Following a series of “super clarifying” meetings with shareholders, Uber’s chief executive, Dara Khosrowshahi, emailed employees on Sunday night with an arresting message: “we need to show them the money.”
Mangling his metaphors, Khosrowshahi explained that the market was experiencing a “seismic shift” and the “goalposts have changed.” The ride-hailing and food delivery company’s priority must now be to generate free cash flow. “We are serving multitrillion-dollar markets, but market size is irrelevant if it doesn’t translate into profit,” he wrote.
For the boss of Uber to be trumpeting cash flow and profit would once have seemed about as likely as Elon Musk shouting about the benefits of personal humility and petrol-fueled cars. Uber is the most emblematic company of the capital-doped, long-term bull market in technology stocks. Founded in 2009, the company floated a decade later at a valuation of $76 billion without recording a single quarter of profits. Its belated conversion to financial orthodoxy shows how much markets have been transformed since the turn in the interest rate cycle and the crash of the tech-heavy Nasdaq market, which has dropped 26 percent this year.
As ever, when bubbles burst, it is hard to distinguish between temporary adjustment and permanent change, between the cyclical downturn and the secular trend. Is the market now awash in speculative froth? Are the rules of the game changing for venture capital-backed start ups trying to imitate Uber?
There is certainly a strong argument that the extraordinary boom in tech stocks over the past decade was largely fueled by the unprecedented low-interest-rate policies in response to the global financial crisis of 2008. Capital becoming a commodity, it was logical for opportunistic firms such as Uber to get as much cash from VC firms as they would allow them to “blitzscale”, their way to market dominance.
This madcap expansion was accelerated by funding provided by a new class of non-traditional, or tourist, investors, including Masayoshi Son’s SoftBank and “crossover” hedge funds such as Tiger Global. These funds are experiencing dramatic falls in portfolio valuations. SoftBank has just announced a historic $27 billion investment loss over the past year at its two Vision Funds, while Tiger Global has lost $17 billion this year.
“There was a unique set of economic and financial policies enacted by the world’s central banks that we have never seen before: sustained negative interest rates over the long term,” says William Janeway, the veteran investor. As a result, he says, some companies pursued “capital as a strategy,” looking to invest their way to success and ignoring traditional metrics. “But I do not believe that is a sensible or sustainable investment strategy.”
Stock market investors have drawn the same conclusion and are now distinguishing between those tech companies that generate strong cash flow and profits, such as Apple, Microsoft, and Alphabet, and more speculative investments, such as Netflix, Peloton, and Zoom. These may have grown extraordinarily fast during the COVID-19 pandemic, but they are still flooded with red ink.
Just as public market investors have rotated out of cash-guzzling growth stocks into cash-generating value companies, so private market investors are following suit, says Albert Wenger, managing partner of Union Square Ventures, the New York-based VC firm. This is a good thing. Companies have to build real products and deliver customer value that translates into earnings,” Wenger says, even if this shift will prove “very, very painful for a number of companies.”
Life is already becoming uncomfortable for late-stage startups looking to exit. Access to the public markets is difficult now. According to EY, the value of all global IPOs in the first quarter of 2022 dropped 51 percent year on year. The once-manic market for special purpose acquisition companies, which enabled highly speculative tech companies to list through the backdoor, ha