A 3D-printed Facebook logo standing on PC motherboard. Too many start-ups today are overvalued, expert argues. Dado Ruvic/Reuters
A 3D-printed Facebook logo standing on PC motherboard. Too many start-ups today are overvalued, expert argues. Dado Ruvic/Reuters

Start-up overvaluations could leave unicorn blood on the carpet



I'm going to spill a dirty secret of technology start-up investing - brace yourselves.

Too many young tech companies have raised too much money, often at unjustifiably high valuations. Not all investors in private companies will make a profit from the bloated pool of startups. There will be (unicorn) blood.

There are understandable reasons that young technology companies are collecting more investment money than at any point in the past decade. Globally, people have few options to generate good investment returns, and they're grabbing slices of fast-growing start-ups that could become the next Facebook.

But those individually rational investor decisions have resulted in collective irrationality. Too many young companies have valuations far higher than reality can support.

For public companies, a common exercise is comparing how much investors are willing to pay as a multiple of earnings. Stock investors right now have determined that Facebook is worth 27 times its future earnings. Struggling, slow-growing General Electric is worth less. We understand how this works.

Many start-ups say this cold investment logic doesn't apply to them. They say they're doing something fundamentally different from any company that came before and deserve to be valued more richly than similar public companies.

Stitch Fix, an online personal stylist company, is about to tell stock market investors why it deserves a richer value than a traditional retail company. WeWork doesn't want to be considered in the same category as boring old office-leasing companies. Stripe doesn't want the stodgy stock multiples of traditional payments companies.

_____________

Read more:

Self-driving startups are fighting heavy traffic to compete for investment

Technology in Middle East on cusp of change

_____________

It's true that these and other young technology companies are often changing existing industries in ways that permanently expand a market. When that's the case, investors can and should pay more for a company that still sells clothes but can reach many more people than traditional retailers ever could and at lower costs. But it's not always easy to tell the true market-expanding disrupters from the overvalued wannabes.

Honestly, profit or revenue multiples based on semi-fictitious start-up financials and semi-fictitious start-up valuations don't matter when companies remain private. But the rubber meets the road when start-ups go public. To steal from investor Benjamin Graham, the public markets are a weighing machine over the long term.

The market value of a company will eventually reflect what it's worth based on some multiple of its earnings. The whole idea of owning a piece of a business is to get a slice of its income. Few companies can defy the weighing machine for long.

That's why it's tough to look at companies like WeWork, Uber, Stripe and many other truly superb start-ups and not see potential pain in their valuations. If office-leasing companies are valued at eight times their projected revenue in the next year, at most, it's unlikely WeWork can be valued at 20 times.

This can only change in two ways. One, the start-up grows fast enough that its bigger revenue or earnings slim down the ratio of market value to hard numbers. That happened to tech companies such as Facebook that once had irrationally high valuations.

Or, the weighing machine tilts in the other direction and the value falls as the start-ups cross the chasm from private markets to public ones. That's when it gets bloody.

Shira Ovide is a former Wall Street Journal journalist and writes fro Bloomberg

The specs
Engine: 4.0-litre flat-six
Power: 510hp at 9,000rpm
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
Price: From Dh801,800
Three ways to get a gratitude glow

By committing to at least one of these daily, you can bring more gratitude into your life, says Ong.

  • During your morning skincare routine, name five things you are thankful for about yourself.
  • As you finish your skincare routine, look yourself in the eye and speak an affirmation, such as: “I am grateful for every part of me, including my ability to take care of my skin.”
  • In the evening, take some deep breaths, notice how your skin feels, and listen for what your skin is grateful for.
Anxiety and work stress major factors

Anxiety, work stress and social isolation are all factors in the recogised rise in mental health problems.

A study UAE Ministry of Health researchers published in the summer also cited struggles with weight and illnesses as major contributors.

Its authors analysed a dozen separate UAE studies between 2007 and 2017. Prevalence was often higher in university students, women and in people on low incomes.

One showed 28 per cent of female students at a Dubai university reported symptoms linked to depression. Another in Al Ain found 22.2 per cent of students had depressive symptoms - five times the global average.

It said the country has made strides to address mental health problems but said: “Our review highlights the overall prevalence of depressive symptoms and depression, which may long have been overlooked."

Prof Samir Al Adawi, of the department of behavioural medicine at Sultan Qaboos University in Oman, who was not involved in the study but is a recognised expert in the Gulf, said how mental health is discussed varies significantly between cultures and nationalities.

“The problem we have in the Gulf is the cross-cultural differences and how people articulate emotional distress," said Prof Al Adawi. 

“Someone will say that I have physical complaints rather than emotional complaints. This is the major problem with any discussion around depression."

Daniel Bardsley

The specs

Engine: Dual 180kW and 300kW front and rear motors

Power: 480kW

Torque: 850Nm

Transmission: Single-speed automatic

Price: From Dh359,900 ($98,000)

On sale: Now