After a series of “super-illustrative” meetings with shareholders, Uber CEO Dara Khosrowshahi emailed employees Sunday night with a moving message: “We need to show them the money.”
Playing with his metaphors, Khosrowshahi explained that the market was experiencing a “seismic shift” and that “the goalposts have shifted.” The priority of the carrier and food delivery company now should be to generate free cash flow. “We serve multi-billion dollar markets,” he wrote, “but the size of the market will be irrelevant if it does not translate into profit.”
For the head of Uber, he would have screamed about cash flow and profit once as if Elon Musk would have been screaming about the benefits of personal humility and gasoline-powered cars. No company is more indicative of a long, crazy, capital-intensive bull market in tech stocks than Uber. Founded in 2009, the company floated a decade later at a valuation of $76 billion without posting a single quarter of earnings. Its belated turn to financial orthodoxy shows just how much markets have shifted since the shift in the interest rate cycle and the crash of the tech-heavy Nasdaq, which is down 26 percent this year.
As always, when bubbles burst, it is difficult to distinguish between temporary adjustment and permanent change, between cyclical contraction and secular trend. Has the speculative foam been dumped from the top of the market? Or have the rules of the game changed drastically for venture capital-backed startups trying to emulate Uber? My bet is on the latter, but that might not be a bad thing.
There is certainly a strong argument that the extraordinary boom in tech stocks over the past decade has been driven in large part by unprecedentedly low interest rate policies in response to the 2008 global financial crisis. With capital turning into a commodity, it made sense to be opportunistic to reap companies Uber has generated as much cash as the venture capital firms that “scaling up” will give them their way to market dominance.
This crazy expansion has been accelerated by funding from a new class of unconventional investors or tourists, including Masayoshi Son’s SoftBank and “crossover” hedge funds like Tiger Global. Such funds are now seeing a staggering decline in the valuation of their portfolio. SoftBank has just announced a historic $27 billion investment loss over the past year in its two Vision Funds, while Tiger Global has lost $17 billion this year.
“There has been a unique set of economic and financial policies enacted by the world’s central banks that we have not seen before: they have maintained negative long-term interest rates,” says veteran investor William Janeway. As a result, he says, some companies have pursued “capital as strategy,” looking to monetize their path to success and ignoring traditional metrics. “But I don’t think this is a reasonable or sustainable investment strategy.”
Stock market investors have come to the same conclusion and are now distinguishing between technology companies that generate strong cash flows and profits, such as Apple, Microsoft and Alphabet, and more speculative investments, such as Netflix, Peloton and Zoom. These may have grown at an unusual speed during the Covid-19 pandemic but are still awash in red ink.
Just as public market investors have rotated from cash-intensive growth stocks to cash-generating value companies, so are private market investors following suit, says Albert Wenger, managing partner at Union Square Ventures, a New York-based venture capital firm. to her. “I think this is healthy. Companies have to build real products and deliver value to customers that translates into profits,” says Wenger, even if this transformation is “extremely painful for a number of companies.”
Life is already getting uncomfortable for late-stage startups looking to get out. It is now difficult to access public markets. According to EY, the value of all global IPOs in the first quarter of 2022 fell 51 percent year-over-year. The market obsessed with special-purpose buyouts, which has enabled speculative high-tech companies to list through the back door, has completely frozen. Commercial sales also slumped as merger and acquisition activity shrank sharply. Valuations of late funding rounds in the US have now fallen, and the rest of the world has followed suit.
Despite this, the venture capital industry is still full of money and desperate to invest. According to KPMG, nearly 1,400 venture capital funds around the world raised a total of $207 billion last year.
Although cash will count for much more, the ability of startups to exploit opportunities with cheap and powerful tools such as open source software, cloud computing, and machine learning applications remains unaffected. And a slowdown in the aggressive hiring plans of big tech companies may persuade more budding entrepreneurs to try it. “We still need to take more shots at the target from an investment and societal perspective,” Wenger says. There is still a stark demand for climate technology startups to devise smarter ways to reduce energy consumption, for example.
Venture-backed companies may have just navigated the most exotic bull market and wealth creation in history. Such supernatural conditions will never happen again. What follows is more likely to be catharsis than a crisis, as long as it, like Uber, can show investors the money.