Have you ever flown with Air Canada, a company that concluded 2020 with a revenue of $3.5 billion? Or with JetBlue, whose revenues last year totaled a similar amount? Or maybe one of the best airlines in the world, Cathay Pacific, whose revenue in 2020 reached $14 billion? Perhaps you joined Marriott Vacation Club (VAC) that offers 3,200 sites worldwide, and whose revenue last year stood at $2.6 billion?
What do all of these well-known companies with billions in revenue have in common? Their value as public companies is less than $7 billion, the value of Israeli-founded unicorn TripActions, a business travel company that just last week completed another fundraising round, at a $7.25 billion valuation, but with revenues significantly lower than the aforementioned companies.
We read daily about the birth of a new unicorn or fundraising of a new company with a monstrous valuation, often, higher than known companies or powerful brands (as a die-hard sports fan, I find it hard to accept that a year-and-a-half old cyber company is worth more than Real Madrid or Barcelona, more than the Yankees or Warriors). In many cases, additional capital is raised after a few months and a company could double or triple in value during that period.
Entrepreneurs like to show off valuations, which until a few years ago, were kept secret and considered as one of the benefits of a private company. Investors, too, like to show that they have betted on a winning horse and name-drop unicorns in videos and posts. And as for the employees, of course, they are proud too. They are about to win the lottery while they tell their friends about the amazing company they work for, as they try to recruit others to join and even get a bonus for it.
We are in the land of the unicorns, on the express train of value multipliers, and I as an investor, and many like me, want to shout stop the train! I want to get off.
But we do not. Why would we? We are in a position where we have all recorded huge returns (mostly on paper), and suddenly each of us has not one unicorn company, but several in our portfolio. So we enjoy the tide, and show off like everyone else and look in amazement at the market, while occasionally, in private, we pause and scratch our heads, but immediately come back and talk about who registered the biggest win.
The inflation in unicorns is not only happening in Israel of course, but Israel is a small country and it seems everyone is involved with unicorns. At the end of the day, despite the massive billboards, it's a small industry.
So what drives these markets? I recently sat down with a friend, who was fortunate enough to invest in a company in its early days that is now worth a few billions. "I do not understand why they need to fundraise again now?", he wondered. "They have a lot of money from the previous round six months ago. What is it for?"
So first of all, it is good for entrepreneurs. Today in almost every major fundraising round, entrepreneurs make a secondary deal, sell some of their shares and bring some money home. At times, these are $20-30 million paydays, which in itself is no small exit.
Investors trying to get into raising capital out of expectations for bull market multipliers are happily willing to buy more stocks even in the secondary market in such situations. Sometimes, even the early-stage funds also sell some of their holdings and instead of waiting eight to nine years for an exit, they make a nice multiplier that helps them raise the next fund, which is already around the corner.
And what about the funds that invest in companies at such a huge value? In recent years, “Godzilla” funds have entered the unicorn market, huge funds that in the past were more in line with the model of private equity and late fundraising, and are now investing in really early stages, sometimes even in the seed phase.
The first fund to go down that road was SoftBank, which with a $100 billion fund poured sums that appeared huge for companies, but were only a small part of the actual fund. Sometimes it worked, and sometimes as we saw with WeWork and other companies the results were painful.
Those instances however, in most cases and at these scales, were just a minor setback compared to very big successes. SoftBank’s power, at the time, confused Silicon Valley which was not accustomed to such monsters and went on to inflate the prices of companies. Newer Godzillas like Tiger Global and Insight Partners have taken the same approach, which has a huge impact on Israel because it is a small market.
The big funds changed the game when they started investing early, and since they have investments of tens and hundreds of millions of dollars, which are considered relatively small for them, the diversification of investments is less risky. So they invest in situations where they cannot be told no, and in dozens of Israeli companies, which creates inflation in the Israeli investment market, as well as the high valuations of companies, to which the public is suddenly exposed.
My venture capitalist friends are constantly talking about the impact of these funds. For example, a company receives several bids at a valuation of $50 million, then one of the Godzillas offers a valuation of $100 million. For the fund, it is a small amount, if successful, then it will be a big-time win and will cover all the losses from the other investments. For the other, smaller venture capital funds, it is devastating because they are pushed to their limits in order to offer or enter fundraising rounds at an unrealistic value in their eyes.
And after all these big headlines, there remains one question that none of us has the answer to: how, after investing at a valuation of $6-7 billion in companies that sell for tens of millions of dollars in total, do you register a double-digit exit of billions, while companies that already sell for billions of dollars do not easily get there. But, hey - venture capital is not for those who fear risk, it is for those who believe that anything can happen.