4 The Sunday Times May 22, 2022
BUSINESS
Staying
alive is
what it’s
about.
Cash
matters
more
than
your
mother
T
imes of chaos sometimes
serve up delicious slices of
irony. And so it was last week.
“Chaos” does not overstate
the troubles of the tech mar-
ket, which has gone into melt-
down to an extent not seen
since the dotcom crash of- America’s tech-heavy
Nasdaq index has dropped
nearly a third since its high last Novem-
ber, vaporising trillions of dollars in the
process; it closed on Friday at 11,354.62,
down 3.8 per cent on the week. Venture
capitalists, who grease the wheels of the
machine by lavishing founders with cash,
have closed their wallets. After a decade-
long bull market, winter has arrived.
Amid the gloom, Marc Andreessen
showed up, as he often does, on The Good
Time Show, an in-house chatshow for
Andreessen Horowitz, the venture capi-
tal giant he co-founded. With his fellow
panellists, the billionaire investor
groused about how start-up founders
had, apparently, not yet got the memo
that the world had changed.
“It’s like, ‘We’re gonna keep the mas-
seuse,’ ” he said. “The level of inventive-
ness in the last ten years that companies
have found to spend money is just stag-
gering. It may be time to go to a little bit
more of a spartan mode of existence...
to build for long-term survival and suc-
cess rather than short-term, let’s say,
creature comforts. It may be time to get
out the sharp pencils, put on the eye
shades and start to really rethink how
you spend money.”
His austerity soliloquy finished,
Andreessen then took a sip from a glass of
(neat) Armut, an £800 bottle of imported
Indian whisky. Austerity personified.
Welcome to “The Great Revaluation”
of 2022, as it has been called by Laurence
Tosi, former finance chief of Airbnb and
Blackstone, now a start-up investor at
investment firm WestCap.
The question is, how bad are things
going to get? Will this indeed be a rerun of
the dotcom crash?
For context, when the dotcom bubble
burst, the Nasdaq plunged 75 per cent
between March 2000 and October 2002,
destroying more than $5 trillion of wealth.
By the end of that year, 70 per cent of US
retirement plans had lost at least a fifth of
their value; 20 per cent lost nearly half.
More than half the companies that floated
in the boom perished in the bust.
Yet it was also a time when the wheat
separated from the chaff and world-beat-
ers such as Amazon and Google emerged.
A similar trend followed in the aftermath
of the Great Recession of the late 2000s,
when the likes of Airbnb, Uber and pay-
ments giant Stripe were born. Airbnb
chief Brian Chesky tweeted this month:
“This moment feels similar to late 2008,
when we started Airbnb. Lots of impor-
tant companies were started during down
cycles. Your conviction will be tested.
Those that survive will be stronger.”
So how far along are we in the Great
Revaluation? In short, it’s early. Public
company share prices have been the first
to crack: business software firms have,
since the November market peak,
dropped 65 per cent; consumer internet
players are down 70 per cent; and fintech
stocks have lost more than 80 per cent of
their value. In many cases, years of com-
pounding gains have been obliterated.
Shares in Facebook parent Meta, for
example, have plunged to $192.40 from a
pandemic high of $380, destroying half a
trillion dollars in value.
The reasons for the wipeout are many,
from the war in Ukraine to supply-chain
issues gumming up the economy. The
biggest, however, have been inflation and
rising interest rates. Jerome Powell,
chairman of the US Federal Reserve, has
made taming America’s 8.3 per cent infla-
tion, which is near a 40-year high, his
number one priority. The Bank of
England is similarly focused on Britain’s 9
per cent rate — also a four-decade peak.
The most effective weapon in the fight
is to ratchet up the cost of money. Powell
has already pushed through two rate
rises and has promised two more 0.5 per-
centage point increases over the next few
months. Rate hikes make goods more
expensive, which dampens demand, in
turn easing supply constraints and sof-
tening prices. They also, potentially, lead
to recession, as companies cut back to
adjust to shrinking sales.
In the past fortnight, Uber, Facebook,
Robinhood, Twitter, Coinbase and Net-flix have all announced lay-offs or hiring
freezes. In an email to his employees,
Uber boss Dara Khosrowshahi
explained: “In times of uncertainty,
investors look for safety. Channelling
[the Tom Cruise film] Jerry Maguire, we
need to show them the money.”
Khosrowshahi added: “We will abso-lutely have to do more with less. This will
not be easy, but it will be epic.”N
ot everyone is so phlegmatic.
Indeed, the crumbling of public
market valuations has begun to
cascade through the start-up eco-
system. Venture capitalists have
become much more draconian because
suddenly the markets are shut, cutting off
the preferred exit route for investors hop-
ing to cash out on their bets. In the event
that a company can float, the chances are
it will be at a much-reduced value than
the last time it raised money.
Consider Instacart, the grocery-deliv-
ery business that had a great pandemic.
At the height of lockdown, the loss-mak-
ing firm raised money — from Andreessen
Horowitz and others — at a $49 billion
(£39 billion) valuation. Two months ago,
it slashed its valuation by 40 per cent to
$24 billion. It announced plans for a mar-
ket debut this month. The last investors
in are staring at big paper losses.
The picture is not all bad. Last year was
a record for venture capital. The sector
raised nearly $120 billion, bringing its
store of “dry powder” to more thanILLUSTRATION: JAMES COWENSEASON FOUR OF
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Trillions of dollars have been wiped off the value of America’s technology stocks — and the carnage has possibly only just begun
Buckle up for the Great Revaluation
DANNY FORTSON IN SAN FRANCISCO
$150 billion. That is a lot of money to
plough into companies the industry
thinks have the best chance to make it.
However, even this record pile of cash
is not what it seems.
Not long ago, founders could close a
funding round in days. Investors desper-
ate not to miss out on the next big thing
would do cursory due diligence and hap-
pily bid up the valuation, even if the com-
pany remained far from generating cash-
flow or profit.
That has changed. “There’s an entire
generation of founders who basically
have been trained to generate Fomo [fear
of missing out],” Andreessen said. The
dynamic is shifting, he added, from Fomo
to what he termed Jomo — the joy of miss-
ing out. He continued: “It’s just gonna get
a lot harder for a lot of people.”
In a recent presentation to founders
on how to operate in a downturn, David
Sacks, founder of Craft Ventures, warned
that a slowdown in the rate at which firms
invest will have a chilling effect. He
explained: “Even if you reduce the pace
of deployment from one year to three
years, you’re looking at a two-thirds
reduction of capital available.”
It is also worth bearing in mind that
venture capital funds are not, in fact,
piles of cash sitting in a bank account.
They are commitments from investors
who, when a venture capitalist calls, wire
a sum to fund an investment in a new
company. When the stock market is in
freefall, those calls can get tricky.
Jason Calacanis, an angel investor who
backed Uber, said on the All-In podcast:
“During the great financial crisis — for
about a year, maybe even two — many
venture firms did not want to call on capi-
tal from their investors, whose portfolios
were crushed. They’d say, ‘I know we are
on the hook for this, but I would appreci-
ate it if you don’t make a ton of invest-
ments right now.’ ”
Those most likely to get burnt are what
Redpoint Ventures called “hot money” —
the hedge funds, private equity and
mutual funds that have rushed in to tech
investing in recent years. Last year, these
non-traditional investors accounted for
an astonishing 77 per cent of the $330 bil-
lion poured into US start-ups. Tiger
Global, the hedge fund that was founded
by billionaire Chase Coleman and was
among the most aggressive of the arri-
vistes, has lost $17 billion on bets on big
names such as Netflix and Peloton. The
losses wiped out two thirds of its profits
since it started in 2001. Just as astonish-
ing, Tiger’s $12.7 billion venture capital
fund, which it raised last year, has already
been almost fully invested — an orgy of
bets made at the peak of the market.
And yet, the carnage may have barely
begun. The time that passed between the
peak of the dotcom bubble and the
trough was 2½ years, according to Logan
Bartlett of Redpoint Ventures (in yet
another “hold on to your hats” presenta-
tion for founders). If the current down-
turn follows a similar path, there are two
years yet to run of falling values, implod-
ing companies and desperation mergers.
Andreessen said: “Staying alive
becomes the order of the day, and, as the
old VCs would say, ‘Cash is more impor-
tant than your mother.’ ”
Maybe it was the whisky talking. Start-
ups can only hope.Buyers
circle
shaky
Hut
Under rising pressure,
has the time come
for Matt Moulding toswallow his pride and sell
THG, asks Sam Chambers
A sales person at investment
bank Numis fired off an
incendiary email to clients
last November. The message
urged investors to sell shares
in the troubled online beauty
retailer THG, citing alleged
“accounting irregularities”.
It is fair to assume the
author failed to check the
recipient list before hitting
“send”. If they had done,
they would have seen the
name Iain McDonald, a board
director at THG for 12 years.
Unsurprisingly, McDonald
took umbrage at the email.
Numis subsequently sent a
corrected version, apologised
and reported itself to the
Financial Conduct Authority.
McDonald has had a front -
row seat for this corporate
soap opera. Now, after a
torrid 20 months on the stock
market, Belerion Capital,
where McDonald is chief
investment officer, has
teamed up with King Street
Capital to table a £2 billion
bid to take the firm formerly
known as The Hut Group
private. Morgan Stanley is
lined up for debt financing.
On Thursday evening, THG— which owns brands such as
Myprotein, Lookfantastic and
Cult Beauty — disclosed it had
rejected the “highly
preliminary” 170p-per-share
offer. This came 15 minutes
after Candy Ventures,
investment vehicle of
property tycoon Nick Candy,
issued a separate statement
saying it was in the “very early
stages” of mulling its own
offer for THG.
The flurry of
announcements was
prompted by the Takeover
Panel, which had asked the
various companies to clarify
their positions after financial
blog Betaville published
rumours of deal activity.
Whether the interest in
THG progresses will depend
ultimately on co-founder and
boss Matt Moulding, who
holds a golden share giving
him the right to veto any
hostile takeover.
Moulding has done little to
hide his disdain for life on the
public markets: in an
interview with GQ magazine
last year, he said the
experience of being listed
“just sucked from start tofinish”. The question is
whether he is fed up enough
to swallow his pride by
endorsing a bid that will
inevitably value THG at a
fraction of the £5.4 billion
achieved at its float in
September 2020.
THG’s shares initially
soared after listing, taking its
value above £7.25 billion and
triggering a controversial
£830 million share-based
payout for Moulding, the
largest shareholder with a
13.6 per cent stake. But they
crashed back down to earth
amid mounting concerns
over THG’s light-touch
corporate governance, its
weak cashflow, and whether
Ingenuity, the e-commerce
platform that THG sells to
other online retailers, could
ever meet lofty expectations.
In an effort to appease the
City, Moulding brought in
Lord (Charles) Allen as
chairman and pledged to
relinquish his golden share —
which he has yet to do.
As THG’s problems piled
up, private equity giants
Advent International, Apollo
and Leonard Green all ran therule over the business.
Belerion Capital cannot
compete with that sort of
clout — but McDonald enjoys
a personal relationship with
Moulding that other potential
suitors do not.
McDonald is a well-
connected figure in the
e-commerce industry who
spearheads the UK Digital
Business Association, a trade
body including Ocado and
Asos, which is pushing back
against the creation of an
online sales tax.
In his time as chief
investment officer at William
Currie Group, McDonald led
the firm’s investment in
THG in the company’s
first big funding round
in 2010. He has served
as a non-executive
director on the board
ever since and
personally owns
2.51 million THG
shares, currently
worth £3.64 million.
“Iain has been
ever-present and is on
very good terms with
Matt. He knows THG
as well as anyone,” asource said. Spokespeople for
Belerion and THG both
declined to say whether
McDonald had recused
himself or been stood down
from the board of THG.
McDonald is understood to
have been dumbfounded by
the collapse in THG’s share
price — but acquiring the
business would be a deal of
far greater magnitude than
anything he or Belerion have
previously undertaken.
Belerion runs a fund that
invests in listed e-commerce
companies as well as a private
fund targeting start-ups in the
sector. The investment fund,
which owns 4.3 million shares
in THG, is advised by Asos
co-founder Nick
Robertson.
THG’s decision to
reject Belerion and King
Street’s offer — pitched at
a 79 per cent premium to
THG’s share price before it
originally disclosed it had
received numerous
takeover approaches in
April — may divide THG’s
shareholders, some of
whom bought in after the
slump in its shares.There may not be a better
time to sell in the coming
months, either. A brutal
squeeze on disposable
incomes, soaring costs and a
swing of trade back towards
high street shops have
combined to hammer online
retailers.
THG warned in April that
underlying profits this year
would be similar to last year’s
£161.3 million, compared
with forecasts for
£206 million.
City sources are sceptical
that Candy’s interest will
progress into a full offer. The
developer behind London’s
One Hyde Park has in the past
been linked with a takeover of
Covent Garden-owner Capital
& Counties and, more
recently, Chelsea Football
Club — only for neither to
materialise.
After jumping by 24.5 per
cent on Friday, THG’s shares
closed at £1.45 — a 14.7 per
cent discount to Belerion and
King Street’s bid, implying
the market is sceptical that a
deal will be done at all.
Moudling, ultimately, will
have the final say.Matt Moulding
rejected a £2bn
bid from two
investment firms
but he disdains
life on the public
markets