I wrote this post on Feb 3, 2016 — and like clockwork two years later, its timely again. The Dow Jones and Nasdaq are tanking and people are out with stories of imminent end.
This too shall pass
The unicorn, the billion dollar startup, is finally dead. The same columnists and magazines that turned every startup funding or launch story into a unicorn event are now busy proclaiming its decimation.
I have seen this movie before and I am here to tell you that reports of unicorn death and extinction are greatly exaggerated.
Unicorns Are Not Dead, Winter Is Here
Companies that have real usage and unit costs that support eventual profitability are going to be just fine. The huge decline in oil prices has brought down equity values, both public and private. This means companies ranging from Netflix to Apple are being valued up to 30 percent less and the S&P and Nasdaq are both down double digits.
Observers who are focusing narrowly on newly IPO-ed companies like Fitbit and the pre-IPO valuations of startups are often coming up with explanations in isolation.
The house of unicorns is not cold; winter is upon us. The biggest reason why Netflix and ServiceNow are down has nothing to do with their performance, or the performance of their B2C and SaaS sectors.
The winter of low oil prices means that the biggest investors like sovereign wealth funds of oil rich nations are under pressure to sell, or at least stop buying. That combined with losses incurred in energy by hedge funds and investors means there is high aversion to taking risk. All of that and slowly rising Fed rates have combined to create a perfect winter storm for equities.
The Strong Hibernate, The Weak Die
The winter is not without consequences. In the last few years, many investors who missed out on genuinely amazing future billion dollar businesses like Uber and AirBnB went into FOMO mode (fear of missing out). They started investing in B2C startups that looked ‘as bad as Uber and AirBnB’ when those companies were founded. The thinking was often that many businesses that look bad at first glance can become huge winners.
Well, we ended up investing in startups that were bad businesses not just at first glance but also after any number of years. Losses at scale just scaled the losses — it didn’t change the economics.
These startups that never really had a shot in my view are now getting trimmed back. Some like Homejoy have had to shut down while others like food delivery startups are fighting for survival.
The Strong Shall Inherit The Nasdaq
In the real recession of 2008, I learned a huge lesson. The mortgage and banking crisis pushed almost all assets down to unbelievable prices. You could buy Netflix, Amazon, LinkedIn for the fraction of today’s prices. At that time, these companies were somewhat genuinely impacted by weakening consumer demand which hurt due to layoffs.
But today, we live in a near utopian economy, at least here in the United States which contributes majority of earnings for many of these tech companies. The unemployment rate is lower than ever in last 10 years, demand is healthy, and everyone has more money than a year ago thanks to tanking gas prices.
In two years, the strongest tech companies — public and private — with real, growing usage and sound unit economics will be huge.
The strong shall inherit the Nasdaq. Invest wisely.
(Cross-posted @ Storm Ventures)