It’s been get-rich-quick week on Wall Street. Except it wasn’t. Two ride-hailing companies are supposed to make you rich in the blink of an eye.
Lyft and Uber are both hitting the market with initial public offerings. Lyft went splat and broke a rule in Silicon Valley. Start-ups should be priced on Day One at a little “under market,” so that the stock rises quickly.
But the swoon was predictable. These outfits are a long way from profitability, and we may not recognize either when they get there. They’ll be pressured to make cuts, including driver pay, and raise fares — although lower fares were part of their promise.
Silicon Valley is more of a cemetery than a rally party statistically. But when a start-up “shoots the moon,” it makes lots of noise.
Uber went public valued at $90 billion. That’s unfathomable (now try pronouncing the word). Harvard Business School professor Mihir Desai notes it exceeds the worth of FedEx and General Motors combined. Basically, it buys a lot of mochas.
Lyft’s price is down 29 percent since it went public March 29, professor Desai notes in a New York Times op-ed. Uber has managed to chew through billions of other people’s money since it opened for business.
Silicon Valley is located, both in lore and fact, in Palo Alto, also hometown to Stanford University. It has drawing power. Facebook founder Mark Zuckerberg felt compelled to drop out of Harvard because he could find both venture capital and coding talent on the West Coast.
Venture capital steps in where banks won’t. But its funds — from firms or “angel” investors — are costly. Investors don’t always see those costs. They are buried in a nasty secret of start-up economics: capital invested in a new firm is far more expensive for the company than debt. The notion that stock is cheaper just an illusion.
Much of the American Dream is rooted not in what Silicon Valley is but what it means. On the bright side, it’s loaded with money and optimism for those blessed with luck, skill and insight. But it ousts the many more whose coin didn’t land on the right side.
Not that it’s even close to a 50-50 proposition. The traditional score of the Valley runs like this: for every 10 start-ups, eight will fail, losing all their capital. A ninth will drag on, miserably, earning enough just to stay alive. These are known as the “living dead.” The tenth becomes an Apple, Google or Amazon. It shoots the moon, minting instant billionaires. Such examples are rare, but public enough.
Going rags to riches in tech is a recent phenomenon. It began in the mid-1990s. A bust can be as easy as a bad guess. Web Van was a firm set to cross the country with an online concept of ordering groceries, to be delivered to the doorstep. It was growing rapidly and was full of promise, except for a bad psychological gamble. It turned out that shoppers en masse didn’t like to do their grocery shopping from home, with many preferring to browse aisles instead. Web Van burned through $830 million before going bankrupt in 1999.
Betting on a start-up is a gamble with far less than 50-50 odds. It requires homework. Lots of clues are buried in the fine print, at the end of a financial statement under “losses in working capital.” Investors miss the warnings. Founders proclaim newfound profitability while using cost accounting, deeply in the red.
Back in 1999, I was part of a start-up daily paper in Berkeley. It was a great product on the fast-track to success. But the managing founders, educated in all the right schools, were overconfident. They raised millions, counted themselves in for mega-pay — a common danger sign— and didn’t pay attention to basics like collecting bills.
My 15 percent didn’t count for much, but I was determined to slim down the company. This produced a blockade. One of my fellow partners — they were all male — scolded me. “C’mon buddy. We have to support the boys.” Our votes had always been unanimous.
One investor was a good friend and fellow Red Sox fan. I flew to Boston and, at a bar one night, tried to elaborate. Grabbing a napkin, I exclaimed, “Let me draw it for you.”
I borrowed a phrase from Tom Clancy: “It’s just an equation of speed and distance.”
On the napkin, I drew a tall mountain, and a plane flying straight towards the side of it. There was a crash site, with a question mark for the date.
After two more rounds of fundraising and another year, the paper died in 2002, startling its backers and even public officials. The founders were unwilling to cut costs, instead prepared to float comfortably to earth on “golden parachutes.” The company represented a deflated dream — especially to employees and customers.
But life went on. Easy money dried up for a while after 2002, before the spigots opened again. Venture capital can be fun for the few who know the game. But beware. The odds are 1-in-10 at best. If you’re not up for that, you might consider Bitcoin.