While the full story of the unprecedented collapse of Theranos, its $9 billion "valuation", and its "wunderkind" founder Elizabeth Holmes has yet to be written, many are already wondering if this will be the catalyst that exposes just how naked the startup unicorn emperors have been all along.
Luckily, we don't have to wait that long: according to the WSJ [11], the second tech bubble, one which has seen nearly 200 tech "unicorns" rising out of the ZIRP ashes in the past few years and promptly attaining valuations of over $1 billion, is bursting.
Take IPO-hopeful Dropbox.com. Back in January 2014, TechCrunch wrote the following [12]when the company was revealed to have just hit its $10 billion valuation round:
Dropbox has raised a massive $250 million funding round, valuing the company at $10 billion according to the Wall Street Journal. The new funding round is led by a BlackRock fund, according to the WSJ, which cites “two people familiar with the deal” as the source of the report.
This is actually the second time that Dropbox has raised $250 million: It did so in 2011 in a round that included Goldman Sachs, Sequoia, Index Ventures and Accel Partners. Back in November, a rumor about an additional $250 million raise put the valuation of the company at a supposed $8 billion, which, based on various revenue estimates, could have been viewed as anywhere from expensive to cheap.
A $2 billion increase in the valuation of a company with no profits in two months: what could possibly go wrong?
Well, a few things.
As we showed in January of last year [13], more so than in the public markets, the full scale of the tech bubble was best visible in private market "valuations", where a handful of billionaires and venture capitals would flip hot startup shares to each other at ever greater valuations, to mark soaring profits if only on paper.
[14]
The problem emerged when the investors in these bloated, money-losing ventures decided the time has come to cash out.
Which brings us back to Dropbox.com.
According to the WSJ, Dropbox Inc. had no trouble boosting its valuation to $10 billion from $4 billion early last year, turning the online storage provider’s chief executive into one of Silicon Valley’s newest paper billionaires.
But the euphoria has begun to fade. Investment bankers caution that the San Francisco company might be unable to go public at $10 billion, much less deliver a big pop to recent investors and employees who hoped to strike it rich, according to people familiar with the matter.
Worse, some of the investors are already doing what is the #1 "verboten" anathema in the start up world: reducing their value on private investments before a company has gone public. Such as BlackRock, which led the $350 million deal that more than doubled Dropbox’s valuation, and has since cut its estimate of the company’s per-share value by 24%, securities filings show.
As we warned last January, sooner or later, the specter of unsustainable valuations would come to roost. That time has come as Dropbox has become a "portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom. The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay."
From the WSJ:
Many U.S. based companies that went public this year have seen their stock prices suffer, posting a median return of zero compared with their IPO price. Investors who bought shares after the IPOs began trading, often the first chance many individual investors get, are down by a median of 13%.
And as of Friday, at least 11 of 49 venture-capital-backed U.S. technology companies with IPOs since the start of 2014 traded below the per-share value where they last raised money as a private company, an analysis of stock-sale documents by The Wall Street Journal shows.
Don't expect to hear much about the following "bombed" IPOs on CNBC - they may suggest not all is well in the land of mark-to-unicorn valuations.
[15]
The bad news: with startup valuations already in the stratosphere, they are now locked in a valuation limbo, where they can't afford a down round, but they also can't go public.
The data suggest that even some of the most promising startups in Silicon Valley might be worth far less in the eyes of the rest of the investment world. The risk is that the lackluster reception for tech startups in the stock market could ricochet through companies that are still private.
The worse news: even retail investors have realized that the second tech bubble is precisely that:
New York City firefighter Brian Gitman bought 250 shares of LendingClub during the IPO and held on to them as the price slid. He regrets it.
Knowing that big-name investors put money into LendingClub when it was private gave Mr. Gitman, 33 years old, a false sense of security, he says. “It feels like that should be like the bumper in bowling,” he says.
Henry Ellenbogen, who manages T. Rowe Price’s technology investments, says the gap between what private and public investors are willing to pay is starting to narrow. “When times are good and valuations are strong, people think they have liquidity in the private markets, but that is illusory,” he says.
Back to Dropbox which finds itself in a dilemma: go public at a vastly lower valuation, admitting the smoke and mirrors...
At Dropbox, the valuation dilemma looms large. Drew Houston, the company’s chief executive, rebuffed a takeover offer in 2009 by Apple Inc. co-founder Steve Jobs. The size of the offer wasn’t disclosed. Dropbox now has 400 million registered users, who share and store files through its Web service.
Most of them use Dropbox for free, though the company says more than 130,000 businesses pay at least $900 a year for a minimum of five employees. Customers include News Corp, which publishes The Wall Street Journal.
Online storage is fast becoming commoditized, and Dropbox now competes with Apple, Google Inc., Microsoft Corp. and Amazon.com Inc., the world’s four largest tech companies by stock-market value.
Dropbox says it is expanding its business beyond data storage. Last week, the company released a document-collaboration tool called Paper.
“Others can chatter about valuations,” a Dropbox spokeswoman said in a statement. “We’re hard at work building an enduring business.”
... or it can do what every other successful business resorts to when times are tough: its own, organic cash flow.
Good luck with that.
