“What a hell of a league this is. Ah hit .387, .408, and .395 the last three years, and Ah ain’t won nothin’ yet!” — Joe Jackson, 1918
One hundred years ago, “Shoeless” Joe Jackson batted .351 during the regular season and .375, along with perfect fielding, in the World Series. Despite this, Jackson was accused of throwing the Championship. In 1921, a Chicago jury acquitted Jackson of helping to fix the 1919 World Series, but Kenesaw Landis, the first commissioner of Baseball, went against the ruling and banned all eight players, including Joe Jackson, from baseball for life.
Say It Ain’t So
For the last ten years, capital markets have been experiencing a stampede of Unicorns. First coined by venture capitalist Aileen Lee, the term, Unicorn, has become widely used to refer to startups with very high valuations questionably supported by their fundamental finances. They have accomplished what Jackson sought, won the money game but without putting up the numbers.
The hope for investors in many of these companies is that they discover a breakthrough in technology, Theranos, they build scale with a better mousetrap, WeWork or Uber, or they rethink a business entirely, Blue Apron or GrubHub. Mostly, investors are looking for profitability or an investor to sell to at a higher price before the music stops.
After a decade of endless amounts of money pouring into extraordinarily cash-flow negative companies, it seems like we are experiencing the first signs of restraint.
Because Pets Can’t Drive
As stated in a previous newsletter, we have been here before. In the dot.com bubble, we also had enormous amounts of capital pouring into uneconomic concepts. Back then, we had Pets.com which sold various low margin, low price and often heavy items (think bags of dog food) for less than cost. Add in free shipping and they were operating very unprofitably.
Today, there is WeWork. In their prospectus, they describe themselves as “a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” Pretty grand. They also claim to “have disrupted the largest asset class in the world – real estate.” Their business model is to lease long-term large-scale office space and rent to individuals and small businesses that have graduated from working out of coffee shops and libraries. In the first half, they had revenues of $1.535 billion and losses of $1.175 billion (excluding one-time gains). Revenues are covering only a little more than half of their cost to operate.
According to MarketInsider, “This year’s IPO class is the least profitable since the tech bubble, with less than a quarter of the newly tradable companies set to reach positive net income by 2020.” Many are also stumbling after their public offerings. With hindsight bias, we tend to focus more on the companies that survived and thrived rather than the ones that failed. These appear obvious in the rearview mirror.
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Shoreline Financial Advisors, LLC