If you’ve ever read any of Nassim Nicholas Taleb’s work (which should be a requisite for anyone in business) you’ll know one of his often used analogies to explain the psychology of many prior to a Black Swan event is the turkey, and its view of the world up and until Thanksgiving.
A brief description goes something like this: All the time prior the turkey believes life is grand and will continue forever, and the farmer has nothing but his best interest at heart, caring for him with plenty of food, water, and shelter. To convince him otherwise is a fools-errand. Then – Thursday happens.
A similar event may also be on the horizon, but this time – it doesn’t involve turkeys. No, this time it involves a creature once considered so far above and beyond reproach, to even question its business model, metrics, or valuation was seen as blasphemy. And for those that did? Let’s just say – the long knives came for you.
With that said, a lot has changed over the last year. And by “a lot” I mean just that. For if you’ll recall in 2015, everyone within not only the tech world, but the financial/business media at-large were all touting 2016 was going to be “The rebirth of the IPO!”
Everyone that is, except yours truly.
I’m on record stating precisely the opposite. So much so that earlier in the year as to answer, or respond to the critics (aka “Valley aficionados”) I dared openly ask in an article “Did Apple’s Didi Investment Just Kill All The Unicorns?” the following. To wit:
“Didi is Uber’s™ business nemesis and competition in China. Whether or not this is a “good investment” for ride-sharing dominance in China from my perspective is irrelevant. What should be the focus here is what such a move brings to the entire Silicon Valley narrative. And, in particular; the entire “unicorn” mythical valuation story. For it just might be that Apple single-handedly opened the seal on the unicorn apocalypse.
One thing in business never changes: Cash burn is a death sentence only kept at bay by either generating net profits, or, raising additional funding via loans and/or investors. Without the former, the latter is a never-ending begging and pleading process that ultimately ends in disaster because focusing on “investors” as the customer, rather, than actual customers with the ability and willingness to pay is no longer paramount. Only funding.
But “funding” has the ultimate “Achilles’s heel”: Perception. And once perception changes? Like I stated earlier – everything changes along with it. And I do mean – everything.”
Have you seen a “unicorn” IPO filing and launch in 2016 or since? I know, trick question. For it really can be yes and no. And for those of you who did scramble to “get-in-early” on the whole Twilio™ offering? You have my condolences, once again.
So to define and all be on the same page: when we think of “unicorns,” what we’re really talking about here are what “the Valley” likes to now call “Decacorns.” You know, because when it comes to “The Valley;” stating you’re only worth $1Billion is considered “low rent.” You now need to state you’re worth $10’s of Billions otherwise – you may not get invited to the best of parties. And, after all, that’s the only true metric that matters, right?
So, now with that said. Who is it to dare take on the IPO world making rumblings? It seems it’s non-other than the once deemed “When these guy’s file it’ll be a the signal everyone in the IPO world is waiting to hear!” Sounds great! But there seems to be a problem with that once held viewpoint. The problem?
It seems they didn’t want anyone to hear about it until they were sure it didn’t fall on deaf ears.
For Snapchat™ did so file, but “confidentially.” You know, because the markets at record high levels one can only assume they didn’t want to announce too much good news, right? Oh yeah, and it’s for 2017 not ’16. So, that throws (like I argued in 2015) that “In 2016 IPO’s are back!” argument out the window.
So what is it that I’m implying with “Next Week” you may be asking. Well, it’s this:
Next week the E.U. is set to hear whether Uber will, or will not, be subject to the laws that govern other businesses when it comes to employees, and expenses. If Uber loses this battle, I believe, things don’t just change, rather, the meme “It’s different this time” may portend far more onerous revelations going forward.
Here is where the entire “unicorn” meme, and stated metrics when comes to valuation, growth projections, and more may suddenly find much like many a turkey found its neck on Thursday morning. i.e., about to be cleaved. And, it’s hard to weigh which way this decision may go. Presidential pardons excluded.
On the one side you have many of the top-tier E.U. politicians wrangling for some form of a delay in the case (such as the E.U. Commission) in reasoning a ruling favoring Uber might cause some form of populist backlash. One could infer this signals that maybe people such as Mr. Juncker may have derived some form of “insider” insight and concluded the decision will rule in Uber’s favor. It’s very possible. However, we all know how well E.U. politicians have been at reading “tea leaves” of late. e.g., Brexit.
On the other hand, there’s the recent decision lost via a London tribunal as it pertains to drivers. From this point of argument one could make the case where politicians/judges may now be more inclined to protecting the-devil-they-know as opposed to one they don’t. i.e., Current cabbies, the companies that employ them, the taxes they generate, and the votes they represent.
Surely after Brexit, and now with the U.S. election as an additional “lens” to peer through, anything including the word “populist” where a legal challenge and decry is called for might now have different weighing in the minds of any one in the “political arena.” If it didn’t: Why is the term and idea of “worry” being used by E.U. politicians to describe it?
Yet, the real one’s to worry in my view are the entirety of unicorns. And I mean just that – all.
I say this because if you take a step back you have to remember there are a few very important points that many need to be reminded of. First: Unicorns (and that means all) are stated to be worth their valuations because, in a nut shell, the companies believe that’s what they are worth, based on metrics they decide. And that metric (i.e., worth $Billions upon $Billions) can only be interpreted as “priced for perfection.” Remember, most are currently only still cash burn machines. Net profits are “in the future.”
Uber, along with AirBnB™ are by far the most prominent and bellwether unicorns being followed by not only “the Valley,” but financial institutions, V.C.’s, sovereign wealth funds, traders, and more everywhere. If these unicorns show anything revealing weakness or potential harm to their valuation metrics? i.e., Legal challenges showing everything they claimed for the future may have doubts based on court rulings. As I iterated before “It’s different this time” takes on a meaning never thought possible, much like a turkey’s revelation this past Thursday.
So far AirBnB has not fared as well as it once thought was its birth right. i.e., The San Francisco and N.Y.C. outcomes. And they are facing ever more, both here in the U.S. as well as globally. Uber has since lost China (as you read at the beginning) and now is facing a very tumultuous decision if it goes against them in Europe.
That’s quite a change in market “domination” and “pricing valuation” for the future if it goes against them, no?
And if it does? Do you think that will reflect not only the eagerness, but rather, who buys into the next “funding round?” Funding rounds which are the life’s blood of both valuation metrics, as well as life support for cash burning entities.
Remember, without funding rounds – cash burn is the only metric that matters. Because it is finite, it reflects upon the entire unicorn meme, complex, as well as “the valley” in total.
And I would presume this newest “reflection” about to show its face in Europe will be watched more closely, and with so much scrutiny – it would make a Kardashian blush.
© 2016 Mark St.Cyr