priority now must be generating free cash flow. “We serve multi-trillion dollar markets, but market size is irrelevant unless it translates into profit,” he wrote.
The Uber boss touting cash flow and profits would once have been as likely as Elon Musk yelling about the benefits of personal humility and gas-powered cars. No company embodies the long, crazy, funded tech stock bull market more than Uber. The company founded in 2009 floated a decade later at a valuation of $76 billion without making a single quarter of a profit. His belated switch to financial orthodoxy shows how much the markets have changed since the turnaround in interest rates and the crash of the tech focus Nasdaq market, which is down 26 percent this year.
When bubbles burst, it remains difficult to distinguish between temporary adjustment and permanent change, between cyclical downturn and secular trend. Has the speculative froth just blown off the top of the market? Or have the rules of the game fundamentally changed for the venture-backed startups trying to emulate Uber? I’m betting on the latter, but that might not be a bad thing.
There’s certainly a strong argument that the extraordinary boom in tech stocks over the past decade was largely fueled by unprecedented low interest rate policies in response to the 2008 global financial crisis. As capital became a commodity, it made sense for opportunists to grab as much cash as VC firms would give them to companies like Uber to blaze their way to blitzscale for market dominance.
This insane expansion has been accelerated by funding from a new class of non-traditional or tourist investors, including Masayoshi Son’s SoftBank and “crossover” hedge funds like Tiger Global. Such funds are now experiencing spectacular slumps in their portfolio valuations. SoftBank just announced a historic $27 billion investment loss last year at its two Vision Funds Tiger Global lost $17 billion this year.
“There was a unique set of economic and financial policies being enacted by the world’s central banks that we’ve never seen before: sustained negative interest rates for the long term,” says William Janeway, the veteran investor. As a result, he says, some companies pursued “capital as a strategy,” who seek their way to success and ignore traditional metrics. “But I don’t think that’s a sensible or sustainable investment strategy.”
Stock market investors have come to the same conclusion, and are now distinguishing between tech companies that generate strong cash flow and earnings, like Apple, Microsoft, and Alphabet, and more speculative investments, like Netflix, Peloton, and Zoom. These may have grown extraordinarily quickly during the COVID-19 pandemic, but they’re still awash in red ink.
Just as public market investors have morphed from money-hungry growth stocks into money-worthy companies, so are private-market investors following suit, says Albert Wenger, managing partner of Union Square Ventures, the New York-based VC firm. “I think that’s healthy. Companies need to build real products and deliver customer value that translates into revenue,” says Wenger, although this shift “is going to prove very, very painful for a number of companies.”
Life is already getting rough for late-stage startups looking to exit. The public markets are now difficult to access. According to EY, The value of all global IPOs in the first quarter of 2022 fell by 51 percent year-on-year. That once manic market for special purpose acquisition companies that allowed highly speculative tech companies to go public through the back door is all but frozen. Retail sales have fallen, as has M&A activity strongly contracted. And reviews for Late Stage Financing The rounds have now fallen in the USA, with the rest of the world following behind.
Nevertheless, the VC industry remains stuffed with cash and is keen to invest. According to KPMG, Nearly 1,400 VC funds around the world raised a combined $207 billion last year.
While cash will count far more, startups’ ability to seize opportunities through the use of cheap and powerful tools such as open-source software, cloud computing, and machine learning applications remains untarnished. And a slowdown in the big tech companies’ voracious hiring plans could convince more budding entrepreneurs to give it a try. “From an investment and social point of view, we have to shoot a lot more at goal,” says Wenger. There continues to be a screaming demand for climate technology startups, for example to invent smarter ways to reduce energy consumption.
Venture-backed companies have just witnessed perhaps the most extraordinary wealth-generating bull market in history. Such supernatural states will never happen again. What follows will prove to be more of a catharsis than a crisis as long as they, like Uber, can show the money to investors.
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