Following the widespread use of the internet during the 1990s of the 20th century, global venture capital became a volatile, high risk-reward entity. A majority of the American companies in the fields of semiconductor, software, internet and consumer electronics such as Microsoft, Apple, Amazon, Google, Facebook and the likes of many major biotech companies were not spared from its grasp. This has led to the emergence of many unicorns, a result of global excess capital. However, all of that will soon change. On October 31, 2019, only a handful of attendees could be seen at the Future Investment Initiative in Saudi Arabia as SoftBank Group CEO Masayoshi Son appeared at the to speak at the panel, a stark contrast compared to his appearance from two years back. In fact, the Japanese billionaire said little and did not speak of Saudi Arabia's pledge to the second US$ 100 billion Vision Fund.
The sight was an obvious reflection of the market's change in perception towards venture capital. It was once the pet of venture capitalists, yet now such interest is beginning to wane. Such is the case with SoftBank Group super unicorn WeWork, who was recently met with challenges in the listing process.
In truth, the venture capital is not the only scene to be affected. As a matter of fact, other venues of the capital market (such as stocks and bonds) too have been seeing gradual changes, signifying a shift in the trend of investment conception. In the United States, public concerns regarding the economy are growing as data indicates a slowdown in its global manufacturing and an inverted yield curve in the country's public debt. For many investors, purchasing new shares from IPO whilst having to bear huge cost of risk, particularly ones that involve shares from an unprofitable company (as is the case with many unicorns) is an undesirable thing. The S&P 500 Index has shown that the top performing sectors for third quarterly were utilities, real estate and consumer staples companies, not information technology nor internet services and infrastructure. Concurrently, these companies boast high dividend yield, possess business relevance and are relatively stable. Equally worth noting is the disconnection exhibited between private and public markets. In private markets, unicorns are provided with an endless supply of cash flow and display signs of a unicorn bubble. Yet for public markets however, reviews of business models are much more stringent, causing many new investors to pursue traditional indicators of profitability.
Despite all that, the capital surplus continues to support the private market in terms of funding. In 1990, attempts to loosen the financial investment regulation was achieved through the National Securities Market Improvement Act (NSMIA) 1996, which successfully lowered the number of information needed to be disclosed, thereby enabling startups an easier time at receiving funding. Simultaneously, the act had also amended the Investment Company Act and in doing so, increasing the cap of investors allowed to invest in companies. Consequently, the deregulation of these measures have created a massive gateway for private equity and venture capital to tap into the market and in doing so, allowing companies to obtain funding without needing to pass the IPO whilst continuing to remain private as so to achieve considerable growth potential.
The stock market is the ultimate destination for every venture capital and private equity looking to profit but the question of why many investors choose to hop on the bandwagon of unicorns remains a controversial topic. Perhaps it is all merely a coincidence. Although skeptics believe that it is due to the aging of the economic cycle, where the window period to profit from thriving stock market is beginning to shrink.
Even as the market continues to experience changes, overvalued unicorns can be seen aggressively marketing themselves towards investors who are now adopting a much more defensive approach towards the stock market. Sadly, investors just aren't willing to invest in ambitious companies with low-growth potential. On the topic of hedge funds, Chilton Trust Co-Chief Investment Officer Jennifer Foster says, "The sheer number of private capitals pursuing companies in its venture capital phase is what causes a delayed feedback loop between private and public markets."
The string of investment cases taking place within the American market reflects the changes market has gone through over the years. Morgan Stanley Chief U.S. Equity Strategist Michael Wilson believes that companies who failed the IPO should be seen as another important turning point for the market. In 1989, the failure in leveraged buyout of United States Airlines marked the end of a 10-year leveraged buyout driven by junk bonds. Meanwhile, the merging of AOL and TimeWarner heralded the end of the Internet Bubble. And in 2008, the buyout of Bear Stearns under JPMorgan signified the end of post-millennial financial excess.
Final analysis conclusion:
After paying a hefty price in its mistake, the global market is now experiencing a major shift in the philosophy and standards of investment. The string of events that have happened recently are an indication the days of unprofitable businesses receiving generous capital are coming to an end.
