By Liam Proud and Peter Thal Larsen
LISBON (Reuters Breakingviews) - It’s a good thing they serve wine with lunch at Web Summit, the gargantuan technology bash held in Lisbon each year. Some exhibits are hard to fathom with a sober lens. The gathering held last week featured an almost full-size boxing ring inviting startup founders to deliver a “knockout pitch” to investors against the clock. Nearby was a mountable plastic unicorn on a raisable plinth that lifted riders above the 70,000-odd assembled investors, entrepreneurs and hangers-on.
Such exuberance may smack of hubris given the mauling former tech darlings have received this year. Uber Technologies and Slack Technologies tumbled following stock market listings, while WeWork almost collapsed after burning through more than $10 billion on its mission to “elevate the world’s consciousness”. The message from Lisbon was that such flops are a healthy reality check rather than a serious setback.
The bear case is straightforward. Venture investors, flush with cash after a decade of loose money, have poured too much into startups in the hope of backing the next Amazon, Facebook or Netflix. They are now stuck with overvalued, overfunded companies, endangering returns for the wealthy families, sovereign funds and institutions whose money they manage. The biggest culprit is Masayoshi Son, whose SoftBank Group and its $100 billion Vision Fund underwrote Uber and WeWork’s rapid expansion without much evidence those businesses could become financially self-sufficient.
There is evidence to support this narrative. PitchBook data shows the average U.S. venture fund’s firepower has roughly doubled since 2013, to about $200 million. The median U.S. late-stage venture investment in the first half of 2019 was made at 1.6 times the previous valuation, the data provider says. That so-called step-up multiple was 1.4 last year and 1.3 in 2017. Unicorns, or tech companies worth over $1 billion, have an aggregate paper valuation of about $600 billion in the United States. The concern is that venture capital funds will struggle to cash out at those prices, making the WeWork debacle a harbinger of wider pain.
Unsurprisingly, the consensus in Lisbon was different. It’s almost a decade since Web Summit founder Paddy Cosgrave gathered representatives from Ireland’s tech industry at Dublin’s Chartered Accountants House. Since shifting to the Portuguese capital, the conference has expanded to fill a 20,000-seat music venue and four soccer pitch-sized pavilions. This year’s event saw the likes of Microsoft President Brad Smith and Steve Schwarzman, founder of buyout giant Blackstone, sharing the stage with upstarts such as Daniel Wiegand, whose Lilium Aviation is developing an electric flying taxi.
At panel discussions with provocative titles like “Winter is Here”, venture capitalists and entrepreneurs stressed that SoftBank was unrepresentative. It invests at least $100 million in each startup, or 10 times the average ticket size for late-stage deals last year. Son’s fondness for backing more established companies means he mostly has to exit through a public listing. The Japanese group, which last week reported a $6.5 billion quarterly operating loss, is therefore more sensitive to stock-market gyrations than early-stage investors like London’s Balderton Capital, California’s Fusion Fund or White Star Capital.
Besides, the Vision Fund’s 80-odd portfolio companies don’t all share the same cash-burning, growth-at-all-costs ethos. Take OakNorth, the profitable UK-based business lender which sells credit assessment technology to banks worldwide. Or Brazilian property-rental website QuintoAndar, whose co-founder Andre Penha is eyeing international expansion, but only if it makes economic sense. Hard to imagine WeWork founder Adam Neumann saying that.
The current generation of startups have advantages that help support eye-popping valuations. Founders are attacking new markets outside the traditional tech playgrounds of internet advertising and e-commerce.
London-based online lenders like Revolut and Starling Bank are luring customers from Europe’s biggest banks, often tapping into a European Union market for financial services where regulation is less fragmented than in the United States. Others like Gaurav Dhillon’s SnapLogic are finding new and cheaper ways to do boring back-office jobs that consume companies’ IT departments.
Today’s startups can tap into low-cost online servers from Amazon Web Services or others. A few talented programmers can build a product that the world’s biggest companies might use. Venture cash then pays for sales staff who can snag customers.
Venture capital funds had about $240 billion of uninvested capital in 2018, according to Preqin. That figure is probably higher now. Buoyant stock markets have puffed up the portfolios of big endowments and pension funds, encouraging them to allocate more cash to alternative investments. Even if some valuations are a little stretched, the amount of money sloshing around the tech industry will provide a cushion.
If anything, WeWork’s high-profile problems could even keep a lid on valuations and prevent tech bosses from becoming too removed from reality. That will prevent the clouds hanging over the Vision Fund’s London head office from shifting to Lisbon next year.
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