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Some thoughts on Silicon Valley's endgame. We have long said the biggest risk to the bull market is an Uber IPO. That is now upon us.
1) In 2015, venture capitalist Bill Gurley predicted “dead unicorns" and that all these private valuations are "fake." Now he has reconsidered his view, “You have to adjust to the reality and play the game on the field.” There are no more disbelievers, except @chamath.
2) The value of the Nasdaq grew from around 1,000 points in 1995 to more than 5,000 in 2000 at the bubble peak, which mirrors the extreme jump in US unicorn valuations from $100 billion to about $500 billion in the past five years.
3) China is now home to 168 unicorns, worth a total $628 billion. It now takes just four years, on average, in China for a new company to achieve unicorn status compared to seven years in the US. In fact, nearly half of the Chinese unicorns became so just two years after launch.
4) The median global VC deal size for late-stage companies was around $11 million in 2017, but now mega-rounds of $100 million-plus are more common. So much so that CB Insights is considering lifting its threshold of a mega-round to $200 million or more.
5) VCs raising ever-larger funds at an increasing pace, despite a lack of viable opportunities. Sequoia raised $8bn, largest ever by US venture firm. “It’s easier to raise money than anytime I’ve been in the business," said David Rubenstein. Does not bode well for future returns.
6) Gulf money is notoriously late to the party, purchasing Carlye Group in 2007 at the peak of the credit bubble, and anchor investors in Glencore IPO in 2011 at the peak of the commodity bubble. Now they are "all in" on Uber and opened offices in Silicon Valley to do more.
7) Discipline is loosening considerably. @bfeld noted, "A number of companies, often times with nothing more than a team and a Powerpoint presentation, have had great success raising capital north of that $10 million level... I view this as a significant negative indicator."
8) Bird is fastest company to unicorn valuation, raising four rounds in less than 12 months. In less than six months, DoorDash’s valuation nearly tripled to $4 billion. Robinhood went to $5.6 billion from $1.3 billion. Coinbase to $8 billion from $1.6 billon.
9) There has been a 10-fold increase in VC-stage investment by mutual funds in just three years, with more than 250 funds now holding positions in private tech companies.
10) After the new SEC chairman, Jay Clayton, “pledged” to look after ordinary investors upon taking the job, he said he wants to make it easier for small mom-and-pop investors to invest in private companies.
11) Stanford professor Strebulaev examined 135 unicorns and found nearly half would lose unicorn status after taking into account the complicated structure of multiple funding rounds and generous promises to their preferred shareholders.
12) Because of QE, capital was abundant, but had nowhere to go and be productive because the world was still in a downturn. The scarce asset was “growth” and so have created a bubble in the riskiest long-duration asset—venture backed companies.
13) As @lessin puts it, technology was a “bubble of last resort"... soaring tech valuations are really more a commentary on the plummeting value of capital than the value of tech companies themselves. This is now changing, money is becoming scarcer and cost of capital is rising.
14) Uber's new CEO said, "We suffer from having too much opportunity right now as a company." Uber addresses this ailment by burning money some $20 billion since it’s founding a decade ago and now accessing public markets as private capital is tapped out.
15) A century ago, railroad entrepreneurs found a ready market to fund their massive expansion plans based on an extreme overestimation of the market opportunity. This ended badly, of course, and holds more parallels to today’s ride-sharing companies than we might like.
16) On seeing the announcement of a new issue of stock by the Northern Pacific and Great Northern roads, Jesse Livermore said, “The time to sell is right now... If money already was that scarce and the railroads needed it desperately. What was the answer? Sell ’em! Of course!"
17) Saudi Arabia is the single largest funding source for US startups, funneling at least $15 billion since mid-2016. As @karaswisher said, "If you remove the Saudis from the worldwide network, everything collapses." By comparison, China has invested $11 billion since 2000.
18) Masa announced a second $100 billion Vision Fund last year. Saudis committed another $45 billion. But after the Khashoggi murder, Softbank raised doubts over its plans. Without a second Vision Fund and with tighter scrutiny on China investing in US, party coming to an end.
19) Just as churches once raised the highest towers of the city, wealthy individuals use skyscrapers as egotistical personal and corporate symbols at the peak of every cycle. Salesforce Tower, the new tallest structure in San Francisco, is the church of our time.
20) At the opening last May, the building was christened as a symbol of “transformational optimism” that “courageously reaches up to the clouds” and creates a “seamless connection between heaven and earth.”
21) Transamerica Building became the city's tallest in 1972. What followed was a collapse in the high-flying Nifty Fifty growth stocks and the vicious 1973-74 bear market, the worst ever since the Great Depression. Same story with Woolworth in 1913 and Chrysler in 1929.
22) When the leading company in the hottest sector goes public, it reflects a peak in social mood and usually presents an important inflection point in financial markets. As a rule, insiders sell at the top.
23) The AOL Time Warner merger in 2000 culminated in the tech crash, the Blackstone IPO in 2007 presaged the 2008 meltdown, and the Glencore listing in 2011 marked the peak in the commodity super-cycle. Uber, we believe, will mark the peak in Silicon Valley and tech valuations.
24) Let us not forget the consequences of humans’ compulsive greed and hubris. Uber—and many other Silicon Valley unicorns—could be worth multiples of their current value over the long run but not without first facing a reality check from public markets. The time to worry is now.
25) We believe Lyft’s IPO will be successful, allowing Uber to easily cross the $100 billion valuation mark. This inevitably makes the public markets test more difficult after the initial euphoria and lock up period is over.
From a macro perspective, what needs to also happen is inflation rise. That is, core PCE above 2% for some months and the Fed not responding. Hard for $LYFT and $UBER to trade at 10x sales once inflation heats up. As long as inflation is lowish, party on.
The macro catalyst for Silicon Valley’s endgame is inflation. New signal has arrived. Fed pivot and now this.
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