The stock market and unicorns

In his Short History of Financial Euphoria, published in 1990, John Kenneth Galbraith shows that, with each new generation, human financial ingenuity knows few bounds when it comes to getting rich. The Harvard professor also reminds us that the rapid enrichment associated with an asset bubble, be it tulips or bitcoin, invariably has the effect of altering the judgement of those who benefit. New generations never fully grasp the lessons of the old. This point remains topical, and is worth reflecting on, nearly 20 years after the dotcom bubble.

The honeymoon between investors and unicorns is over, going by The Economist in an April 2019 issue. Silicon Valley today alone has some 90 unicorns, those privately owned start-ups valued at over a billion dollars. China probably has an equal number, and Europe a handful. For years, these companies raised capital from venture capital funds on the basis of ever-inflating valuations, in the hope that they would replicate the successes of Alibaba, Facebook or Google. Some were able to take advantage of market complacency to go public. Others, like Airbnb, are still waiting for their IPO, although it would appear that the process, despite being well oiled, ultimately went off track because of one big problem: the valuations used in the latest rounds of fund raising are substantially above possible stock-market valuations.

A prime example of this phenomenon is provided by WeWork, an American co-working giant, which planned to refinance by raising $4 billion, but has just pushed its IPO back to 2020. At $10 billion, the prospective valuation was too far removed from that used when the company last raised private funds ($47 billion). Its CEO has just stepped down, pressured to do so by SoftBank, which has invested $4.5 billion in the company. Previously, Snap, Lyft and Slack had problematical IPOs, as their most recent private valuations were much higher than what the markets were willing to pay.

Some assets can earn good valuations in both the venture capital and the stock markets. But whether a stake be private or public, its price cannot remain far off its value for long. At La Financière de l’Échiquier, we believe that in-depth knowledge of companies and the quality of financial analysis will always prevail over fads!