Over the past year, multiple Silicon Valley “unicorns” — companies privately valued in the billions, or even tens of billions — came to market via initial public offerings (IPOs).
Investors seemed enthusiastic, scooping up the shares of these loss-making companies no matter how much cash they burned. WeWork appeared to be the worst of them all; we wrote about the company on Aug. 23, describing how it summed up “everything bad about the Silicon Valley unicorn bubble.”
Now it looks like the unicorn bubble has popped. We can see this in three key areas: Fundamentals, technicals, and sentiment. Tech stocks are struggling in light of this, from the majority of the FANGAM group (with Apple as the one exception) to the Nasdaq composite in general.
As such, it makes sense to keep risk points snug on remaining tech stocks in the portfolio, or to rotate out of the tech sector entirely on further sign of weakness. Greener pastures exist in precious metals and clean energy stocks — two areas where price trends, news flow, and sentiment are still bullish.
We only need look to the rideshare giants, Uber and Lyft, to see that investors are no longer excited about bidding up ridiculously expensive, cash-burning unicorns. As of this writing, for example, UBER (the name and stock symbol are the same) is down more than 30% from its IPO price. LYFT, an even worse debacle, is down more than 50%.
At the same time, WeWork, the unicorn we described as a parody of bad governance, has now withdrawn its IPO and forced its original leadership to step down.
The WeWork S1 form — a prospectus document filed by every company intending to go public — was such a self-indulgent mess that investors were disgusted, with nauseating easter eggs like the hiring of multiple family members, a seemingly random collection of side businesses (like a wave pool venture based on the founder’s love of surfing), and a $60 million private jet (on which the founder reportedly liked to smoke weed).
A few short months ago, WeWork — which now appears more an ode to narcissism than an actual capitalist enterprise company — had hoped and believed it could go public at a valuation north of $47 billion. Now it appears the company is worth single-digit billions at best — an 80 to 90 percent haircut from prior levels. And even a single-digit-billions estimate could prove optimistic given that, if a real estate recession takes hold, WeWork’s liabilities could make the company worth zero.
Adam Neumann, WeWork’s deposed CEO-founder, has taken a beating in the press, but it wasn’t all his fault. The company’s fall from great heights was significantly the fault of another larger-than-life operator, a man named Masayoshi Son, and the SoftBank Group, Son’s company that had made a big investment in WeWork.
The SoftBank Group is a Japanese conglomerate, founded by Son, and is known for three things: First, for being a giant telephone operator, with nearly $750 billion in revenues; second, for running the SoftBank Vision Fund, a $100 billion investment vehicle for investing in technology startups; and third, for being bullish on unicorns to the point of delusion.
Son, or “Masa” as he is nicknamed, is personally worth $15 billion — or at least he was — and is known for speaking of technology in messianic terms. To justify the $100 billion Vision Fund, Masa’s SoftBank was famously known for its “300-year plan,” which was divided up into 30-year blocks, with near-term expectations for sci-fi stuff like cloning, telepathy, and human life expectancy extended out for centuries. For all we know, Masa may expect to still be running SoftBank in 2319.
The strategy for the $100 billion Vision Fund, backed by funds from Saudi Arabia and other deep-pocketed players with huge amounts of capital and zero venture capital experience, seemed to involve writing a big check to every high-profile unicorn, no matter how steep the valuation, while encouraging the founder to think 10X to 100X bigger as valuations were pumped to the stratosphere.
The firehose of money from the $100 billion Vision Fund single-handedly changed the dynamics of Silicon Valley, which is a far smaller place than most realize, in the sense that $100 billion is a larger amount of investable capital than all other venture capital deals combined in a typical year.
So, you had one guy, Masayoshi Son, come in with talk of 300-year plans and a money firehose like the world had never seen, and the Vision Fund’s “spray and pay” approach made valuations go absolutely crazy, with investment capital seemingly cheaper than tap water for a few years. Nowhere was this effect so pronounced as WeWork.
As previously mentioned, the ousted founder of WeWork, Adam Neumann, had already developed a big ego by the time SoftBank came along — but as soon as Son met Neumann, and decided to pump billions into WeWork, one of Son’s first official acts was convincing Neumann to think even bigger and crazier by a factor of 10, with a seemingly limitless pool of funds to burn.
So, it was Masa and the SoftBank Vision Fund, almost single-handedly, who were responsible for WeWork’s ridiculous $47 billion valuation, along with many of the other crazy valuations across the spectrum, not least including Uber’s.
That inflated $47 billion number — a metric off which WeWork hoped to IPO — was almost entirely driven by a lone investment round led by SoftBank, based on the highest price paid by SoftBank for a private investment stake.
SoftBank in fact had a habit of doing this with WeWork, Uber, and many other high-profile companies: They would lead successive investment rounds, deliberately paying nosebleed prices each time, and then benefit from the valuation mark-up implied by their hyper-aggressive purchases. If it sounds vaguely like a legal form of a ponzi scheme, that’s because it is.
It never made sense for a moment to assume that, say, a leviathan-sized $100 billion fund could double or triple the amount of capital that normally flows into venture-backed startups in a given year without massively distorting effects. There are only so many good ideas to go around, and flooding startups with capital they don’t need tends to do far more harm than good. And yet Masayoshi Son was so confident in SoftBank’s spray-and-pay strategy, there were actually plans for a Vision Fund II, which would deploy yet another $100 billion. (It is now highly unlikely Vision Fund II will ever get off the ground.)
This is the kind of nutty stuff that happens near the peak of bubbles. At the height of a bubble extreme, the sales pitch becomes utterly detached from reality — a fact that is painfully obvious in hindsight but gets overlooked in real time.
For the unicorns, the bubble moment appears to be over, and it isn’t just the horrible performances of UBER and LYFT, or the soap opera implosion of WeWork, that now confirms this. Here is some additional evidence that the Silicon Valley party has ended, the lights have come on, and it’s closing time:
- Most of the names in the FANG group — also known as FANGAM, for Facebook, Amazon, Netflix, Google, Apple, Microsoft — are struggling or churning sideways, with Apple as the lone exception (keeping in mind that Apple is a Buffett-endorsed value stock these days).
- Peloton (PTON), one of the newest high-profile unicorns, traded immediately down from the day of its IPO — a major sentiment killer — and is more than 10% underwater from the IPO price as of this writing.
- Other high-profile IPO candidates, like Endeavor and DoorDash, are now postponing their IPO plans for a while and perhaps indefinitely for fear investors no longer have the stomach for companies with no profit threshold in sight that shovel cash into a furnace.
- Masayoshi Son, once hailed as a genius, is now seeing his reputation severely questioned, with the performance of the $100 billion Vision Fund being thrown into doubt as bubble valuations deflate.
The upshot here is that, after a period of many years, the Silicon Valley unicorn bubble has popped. There are still a handful of hotly anticipated profitable tech IPOs to come in 2020, like Airbnb for example, but by and large, the party is over. At the same time, many of the big tech dominators — proven cash cows like Google, Facebook, and Amazon — are facing the withering glare of antitrust action.
Put all this together, and the best thing to do is likely to avoid tech stocks for now. The tech outlook is no longer bullish, but sentiment and technicals have not turned sufficiently bearish enough to buy puts.
At the same time, there are other parts of the market that still look excellent. Clean energy and precious metals, to give two examples, are booming areas with the prospect of multi-year bull trends ahead of them, powered by completely separate drivers (a worldwide transition away from fossil fuels on the one hand, and the broad deterioration of non-USD fiat currencies on the other).
In market environments like this one, the stakes are elevated across the board. Risk is higher — in terms of the risks of getting it wrong — but so is the potential reward for getting it right. This reality adds even more weight and importance to consistent investment habits and the deployment of logical risk management, which can be done with the help of TradeSmith tools.
We are focused on stepping up the quality and depth of our research, the power of our tools, and the value of our communication in powerful ways in the coming weeks and months — and once again, you don’t have to do anything other than “keep reading” to benefit from that. You’ve got a front row seat!
Richard Smith, Ph.D.
CEO & Founder, TradeSmith