If WeWork is a lesson in what not to do, then Silicon Valley start-ups should be swapping revenue growth and heavy operating losses for positive cash flow by now. Don’t hold your breath. Generous funding means net losses are going nowhere.
Persistently low interest rates are encouraging investors to take dangerous risks, says the IMF. No kidding. PitchBook’s quarterly report on venture capital funding calculates that not only are total deals on the rise, with more than 10,000 expected for the year, but deal sizes are high too. Total VC deal value reached $97bn in the first three quarters of 2019 — the second highest on record after 2018. As long as global interest rates remain ultra low, funds will keep arriving.
This means tech start-ups have few reasons to change their habits and become more frugal in the hopes of turning a profit. Amazon is often cited as proof that profitability is the wrong measure of success for growing tech companies. But Amazon turned cash flow positive before it was profitable — funding its expansion with the money it made. The company burned through $1.1bn before it became cash flow positive in 2002. Adjusted for inflation that is about $1.6bn. Uber burned through that in the first half of 2019 alone.
Read also: Bill Seeking to establish North Central development commission scales first reading in senate
Public markets are proving unwilling to pour money into tech companies forever without at least a hint of how profits will one day appear. Uber made a point of emphasising its formula for breaking even in its last quarterly earnings. But in private markets it is business as usual.
The notion that funding has dried up as a result of WeWork’s failure is wrong. See the money raised for new funds by Blackstone and Tiger Capital. Even SoftBank is back with a second Vision Fund.
WeWork is being written off as an aberration. The office-sharing start-up’s claim to be a tech company was shaky in the first place. Irrational valuations can be laid at SoftBank’s feet, given the Japanese bank led funding rounds that valued WeWork at tens of billions of dollars. Plus the company was based in New York, miles away from Silicon Valley. More importantly, yields in safe assets are low and trillions of dollars of public and private sector bonds have negative yields. WeWork’s failure looks insignificant against the wall of money looking for a home.
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
