Ashmeet Sidana: The important thing to keep in mind is that building a startup is an evolution that occurs from the concept of an idea all the way to when they have revenue. At some point, they leave that company, which can be a journey of 5 to 15 years. Financing events are simply events along that journey. They are the side effects of that journey. There’s a seed financing round. Perhaps there’s a Series A and B. Even an IPO is just a financing event. All the great entrepreneurs continue to run their companies well after even the IPO.
Sramana Mitra: The other side of this coin is this whole explosion in capital in the late stage financing on very unreasonable terms and on very unreasonable fundamentals. I personally believe that that trend is going to slow down next year just because a lot of these companies that have loaded valuations and weak fundamentals are going to implode in the public market.
We’re seeing a lot of that happening already. I just started writing a series called From Unicorn to Unicorpse. What is your analysis of why this tendency of funding non-fundamentally sound companies at such levels? We’ve seen this before. It happened in the dot-com era. It’s happening again. Have we not learned anything?
Ashmeet Sidana: There are two different things that happened in the dot-com era in which things are different right now. First, let me agree with you that there are companies which have raised money at very high valuations on very poor fundamentals. We will see unicorpses. I love that word. We’ve certainly seen some failures. Conversely, we will also see successes. Arguably, Facebook was a company that people thought was overvalued all along the way.
Sramana Mitra: It was overvalued, but it never lacked fundamentals though.
Sramana Mitra: It had good revenues.
Ashmeet Sidana: I’m talking about the much earlier days at the billion and the $10 billion market.
Sramana Mitra: I just wrote a piece. I went through all the numbers on Facebook. You can look it up on my blog and on LinkedIn. Facebook aside, there are a lot of companies who are getting these ridiculous valuations with no fundamentals.
Ashmeet Sidana: I agree with you on the basic point that there are companies which have unsustainable businesses which have raised money at very high valuations. Let’s call a spade a spade. A company I worry a lot about is Dropbox. I don’t understand the competitive differentiation that Dropbox has.
Why is this valued so highly? We can argue that that’s probably not a good idea. We may be proven wrong. These things can change. Based on the little bit that I know about Dropbox, I worry about the valuation it has. Why did so much money come into late stage valuations in these companies?
This was driven by two underlying forces. One, because of regulatory and market changes in the US. It became less attractive for CEOs to take companies public. We have raised the bar so high on regulatory compliance partly as a reaction to Enron and other bad behaviors that occurred after the dot-com. Now, it’s very unattractive to run a public company. I serve on many Boards. I have CEOs. I talk to them all the time. They’re like, “I don’t want to run a public company.” It’s hard.
One is this raising of the pain threshold that I think has gone too far from the government side. Because of that, it became much less attractive until people started looking for sources of private capital. At the same time, we had a big financial crash. Interest rates came down to zero. The Federal Reserve and all the other central banks flooded the market with capital.
There’s an enormous amount of capital which is available now and which has to go and find yield. Interest rates are effectively zero. There’s a lot of money chasing yield. The only place where yield was available was with private companies. These two things coming together is what created a bubble or this very late stage frothy market which we’ve seen where there will be some irrational behavior that will occur.