Someone Else's Tech Recession

by: Dana Blankenhorn


Privately-funded tech companies, or Unicorns, are in a bad way.

New funding is drying up, available only at lower valuations.

If they were public, this would be tragedy. As it is, it's comedy.

For those bemoaning what has happened to their shares of Apple (NASDAQ:AAPL) or Intel (NASDAQ:INTC) or Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) lately, you're barely being touched by the biggest tech recession since 2000.

You might own Uber (Private:UBER). You might own Lyft (Private:LYFT). You might own Zenefits (Private:ZFIT) or Buzzfeed (Private:BUZZ). Heck, you might be in Theranos (THER).

Many of the so-called "Unicorn" companies have been getting pounded this year, victims of their own hubris, allegations of wrongdoing or a market that no longer values highly what they are selling. If these companies were in the public market, the stories of their fall from grace would be all over the news, and we would indeed be talking about another "dot-bomb."

But they're not. They're privately held. They're other people's problem. It's the fat cats who are taking the losses.

For years, I have been bemoaning the fact that private investors, mainly venture capitalists and private equity firms, have been gobbling up Silicon Valley's best deals, holding them for themselves as these companies sped through the mass market and became household names. Uber is practically a common verb. I ubered over (Don't believe me? Google it).

Seeking Alpha readers have not been invited to the party. It's one way the .000001% are separating themselves further, not just from the 99%, but from the 5%, the 1%, even the .001%. As a qualified investor, who in theory can handle the risks associated with venture funds, the ultra-wealthy have long been able to stand ahead of public ones in the search for gain. Uniquely, in this decade, they have brought enough capital to carry companies all the way to glory, with no help from the public market.

Every technology company, and every technology trend, runs through specific stages of growth and market penetration. It may take years for all but a handful of people to use a product, then hobbyists and "early adopters" get hold of it. The race through the mass market is rapid and can be incredibly profitable - look at what Apple's stock did between 2007 and co-founder Steve Jobs' death in 2011.

But, at some point, any market becomes saturated. Sales are mainly of replacements. Innovation becomes mainstream. That has been reflected in Apple's latest results.

It is also being reflected in the unicorns. It has been going on for six months now since the fourth quarter while publicly-traded tech stocks have mainly been treading water. The number of so-called "mega rounds," funding of $100 million or more to VC-backed companies, has collapsed. When a start-up accepts new funding based on a lower valuation, that's when the fecal matter hits the rotating blades for its other investors. That is when they realize their stock is worth less. That has been increasingly common in the Valley this year.

While it was a tragedy that Unicorn investors got all the gravy during the run-up, it's farcical what is happening now, because it is not happening to Seeking Alpha readers. We just shouldn't expect to be free from blowback here in the public markets.

Underneath the headlines, what is happening is a normal sector rotation among tech opportunities. The "gig" economy is no longer interesting. Now it's all about bots and cloud software. VCs are looking frantically for the "next big thing," the next set of start-ups they can turn into Unicorn companies next year and in 2018.

Meanwhile, expect some of these old Unicorns to try and come public this year or next year. They will look a bit bedraggled. Their horns will be scruffy. They won't be worth the premium valuations they were two years ago. They had better be profitable and be ready to work for their living.

But some could prove interesting. Check their teeth.

Disclosure: I am/we are long AAPL, GOOGL, INTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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