THE ‘GREAT RESET’ IS UPON US
But investor says current environment isn’t quite as sour as previous ones
But tech investor Rich Wong says this time it’s different,
That pounding
SAN FRANCIS CO being inflicted on tech stocks of late carries the unmistakable echoes of past tech boom-bust cycles, Accel Partners’ Rich Wong says. And the more speculative startups — office vodka delivery, anyone? — face the steepest pressure.
Wong has been a lead investor in several start-ups bought by big tech companies in recent years. Another portfolio company, Atlassian, was one of the last tech IPOs of 2015, surging in its debut.
That has given him a front-row seat on the heady valuations assigned to start-ups as institutional investors, eager for a slice of the next Facebook or Google. Some of these, say for Snapchat, Dropbox or the now-public Square, have fallen sharply. Publicly traded stocks such as LinkedIn and Box are down more than 50% from their 52-weeks highs — and the Nasdaq composite is getting dangerously close to a bear market. Sentiment is changing.
A former chief marketing officer at DSL broadband pioneer Covad Communications, Wong has been through the last two cycles to shake the tech economy in the last 15 years. He sat down with USA TODAY in January. The podcast interview has been edited for clarity and brevity.
Q: Why are valuations going down?
A: There is a great reset that’s happening in valuations in the private market, and I think we can all see as we turn on the TV every morning what’s happening in the public markets as well.
To the degree there is a disconnect in public-private (valua- tions), or the level to which there may be some change in valuations, very much depends on which specific ZIP codes you’re living in in the technology world.
Many of these enterprise SaaS (software as a service) businesses, they are real businesses, they have real revenue, they have real clarity about which customers they’re selling to. Some of them might in this environment choose to grow slower and therefore burn a little less cash. But the businesses, speaking very broadly, are much more understood in terms of their fundamental, unit economics and discipline.
On the other end of the spectrum, which always has been much more the gold rush and Wild West, are some of these consumer start-ups that might be much more speculative and early in terms of unit economics. We’re starting to see a large number of delivery companies and valet parking on demand. When you really dig into those businesses, it’s just earlier or less proven in terms of whether you can really make money on a per-delivery or per-unit basis.
Q: Did you see this kind of reset in valuations in private markets in last cycles?
A: Yes, when you step back and look at 2009, after the global financial crisis, and we can all remember 2001, after the Nasdaq peaked. I think there were dramatic resets, to the point a lot of companies went out of business. I personally don’t think the environment is anywhere close to as difficult as 2008-2009, 2001.
Q: Is there something different this time?
A: In some ways a lot of this goes back to the success of Facebook. There was a belief and understanding of how large these winners would be if you were to be in the right ones. So that fear of missing out has driven a lot of froth into the marketplace. The stark reality is that very, very few companies get that opportunity.
Q: Is the bifurcation among companies becoming bigger?
A: This has always been the land of dreamers and the gold rush. This is why San Francisco is here. This gold rush mentality, even if the probabilities are against an individual entrepreneur, that still exists. Even if you were the founder of Instagram or WhatsApp, that had no revenue, that didn’t have unit economics, certainly didn’t have profits, sometimes the dream is fulfilled, sometimes you find that nugget of gold that everyone chases. I would point out we’ll always have some percentage of that here in San Francisco, here in our Valley.
In order to get these big rounds raised, there’s much more scrutiny (on how a company is making money), and the types of entrepreneurs is beginning to change. I’d predict we’re only at the beginning. Over the next year to two, you’ll really begin to see a much more dramatic shift.
“That fear of missing out on that next Facebook rocket ship is starting to be replaced by actual fear of losing money. If I’m doing a deliver-vodka-to-the-office company, it’s probably a different conversation to raise money than I was having two years ago.”
Rich Wong