Unicorn madness unleashed by VC Godzillas can’t end well

Have you ever flown with Air Canada, a company that concluded 2020 with sales of $ 3.5 billion? Or with JetBlue, whose revenues totaled a similar amount last year? Or maybe one of the best airlines in the world, Cathay Pacific, with 2020 revenue of $ 14 billion? Maybe you’ve joined Marriott Vacation Club (VAC) which has 3,200 locations worldwide and last year reported $ 2.6 billion in revenue?

What do all of these well-known companies with billions in sales have in common? Their value as state-owned enterprises is less than $ 7 billion, the value of Israeli unicorn TripActions, a business travel company that just completed another fundraiser last week, at a valuation of 7, $ 25 billion, but with significantly lower revenues than the aforementioned companies.

TripActions co-founders Ariel Cohen (left) and Ilan Twig. Photo: TripActions

We read daily about the birth of a new unicorn or the fundraising of a new company with a monstrous valuation, often higher than that of well-known companies or powerful brands (as a die-hard sports fan, I had to hard to accept that a year – and – a half-old cyber company is worth more than Real Madrid or Barcelona, ​​more than the Yankees or the Warriors). In many cases, additional capital is raised after a few months and a business can double or triple in value during that time.

Entrepreneurs like to show valuations that until a few years ago were kept secret and considered one of the perks of a private business. Investors also like to show they have bet on a winning horse and nominative unicorns in videos and posts. And as for the employees, of course, they are proud too. They are about to win the lottery while they tell their friends about the amazing company they work for, as they try to recruit others to join and even get a bonus for it.

We are in the land of unicorns, on the express train of value multipliers, and I as an investor, and many like me, I want to cry stop the train! I want to get off.

But we don’t. Why would we do it? We’re in a position where we’ve all recorded huge returns (mostly on paper), and suddenly each of us doesn’t have one unicorn company, but several in our portfolio. So we take advantage of the tide, we show ourselves like everyone else and we look at the market in amazement, while every once in a while, in private, we take a break and we scratch our heads, but we immediately come back and we talk. of who won the biggest payout.

Unicorn inflation doesn’t just happen in Israel of course, but Israel is a small country and it seems like everyone is involved with unicorns. At the end of the day, despite the huge billboards, it’s a small industry.

So what is driving these markets? I recently met a friend who was fortunate enough to invest in an early stage business that is now worth a few billion. “I don’t understand why they need to fundraise again now?” He asked. “They have a lot of money from the previous round six months ago. What’s the point?”

So first of all, it’s good for entrepreneurs. Today, in almost every major fundraiser, entrepreneurs close a side deal, sell a portion of their stock, and bring home money. Sometimes it’s $ 20 million to $ 30 million pay days, which in and of itself is no small feat.

Investors who attempt to raise capital based on the expectations of bull market multipliers are readily willing to buy more stocks even in the secondary market in such situations. Sometimes even start-up funds also sell some of their holdings and instead of waiting eight to nine years for a release, they create a good multiplier that helps them raise the next fund, which is already around the corner. .

And what about funds that invest in companies of such enormous value? In recent years, “Godzilla” funds have entered the unicorn market, gigantic funds that were once more of the private equity and late-raising model, and now invest very early, sometimes even in phase. priming.

The first fund to go down this route was SoftBank, which, with a fund of $ 100 billion, paid out sums that seemed huge to companies, but was only a small portion of the actual fund. Sometimes it worked, and sometimes, as we’ve seen with WeWork and other companies, the results were painful.

However, these cases, in most cases and at these scales, were only a minor setback to very big hits. The power of SoftBank, at the time, confused Silicon Valley which was not used to such monsters and continued to inflate corporate prices. New Godzillas like Tiger Global and Insight Partners have taken the same approach, which has a huge impact on Israel because it is a small market.

Large funds were a game-changer when they started investing early, and because they have investments of tens and hundreds of millions of dollars, which are considered relatively small to them, diversifying investments is less risky. They therefore invest in situations where they cannot be said no, and in dozens of Israeli companies, which creates inflation in the Israeli investment market, as well as high valuations of companies, to which the audience is suddenly exposed.

My venture capitalist friends constantly talk about the impact of these funds. For example, a company receives multiple offers with a valuation of $ 50 million, and then one of the Godzillas offers a valuation of $ 100 million. For the fund this is a small amount, if successful then it will be a big gain and cover all losses from other investments. For others, smaller venture capital funds, it is devastating because they are pushed to the limit to offer or enter into fundraising at an unrealistic value in their eyes.

And after all these headlines, there’s one question that none of us have an answer to: how, after investing at a valuation of $ 6-7 billion in companies that sell for tens of millions of dollars in total, double-digit outflow of billions, when companies that already sell for billions of dollars do not get it easily. But hey, venture capital isn’t for those who fear risk, it’s for those who believe anything can happen.

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About Dwaine Pinson

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