After a series of “super clarifying” meetings with shareholders, Uber’s chief executive, Dara Khosrowshahi, emailed employees Sunday night with an arresting message: “We need to show them the money.”
Khosrowshahi mangled his metaphors, explaining that the market was going through a “seismic shift” and the “goal posts have changed”. The priority of the ride-hailing and food delivery business must now be to generate free cash flow. “We serve multi-billion dollar markets, but market size is irrelevant if it doesn’t translate into profit,” he wrote.
The Uber boss trumpeting cash flow and profits would once have seemed about as likely as Elon Musk clamoring about the benefits of personal humility and gasoline-powered cars. No company has been more emblematic of the long, crazy, capital-doped bull market in technology stocks than Uber. Founded in 2009, the company floated to a valuation of $76 billion ten years later without recording a quarter of its profits. The late conversion to financial orthodoxy shows how much markets have transformed since the turn in the interest rate cycle and the crash of the tech-heavy Nasdaq market, which is down 26 percent this year.
As always, when bubbles burst, it is difficult to distinguish between temporary adjustment and permanent change, between the cyclical downturn and the secular trend. Has the speculative foam just blown off the market? Or have the rules of the game fundamentally changed for those venture-backed start-ups trying to emulate Uber? I’m guessing the latter, but maybe that’s not a bad thing.
There is certainly a strong argument that the extraordinary boom in technology stocks over the past decade was largely fueled by the unprecedented low-interest policy response to the global financial crisis of 2008. With capital becoming a commodity, it made sense for opportunistic companies like Uber to spend so much money. if VC firms would give them to “blitzscale” their way to market dominance.
This frenzied expansion was accelerated by funding from a new class of non-traditional or tourism investors, including Masayoshi Son’s SoftBank and crossover hedge funds such as Tiger Global. Such funds are now seeing dramatic declines in their portfolio valuations. SoftBank just announced a historic $27 billion investment loss last year at its two Vision Funds, while Tiger Global has lost $17 billion this year.
“There was a unique set of economic and financial policies enacted by the world’s central banks that we have never seen before: persistent negative interest rates over the long term,” said William Janeway, the veteran investor. As a result, he says, some companies followed “capital as strategy” in pursuit of success, ignoring traditional metrics. “But I don’t think that’s a sensible or sustainable investment strategy.”
Investors in the stock market have reached the same conclusion and are now distinguishing between the technology companies that generate strong cash flow and profits, such as Apple, Microsoft and Alphabet, and more speculative investments, such as Netflix, Peloton and Zoom. These may have grown exceedingly fast during the COVID-19 pandemic, but they are still awash in red ink.
Just as public market investors have rotated from money-guzzling growth stocks to value-generating companies, so are private market investors following suit, said Albert Wenger, managing partner of Union Square Ventures, the New York-based VC firm. “I think this is healthy. Companies need to build real products and deliver customer value that translates into revenue,” Wenger says, even though this shift will be “very, very painful for a number of companies.”
Life is already getting awkward for late-stage startups that want to leave. Public markets are now difficult to access. According to EY, the value of all global IPOs fell 51 percent year-on-year in the first quarter of 2022. The once manic market for special-purpose acquisitions, which allowed highly speculative technology companies to go public through the back door, has been virtually frozen. Trade turnover has also fallen due to the sharp decline in mergers and acquisitions. And valuations for late-stage funding rounds have now fallen in the US, followed by the rest of the world.
Despite this, the VC industry remains stuffed with money and desperate to invest. According to KPMG, nearly 1,400 venture capital funds around the world raised a total of $207 billion last year.
While cash will be much more important, the ability of startups to seize opportunities by leveraging low-cost and powerful tools such as open source software, cloud computing, and machine learning applications remains unaffected. And a slowdown in the voracious hiring plans of the big tech companies may convince more budding entrepreneurs to give it a go. “From an investment and social point of view, we need to get a lot more shots on target,” Wenger says. There remains a screaming demand for climate tech startups to come up with smarter ways to reduce energy consumption, for example.
Venture-backed companies may have just driven the most extraordinary wealth-generating bull market in history. Such supernatural circumstances will never happen again. What follows will turn out to be cathartic rather than crisis, as long as they, like Uber, can show investors the money.
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