Pando

Another VC quarter that makes no economic sense thanks to robots, Softbank, and the pursuit of masculinity through valuation

By Sarah Lacy , written on October 12, 2017

From The Venture Capital Desk

“2017 is on pace to see the highest number of $100 million+ VC rounds in the past decade…”

AYFKM? Still?

For pretty much the existence of Pando, very smart people have been predicting, even trying to talk the Valley into, a downturn. And yet, here we are. Six years into Pando’s life and the news is out about yet another quarter that defies any sense of economic gravitational rules. Yet another quarter where it seems unsustainable, where the money coming in and the money going out makes no rational sense, and yet another quarter where no change is in sight. Indeed, 2017 is on pace not only to see the most $100 million deals of the decade, but a decade high of investment over all.

There were 26 mega-rounds in the US, and even more closed in Asia. That’s way up from last year. Mega deals are increasing. This despite only one decacorn-- Snap-- managing to go public... and performing poorly.

San Francisco-- itself-- was home to eight $100 million-plus mega rounds. Sorry, everyone else who lives here and hates tech. A shit load more money and paper wealth just got blanketed all over the city. That come-uppance you’ve been psyching yourself up for years isn’t coming anytime soon.

Blame Softbank… this quarter. Its near $100 billion “Vision Fund” could give half a billion to every US unicorn and still have plenty left over. And that may well be the plan: This quarter Softbank did the top three deals, according to CB Insights and PriceWaterhouse Coopers.

Blame the toxic masculinity that has been driving this whole era of publicly crowing about valuations.

Blame the cult of the founder for no sanity or board oversight.

Blame Uber because they’ve been such an extreme version of all of this, that any other overvalued company looks sane in comparison.

It’s like a broken rollercoaster that seems to slow when it gets back to the beginning and then the doors lock and it goes around again, even faster. So many false signs it was finally slowing, sanity was returning, and then… Oh, fuck, not again!

First, it was all those super angels funding more companies than we’d seen before. Then it was traditional VCs with their growth funds. Then it was the Fidelities and T. Rowe Prices of the world. Then it was a surge in corporate VCs (even Sesame Street!). And then it was the inescapable flood of foreign capital, more than filling in the gaps when some of that earlier exuberance faded. Foreign capital is what we really didn’t anticipate, calling this “crash” several years ago.

Softbank’s Vision Fund is only the most extreme and latest example of the new surge in “you never have to grow up!” money for startups. Reporters have been trying to wrap their minds around how this could possibly be a good thing for the ecosystem. The New York Times had a recent piece on the fund’s rationale:

[Masayoshi Son] believes robots will eventually become more important than humans in the workforce, and thus he's backing companies that collect massive amounts of data and could potentially help the economy tackle the shifts that will be brought by AI. Q

Well, that’s not creepy at all.

The only weirder version of Softbank’s rationale came from WeWork’s founder after Softbank gave it another $4.4 billion, years after its valuation stopped making sense:

No one is investing in a co-working company worth $20 billion. That doesn't exist. Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.

There you have it. The answer we’ve all be waiting for: Energy, spirituality and the ascendance of robots. It makes no sense, but it explains why regular old money-in and money-out economics are no longer driving this. Hell, actual venture capital firms are no longer driving this.

I got nothing at this point, folks.

Regular readers— and by that I mean those of you who have read me since my San Jose Business Journal days, thru to BusinessWeek, thru to TechCrunch and then onto the earliest days of Pando (yep, that’s you, mom!) — know that there has been on constant across all those publications. I love nothing more than pouring through and dissecting quarterly venture capital reports.

Good times or bad times, the numbers are always fascinating, and there’s always a nuance everyone else misses. Like, say, how the amount of seed deals as a percentage of the whole changes over time portends what will happen in a few years. And the gap that can mount between increases in the amount of funding increasing, and the number of completed deals decreasing. That’s typically a sign that a crash is coming. (And has been happening for since 2015, and is continuing over the last four quarters, according to CB Insights...)

Or, it used to be.

And here’s the thing: Dissecting quarterly venture capital numbers no longer have any allure for me, because this realm we are in is so many quarters beyond logic, industry norms, or anything worth commenting on beyond the many, many quarters I’ve said the same thing.

Here’s what I’ve said for countless quarters now:

— The preponderance of corporate VCs and international funds are the invisible hand buoying all this up that won’t go away. Enter Softbank, just the latest and most the extreme example. Most bizarre examples of this trend are “startups” like Didi who are participating in other startup’s mega rounds.

— At some point, there need to be returns, and slowly but surely deca-corns are slipping out of the decacorn club, unicorns are slipping out of the unicorn club… Even Uber is rumored to be negotiating various deals that would lop $30 billion or so off its valuation. Taken together the deca-corns make up nearly $200 billion in valuation and many of the consumer ones seem untenable as IPO candidates at these prices.

— All this “venture investing” is so far out of the hands of actual venture capitalists. Many of whom would love to regain control and have the leverage to push companies towards IPOs once again.

— Employees will get screwed the most should this ever normalize. Early investors and founders will make plenty of money, at least when it comes to the companies raising mega rounds.

— This can’t last indefinitely.

See y’all next quarter.