We need to stop pretending the VC valuations are meaningful.
It's like asking someone playing roulette to value "13 black", after they bet on it.
There valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
So, it's comparing gambling payouts to corporate valuations, aka "apples to oranges", which are not related.
When the predicted growth doesn't occur, the companies valuation becomes based on its actual value (profits).
Cameo (an example in the article) is an interesting one. It seems like a stable, steady business, making money, should be easy to accurately value if you have access to the financials. No surprise that the "It's $1bn!!!" valuation came from Softbank Vision Fund. https://en.wikipedia.org/wiki/Cameo_(website)
It also peaked during the COVID lockdowns, lots of actors needed alternative sources of funds. Maybe the numbers for 1BN came from multiplying revenue into the future, or hell, expecting it to grow even.
Companies being devalued is not news. It happens on the stock market everyday.
For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
> Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
> Companies being devalued is not news. It happens on the stock market everyday
TFA points specifically at "recent funds" that have underperformed public markets.
More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan.
> Of course the VC investment model is high risk.
Power law at play, apparently: High risk with high rewards only for the top 5%.
... already, just 5% of them produce 90% of its profits.
My impression is a lot of these companies raised mega rounds right before interest rates went up, and are now able to tread water by cutting headcount enough that their revenue + interest can sustain them. To what end? Who knows...
I know a few who are really feeling the pressure from customers now being able to vibe code part or their product and also their cloud bill is about to explode because hardware prices are through the roof
SaaS was always destined for this, with or without AI. Excluding the small subset with network effects, the nominal nature of a remote execution aid in basic business process was always semi-farcical.
Zero interest rates kept many weak companies alive but they also have give great companies time to find product market fit, and the hard part is to separate the two in hind sight
If you think it's haunting Silicon Valley, wait til you see what's on the balance sheets of Private Equity, which holds these and many, many more overvalued companies!
Falling valuations spell horror for vcs. More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the s&p 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars
It's like asking someone playing roulette to value "13 black", after they bet on it.
There valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
So, it's comparing gambling payouts to corporate valuations, aka "apples to oranges", which are not related.
When the predicted growth doesn't occur, the companies valuation becomes based on its actual value (profits).
For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
This isn't how VC funding works. The fund has a time limit, usually ten years, and has to wrap up and pay back in that time limit.
If your company is not profitable in that time limit, tough. The VC will exercise whatever rights they have and pull whatever they can out of it.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
In other words, the sale wouldn't really achieve anything other than lock in the capital write-off. The return would be trivially small.
SpaceX’s valuation + “data centers in space” being taken as a serious pitch leads me to think it’s only getting worse.
TFA points specifically at "recent funds" that have underperformed public markets.
> Of course the VC investment model is high risk.Power law at play, apparently: High risk with high rewards only for the top 5%.
I think it depends way more on where and how much the wealth is concentrated than anything else
Same article:
https://www.businesstimes.com.sg/opinion-features/zombie-uni...
Zune-icorn?
Zombicorn!
I know of some actual in use Microsoft Zune that have outlasted many companies that were predicted to become unicorns.
This is a pointless, shitty post. I'm glad OP likes paying for the economist, maybe they should comment over there.