Taking a company public often brings clarity.
And thus the struggles of WeWork and Uber tell us volumes about the business moment we’re in. The semi-collapse of the upcoming WeWork IPO and the anemic performance of Uber’s stock since its own public offering earlier this year may be pointing to a potential recalibration in the entire economy.
A little over a decade ago, the smartphone era took off. Soon, people began to realize the app economy’s potential, and a vast range of consumer services emerged. We ordinary people across the planet have now become dogged, even addicted, users of smartphones. We’ve gained efficiencies, lowered costs and convenience, in many things we do. It’s gratifying.
But there is a not-often-enough noted connection between how investors have been behaving and the app paradise we’ve been living in. Those investors, including the heretofore conservative managers of giant capital pools like pension funds and college endowments, got frustrated with the returns they could get from traditional investments, especially bonds. They became willing to put their money into venture capital, vastly inflating the amounts that industry had to work with.
In turn, the VC community became much more prone to seeing potentially world-dominating companies around every corner. After all, if Google, Facebook, and Amazon could do it, why couldn’t Uber? A larger and larger pool of companies began to be seen as having nearly unlimited growth potential. Thus were born the unicorns, of which there are now over 300 around the world. These are private, mostly venture-backed companies, many targeting consumers, worth over $1 billion. VCs give such companies, even very young ones, astonishing amounts of money to work with.
One of the main results has been the range of conveniences we experience via app-based companies when we use our smartphones. The activities of our lives have been getting subsidized!
So what about WeWork? It offers companies of various sizes a simply-managed, long-lease-free workplace environment that’s cheap enough to help many small companies navigate the shoals of startup-hood. It isn’t really a tech company, but it has convinced investors to treat it as one. It has been burning through cash, so it periodically needs to raise more. In January it raised $2 billion at a $47 billion valuation. But as befuddled analysts have scratched their heads over the awful numbers and egregious management processes described in its August IPO filing, the valuation that may result when it finally goes public this fall has been looking in recent days like it will be more like $10 billion.
Uber, along with its similarly hapless competitor Lyft, as we all know, simplified and made more affordable the process of getting around the world by car. Uber went public at $45 a share, and was recently trading at $33. Lyft, its smaller competitor, went public earlier, in April, at $72 a share. It’s now trading around $46. The realities of financial transparency have made clear these companies were not worth what private investors expected.
Interestingly, one company is the biggest backer of both Uber and WeWork–Softbank. Through various vehicles it has invested over $10 billion in the real estate company. And it put over $7 billion into Uber through its $100 billion Vision Fund in 2017. And Softbank’s willingness to throw semi-unlimited amounts of money at ambitious new companies has inspired and reassured other VCs and other investors in doing much the same thing.
Softbank’s peculiar investing philosophy led it to create the Vision Fund, and it’s now trying to raise a second one of roughly comparable size. Softbank leader Masayoshi Son believes there are internet-fueled companies emerging in literally every sector of the economy that he expects will become global scale semi-monopolies, largely because of their technology savvy.
I doubt that he’s right. For one thing, in many industries, existing companies are achieving their own tech-fueled efficiencies, even as they continue to benefit from strong and venerable, trusted brands. A few examples are Mastercard, Wal-Mart, Starbucks, or CVS/Aetna. It may not be as simple to “disrupt” the entire economy as Son and others have thought.
Now the stumbles of WeWork and Uber underscore the risk that neither of them will ever turn a profit at all, not to mention rule the world. The investing philosophy that bore them up is showing its weaknesses.
I always found the notion of “unicorns” offensive and irrelevant. Just because there might be greater fools willing to attach an ostensible valuation to a small and untested business of over $1 billion is turning out not to mean very much, especially in these two very prominent examples. But the idea that being a unicorn was intrinsically a good thing helped perpetuate an approach to investing that increasingly seems heedless and reckless.
So where do we stand? Many unicorns remain. Institutional investors continue to throw money at venture capital funds. And entrepreneurs continue to come up with interesting ideas even if many of them may not in fact be great business ideas. Startups will remain a prime engine of the digital economy. The smartphone is still the device we use to navigate the complexities of the world, with the help of myriad businesses.
But even the really profitable existing tech giants are beginning a process of recalibration. Free services funded by targeted advertising are coming into serious question at Facebook, YouTube, and elsewhere. An increasing chorus of voices argues that the solution to the ongoing content crisis would be to reduce targeted ads and ramp up subscriptions.
Could a similar logic begin to take hold outside of media?
If consumers don’t pay for the services they get, or don’t pay enough, a business isn’t going to be a good one, however much convenience may be enabled in the short term. The prevailing models need to be reconsidered.
We all loved those cheap Uber and Lyft rides, and even we at Techonomy enjoyed our year or so in a fun if cramped WeWork office.
But I hope the struggles of Uber and WeWork lead to a recalibration of what the financial community, and the media, are willing to consider success. Maybe, once again, it may be measured by how good the business actually is.
