The Unicorn Derby
Tourists investors must rethink reckless bets to the unknown
Twenty years ago, the dotcom boom went collapsed with online stock merchants left behind, having a vast amount of personal savings lost in the capital market. That was just a decade after the Black Monday brew off the financial institutions such as megabanks, securities, and insurance. Big ones as well as small ones were gone. I lost my job at investment bank in 1990. People often forgot a bad memory with money, especially a risk during financial euphoria.
The popular stock index such as Nikkei 225 reached a record high at more than Yen 38,000 in late 1980’s. After thirty years, Japanese stock market still fails to meet the public expectation. It stands at Yen 28,447 on September 1, 2021. With political quantitative easing during 2010’s, the Bank of Japan observes that the benchmark still fail to come back. Individual investors kept saving and the rich Japanese households’ asset with 126m population reached nearly Yen 2,000trn, roughly 4 year worth of GDP. With ageing society and children being grown up, seniors keep looking for somewhere to invest in. It is not domestic. It is not in America, either.
Most newspapers, as often cited in my short essays, signal the record-breaking statistics of capital market, namely the venture-capital boom in Silicon Valley. The Economist magazine sketches the recent phenomenon of massive cash flow into equity raising of startups in California. A story of the magazine gives a good illustration with its unique title, “Technology, Unicornucopia”, on July 24th, 2021. It is worth reading, especially the second-half of the well-covered episode, sending a strenuous caution to tourist investors with no or little experience of investing in the unknown tech firms.
Eight years ago when Aileen Lee, founder of Cowboy Ventures, coined a term, unicorn, a privately held startup with $1bn, she witnessed only a dozen of them. Today, venture capitalists can count 750 dreamers, adding 136 new ones to the pool. The combined value of cash attraction is worth $2.4trn. The Japanese GDP stands at $5.4trn with mere 3% growth forecast. GAFA and 34 magical startups with more than $10bn received the torrent of cash from the venture capitals. Funds exceed $100m per deal, a triple size from last year and 390 firms are on the rise.
The Economist has two factors to explain the massive cash inflow to the private market. One is a divestment spree with special-purpose acquisition companies (SPACs), reverse-merge into a promising tech firms on initial public offering (IPO). Startups and SPAC’s can exit on IPO in less than five months compared with a traditional IPO procedure for nearly a year. The other reason is that the newcomers with excess cash are looking for a tech-driven firm in Silicon Valley. What is the implication of ordinary investors in private markets?
In short, it is a huge risk for novice investors. Tech startups rarely disclose financial results. It is so strange that some firms receive a whopping valuation as many as sixty times of their annual revenue. The evidence resides in fintech industry. With limited information of financial records, the valuation of tech startups rely on the rough estimates of financial analysts in due diligence or some kind of gut-feeling based on the long experience in hyperactive industry. Still long-time veterans make mistakes. So do individuals with a deep pocket.
So far, I have never heard about early-stage startups (in Tokyo) hiring certified accountant for financial statements. Perhaps, most startups loosely employ wrecked MBAs with no accounting experience whatsoever as part of non-core administrative assignments, letting a sole business expert held responsible for the entire back-office jobs under the title of management.
Most tourist investors outside the rim of private tech market don’t understand the latest technology to the emerging market such as fintech and digital health. It is very difficult to assess the viability of unique technology. With product demo and fancy presentation with slides, the audience in the exhibition hall is impressed with a prototype but it is almost impossible to translate the message into the monetary value of the product and the business model. It is an unproven theory in academics.
In highly regulated market such as finance and health care, the regulation matters. The investigation is going on in the area of security breach and illegal data selling to the third party. That will be a loss making impact on startups.
To get on the boom of the unknown industry in the private market, one thing is for sure. Amateur investors lose their money. The message is clear in a popular academic magazine. The story clearly states that investors lose money in the private market. The rate of loss is even described in the research. It is reckless to do without assessing the non-disclosed magic on the proper financial evidence. The stake is too high. The bet on the derby must be carefully examined.