Thursday, January 16, 2020
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WeWork is not alone
On Wednesday, KKR's head of global macro Henry McVey published his latest overview of the investing landscape.
Among McVey's wide-ranging observations is his standout view that the pain for venture investments — and their cool reception by public market investors — isn't over yet.
"Our belief is that the WeWork situation was not a 'one-off' occurrence," McVey wrote. "Rather, we see a growing number of Venture Capital/early stage Growth investments that we think may have difficulty funding in 2020."
In late 2019, WeWork filed for an initial public offering (IPO), and later pulled the plug after the company’s S-1 was widely criticized. The ordeal shone a spotlight on corporate governance issues at WeWork, and painted an unflattering portrait of SoftBank’s Vision Fund investments. Many SoftBank-backed startups have recently pared back their previously sprawling visions.
For the companies that did make it to market, 2019 was a year that saw a number of high-profile unicorns struggle after their debut. Shares of Uber (UBER), Lyft (LYFT), and Pinterest (PINS) — among others — fell as much as 60% after their public debuts. Anticipated high-profile IPOs in 2020 include debuts from the likes of Airbnb and Postmates.
And it is these consumer-focused, venture-backed brands which offer investors the most troubling unit economics, in McVey's view. "While TAM, or total addressable market, is an interesting statistic, it does not guarantee a company will convert its customers into a cash flowing business model," McVey wrote.
"In the 'Back to the Future' environment we envision, cash flow conversion will again become king,” he said.
“From what we can observe, there are still too many companies with high fixed costs and less marginal revenue dollar per purchase that are being funded, and in 2020 we believe that a more skeptical investment community will expose some of these flaws, particularly as unprofitable private growth companies try to access the public markets,” McVey added.
It seems that some Wall Street names have seen enough from the late-stage venture opportunities they jumped at just a few years ago. After taking a $267 million loss on its stakes in startups-gone-public — including Uber, Avantor (AVTR), and TradeWeb (TW) in the third quarter — Goldman Sachs (GS) said Wednesday that it exited its Uber position during the fourth quarter, and would look to “reduce the size of certain positions in the public portfolio.”
Direct-to-consumer mattress brand Casper is the latest company to receive a skeptical response from many observers when its S-1 hit the tape late Friday.
As Yahoo Finance's Daniel Roberts outlined this week, Casper is an extremely competitive industry with minimal brand loyalty, and is losing money at an accelerating rate. In its filing, Casper's workaround is an attempt to brand itself as a pioneer in the "Sleep Economy."
It is, of course, fair to note as a global private equity giant, KKR may in some cases be in direct competition with venture capital for investment dollars. The institutional client courted by KKR and, increasingly, the venture space is under substantial pressure to hit hurdle rates that appear unrealistic in a world of low interest rates and high stock valuations.
But in an environment where KKR is saying, “our call is certainly not to head to the sidelines and wait for a major pullback,” there’s notable negativity surrounding what had been one of the buzziest sectors available to institutional investors. As for latest class of Silicon Valley offerings, it’s a sign that sentiment towards them isn’t likely to turn around anytime soon.
What to watch today
8:30 a.m. ET: Import Price Index month-on-month, December (0.4% expected, 0.2% in November)
8:30 a.m. ET: Retail Sales Advance month-on-month, December (0.3% expected, 0.2% in November); Retail Sales excluding Auto & Gas, December (0.4% expected, 0.0% in November); Retail sales excluding Autos month-on-month, December (0.5% expected, 0.1% in November)
8:30 a.m. ET: Philadelphia Fed Business Outlook, January (3.8 expected, 2.4 in November revised
8:30 a.m. ET: Initial Jobless Claims, week ended Jan. 11 (220,000 expected, 214,000 prior); Continuing Claims, week ended Jan. 4 (1.803 million prior)
9:45 a.m. ET: Bloomberg Consumer Comfort, week ended Jan. 12 (65.1 prior); Net Long-term TIC Flows, November (-$48.3 billion in October)
7:30 a.m. ET: Morgan Stanley (MS) is expected to report adjusted earnings of $1.02 per share on $9.73 billion in revenue
8:45 a.m. ET: Charles Schwab (SCHW) is expected to report adjusted earnings of 64 cents per share on $2.61 billion in revenue
4 p.m. ET: CSX (CSX) is expected to report adjusted earnings of 97 cents per share on $2.92 billion in revenue
Trump’s China deal will hurt more than it helps [Yahoo Finance]
China’s credit growth holds up in December [Bloomberg]
Tesla, Apple, and Shake Shack get another boost from bulls [Yahoo Finance]