With WeWork, UBER and Lyft fiascos, people are starting to wonder what is going on. Here is my assessment…

In the beginning, there were founders, angels and VCs. Their job was to create a robust fast growing and a profitable company with proven markets. They needed more capital than the VCs could provide to scale up the company. There was also a need to provide liquidity to early players and establish a market value of the company. Hence, an IPO!

Underwriters were needed for an IPO to firmly underwrite an offering. They assessed the market and came up with a market price that they could get behind . They created the demand and built the book of customers.Stocks were then floated at a price which satisfied only half of the demand so there will be demand if somebody flipped the shares. Underwrites were required to stablize the market by stepping in if there was no demand and price started to sink.

I saw this process first hand and it worked like a charm. All this was great as the company’s had a lot of growing to do and a lot of value creation was still to be done. Public investors expected to see a rapid value creation and stock appreciation.

Then came the massively funded Unicorns. They took all the available VC money, then took the wall street money to fund further and they sold in the secondary markets to individuals. The price of the stock had no real meaning as the late stage deals were highly structured and had huge downside protection.

Companies are not proven and are still incurring huge losses. Founders and employees have already been cashed out and are living the rich life. The fire in the belly is extinguished. No more money is available from current investors so stock has to be foisted on the unsuspecting public!

How do you sell such a stock in an IPO? Current and future value is unknown and is very dubious. Stock is already widely held and there are really no buyers left in the market; everybody is waiting to sell!

Is it a fault of Wall Street bankers? VCs? Founders?

It is interesting to see Tech Crunch article ( https://techcrunch.com/2019/11/24/paytm-1-billion/) that PayTM is raising a $1 billion in a new round funding. Tech Crunch article says that it has raised a total of $3.3 billion todate. I don’t have any details but reading between the lines, I see it has prioritized growth over profitability.

I am not able to get my arms around these things. I know for sure that capital flows are not steady and can change overnight. Let me relate the story of Exodus, a darling of dotcom era. Exodus was started by KB Chandrasekhar and BV Jagadeesh and pioneered Internet Data Center business and grew rapidly as Internet grew in late 90s. It was doubling every six months and reached $100 million a month revenue by 1999. It went public in 1998 and reached a public market valuation of $30 billion. 100% growth implied that it needed to double its capacity of data centeres every six months. Money was easily avialable as its banker Goldman Sachs would raise billioh dollar in convertible debentures overnight. Coventional wisdom was not to sell equity to dilute shareholders but to raise debt. I was on the only board that advised against doing so. I resigned from the board and decided to sell my shares.

The problem was that as company scaled, its losses also scaled. It never made profit and it had $3 billion dollar debt that needed to be serviced. It borrowed more to service the debt and build the data centers. When the music stopped with the dotcom bust in 2000, the money dried up. Its customers started to default and new data centers went empty. Company went from being worth $30 billion to nothing- I mean zilch, in no time at all.

My shares had grown 1000+fold and I was super rich on paper but I was not able to sell as I was locked up as an ex-insider for 90 days. I sold as much and as soon as I could but the value had dropped 90% when I was allowed to sell. By the time I was out, it had drpped another 90%.

I learnt the hard lesson that you can not count on financing when you most need it if you are not profitable. A profitable company can pull its horns in and ride out the market storms. Loss making ones go under.