Till not so long ago, WeWork was the shining star in the world of start-ups. The co-working space start-up was led by its charismatic CEO, Adam Neumann, who dazzled everyone who came his way. And then, it all started going downhill. The company, which was on its way to an initial public offering (IPO), cancelled it, and its CEO stepped down.
WeWork was first claimed to be worth US$70 billion. This was lowered to US$47 billion and eventually it didn’t touch even US$15 billion, as the IPO failed. From the saga emerges an important question.
What does it say about venture capital valuations? And how will this impact future venture capital valuations across the world?
There is not an iota of doubt that venture capitalists, primarily SoftBank, which has been the biggest backer of the tech industry’s firms such as Uber, WeWork and Slack, did indeed overvalue the start-ups. There seems to be a chasm between venture capital valuations and the prices of company shares in the open market. News reports show that Uber, for example, closed its first day of trading in May with a fall of over 7 % with a market capitalization of merely $70 billion. By the end of September, Uber’s market cap was a little under $50 billion.
Do your homework
It’s not just VCs and investment bankers who can learn from the world of venture capital. The episode is a warning bell to investors in mutual funds or stocks not to get carried away. Having your ears close to the ground, paying attention to market conditions and actual performance of a company by looking at its profitability and business model rather than flashiness is a lesson for the average investor. But if you are someone who can’t track performance of your investment on your own and are yet interested in investing in mutual funds, you should look up one of the funds available on Finserv MARKETS. You will get access to professional fund managers who will handle all your investments for you. All you need to do is open an online account with zero paperwork.
Going back to the WeWork fallout, commentators and experts are divided over whether this is a SoftBank-only related problem or a larger problem with venture capitalists getting carried away by hipster firms that promise spectacular growth led by charismatic founders and CEOs. SoftBank disrupted the world of venture capital and investments, as a result of its $100 billion Vision Fund. Ever since that happened, in May 2017, VCs have been competing to spend huge capital in ventures. As 2018 came to a close, $130.9 billion had been pumped into US-based startups, beating the high of 2000, a sign of the venture capital ecosystem maturing, according to the PitchBook-NVCA Venture Monitor.
Don’t chase the unicorns
Following the WeWork debacle, venture capitalists will get a chance to correct valuations and stay more realistic. A National Bureau of Economic Research (NBER) working paper from 2017 (2) explains that “private companies worth more than $1 billion — so-called “unicorns” — are frequently overvalued”. The study, which covered 135 such firms, said unicorns are overvalued by 50%.
As a PwC-CB Insights report for Q3 2019 notes that $100M+ rounds of funding fall in the United States as “prominent unicorns exit”. It adds that in the US, 55 VC deals raise $100M or more in Q3 ’19, a sharp decline from a record 67 in Q2’19. Speaking of global venture capital trends, the report notes that global VC funding drops 7% in Q3 ’19 to $52 billion being raised over 3,420 deals. With specific reference to Asia, the report notes that funding has stayed steady in Asia at $15B in Q3 ’19.
However, looking at Q4’19, VC investment in Asia is expected to remain moderate, especially in China, where there are geopolitical and economic tensions, according to the Q3’19 edition of the KPMG Enterprise Venture Pulse Report.
In India, VC investment grew quarter on quarter, thanks to a number of $100 million funding rounds. These include a $490 million funding for Ola, a $373 million for Udaan, a $350 million for 3rdFlix Visual Effects, according to the KPMG Report. In fact, SoftBank has already funded Indian start-ups such as Oyo, Delhivery, Policy Bazaar, Grofers and Paytm, among others.
Tread with caution
With the uncertainty in global markets, VCs are already treading carefully, and with the WeWork collapse, they will tread even more cautiously. VCs should focus on a start-up’s sound business model that allows for sustainability, rather than pushing the company towards spending money at breakneck speed. Growth at any cost may not work too well, looking forward.
There are key investment lessons for the common investor as well from the WeWork saga. Looking at long-term and disciplined investments, such as mutual funds and fixed deposits matter more than ever before now. Keeping an eye on one’s own financial goals, and investing accordingly rather than get carried away by the vagaries of the market is crucial. Invest in one of the mutual funds, available on Finserv MARKETS, and get portfolio insights and summaries. You also get access to some of the most trusted and top-rated funds, all online, without having to pay any brokerage fees.
If you want steady returns irrespective of market conditions, you could pick a fixed deposit scheme, available on Finserv MARKETS. The interest rates are attractive, ranging from 8 % to 8.7%. You can track your returns online.
The businessman too, can start to look beyond venture capital for alternative financing options. For more viable options than VC funding, business loans are a great place to start. With the lucrative business loans available on sites like Finserv MARKETS, you can upgrade to new age machinery and infrastructure, increase your working capital as well as maintain optimum inventory. You can also take out a business loan of up to 30 lakhs and avail flexible repayment tenure options ranging from 1-60 months.
So in a nutshell, investments in business require a certain level of discipline and financial planning, with an eye on long-term goals rather than short-term glory. You should plan and research carefully, make caution your north star and refrain from pie-in-the-sky ideas.
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