As Stripe strips 14% of its workforce, it is good to remember that regardless of what the market thinks a company is worth,
Valuations don't pay the bills.
Stripe (a payment processing platform) was valued last year at 95 billion, but since then it has been devalued by around 65%, leaving it at around 33B. But even at this amount, it is still true that no matter what the market thinks it is worth, salaries need to get paid and so do investors. Stripe is actually doing pretty well, but still, they have admitted to some errors of judgement,
“We were much too optimistic about the internet economy’s near-term growth in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown. We grew operating costs too quickly. Buoyed by the success we’re seeing in some of our new product areas, we allowed co-ordination costs to grow and operational inefficiencies to seep in.”
Ah... haven't we all?
Perhaps not to the tune of billions, but the end of year 2021 hype in the markets which was gutted by the economic downturn due to global government policy and monetary mismanagement during the Covid pandemic, war and general economic cycle, meant that many of us were overly optimistic about the future, expanding too fast and letting those inefficiencies creep in. And similarly to these unicorns, many people are struggling to pay the bills also.
However, while the hype of evaluations makes the news, what companies and investors really need to consider, is whether the evaluation is appropriate over a longer period of time. For example, the Fintech companies are taking a hammering currently, because they are competing with the already established finance systems and in order to grow, they were burning through cash for customer acquisition in a field where it is hard to attract new customers. For example, Blockchain is a part of the Fintech movement.
This is a field that is largely still in its infancy, but one that attracts hype attention, even though the actual implementation and adoption might be quite a few years down the track. And the further down the track something is, the more chance there is for change to the outlook. It is like predicting the weather for Christmas 2030 and then planning everything based on the prediction, and then buying the latest tech as presents for friends and family.
"Thanks for the iPhone 14 Dad - I almost remember when Apple still existed, before it become part of Musk Global Governments"
Just like how the projects in crypto will "eventually" have to deliver an in-demand usecase, these unicorn valuation companies are also going to have to return something more than hype. It is good to remember that these do (generally) have a product or service of some kind already in operation, but in order to meet the demands of investors who are evaluating them so heavily, they are going to have to really make an impact on the marketplace and pull a lot of demand.
For example, Stripe has raised 2.3B in funding with the last round mid-2021, so where does the 95B valuation come from, other than future expectation? And since there are many such companies raising capital based on this expectation, the total investment to valuation deficit is enormous. And due to overlaps in the market and usecase across companies, there may not be enough total demand to cover all the value in the marketplace. So, even if they all get their product range perfect and released, there is enough market to soak them up, meaning that the "real valuation" kicks in where demand meets supply and market forces dictate price.
How many are going to meet their future expectations?
The economic downturn has provided a good indication to the market as to how fragile the valuations are, with many of them looking far more like crypto tokens, than business models that are backed by billion dollar investment funds. And just like crypto "projects" many are not going to survive, but those that do, are going to reach and exceed expectations, because they will be one of the few left in the marketspace of an emerging industry.
The next couple years where government treasurers are uniformly saying "the next two years are going to be very hard", are going to be interesting, as a massive amount of on-paper money is likely to get wiped away from the market place, consolidating into the businesses that offer real potential. When things turn, these businesses will benefit a lot, but it will also inspire the next round of "innovative growth" where new businesses look to take advantage of the current capabilities in order to generate hype on future potential, starting the cycle again.
This is business.
But don't worry, soon the IPOs will be back and we can all FOMO on hype once again. We just have to make sure that we are able to pay the bills and keep the lights on, between now and then.
Taraz
[ Gen1: Hive ]
