Technology Unicorns Expose the Malinvestment Bubble

Only a month ago, Adam Neumann, CEO of WeWork, had it all: a top job, luxury lifestyle, even a Gulfstream G650 private jet. But now, it’s all gone, including hopes of becoming the world’s first trillionaire.

As for WeWork, Softbank — it’s largest backer — led the board into damage control mode by ousting Neumann, followed shortly by his wife, Rebekah. Accusations of fraud and questions about SEC filings are circling the internet while the tech unicorn’s valuation continues to decline from a cool $47 billion to rumors of bankruptcy in just a six week period.

While the drama remains centric around one company, WeWork is just the poster child of a bubble in tech malinvestment: panic is spreading to other popular unicorns’ IPOs such as Peleton, a fitness tech company, as its stock fell 11% on opening day. These two are not alone having joined a long list of failed public offerings; Uber, Lyft, and lesser-known Smile Direct Club, to name a few, who are trading at significant discounts, proving valuations are outpacing reality.

According to Pitchbook, there are over 177 tech unicorns — private startups valued at more than a billion dollars — in the United States alone, implying there’s a lot more pain for investors who buy into the hype of a heightening IPO boom.

We’re soon to find out whether Millenial investors are holding the post-IPO bag as they come to realize they’ve been duped by Wall Street and salesmen masquerading as CEOs. Baby Boomers, on the other hand, may have experienced déjà vu, due to stark similarities between now and the Tech Bubble of 1999/2000; all-time highs in the stock market, record-high valuations, and CEOs pretending to be philanthropists that all fueled numerous malinvestments in tech companies for years.

During the Dotcom bubble, investors were left with a “hard” choice: buy a country or a tech company as some enterprises were valued higher than the GDP of New Zealand when in reality, all they owned was an office in New York and a dinky webpage.

Identifying we’re in a bubble isn’t rocket science and coincidentally it’s the main takeaway from WeWork’s rapid rise and fall; Having a view on the world economy as well as company fundamentals, perceiving companies for what they really are, and recognizing you’re in fear of missing out are the ultimate anti-bubble skills to master.

The problem with valuations is the dislocation between macro and micro drivers of companies, especially in tech: everyone becomes overly excited at the end of the business cycle — which we’re in right now — when bubbles begin to blow up. For earnings to keep rising, economic growth needs to be in great shape, but it’s not, despite what we hear from officials and the number of publicly listed tech companies reporting negative earnings guidance is the highest since, well, ever! How is it possible for valuations to keep rising when earnings are negative year-on-year? That’s bordering on madness. Hopium, maybe? It’s the reason we’re seeing disaster IPO after disaster IPO: growth is slowing at a rapid pace and the big boys — institutional investors — know the party is over.

Not only is it important to understand where we are in the business cycle but circumventing the guise of fake glamour and philanthropy is a must for anyone thinking of investing in a unicorn: you’ll recognize the difference between an Amazon and an Enron immediately: Technology, for a start, has to be innovative, that’s what makes a company, a tech company.

If your business utilizes technology, that doesn’t necessarily mean you’re a tech company.

Tech unicorns naturally inherit the highest valuations, therefore, claiming your company is one when it’s not, is a risky move. Taking on a fake moniker always results in your company becoming a victim of an overcooked market, as demonstrated by tech during the Dotcom bubble and banks during the Subprime bubble.

Ask yourself, does Peleton sound like the next gadget that’ll carry us forward into a new age of discovery? Of course not, it’s an exercise bike with a flatscreen TV attached, valued at $8.1 billion. And WeWork? It’s a real estate leasing company that’s yet to make gains; pure and simple. For contrast, it’s their competitors that produce a profit, which, on paper, would be a much better investment.

Do our anti-bubble indicators suggest we’re in the middle of another tech wreck today? Yes. Absolutely. Our indicators are screaming, “recession,” loud and clear. The warning signs are visible for everyone to see. If so, what’s the best course of action?

Avoid temptation. Fade the FOMO in hot “technology” stocks, yet to prove they are in fact, that. Insiders will do everything and anything to sell their stake to unsuspecting bagholders even if that’s by creating a botched IPO.

You’ll be buying high and selling low.

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