Pre-IPO Profits

A Shift in Private Markets

A Shift in Private Markets
By Adam Sharp
Date January 14, 2020

Since the disaster at WeWork last year, the private investing landscape has subtly begun to change.

All of a sudden, people are asking money-losing “unicorns” – including hard questions, such as “Where are the profits?”

For many years now, some private startups have lost incredibly large amounts of money. Now that it’s time to go public, many of these companies are finding that public market investors aren’t as forgiving about those large losses.

A recent example of this is Casper, the mattress company that sells online. Here’s a snippet of the New York Post’s coverage of Casper’s attempt to go public…

But like a lot of startups, Casper loses more money than it makes and is seeking to go public at a time when investors have been turning up their noses at unprofitable startups like Uber, Lyft and office rental company WeWork.

In the first nine months of 2019, Casper lost more than $67 million on sales of $312 million, short of the $556 million in sales it projected it would earn last year.

Bill Gurley, old-school venture capitalist and founder of the iconic firm Benchmark, recently summed up the problem on Twitter

Increasingly seems like we are entering a new reality in Unicorn land. If you have raised more than $250mm & are NOT public, the presumption is you are losing WAY too much money, and you probably have sh***y unit economics. And probably need to do a lay-off (like Oyo & others).

This is an important trend to keep an eye on, especially if you like investing in late-stage private companies. The companies most affected by this shift in attitude will be the ones that are still losing large amounts of money and can’t seem to go public.

So my advice is to beware of those late-stage money-losing private companies. I would also steer clear of private companies valued at more than $3 billion. Ask yourself, “Why haven’t they gone public yet?”

This is another reason I prefer to invest during the early stages of a startup’s life. More of the companies will fail, but you pay a lot less for them. When you invest in a company when it’s worth $10 million to $50 million, the upside is incredibly high. You can afford to take some losses. But you do need to spread your bets out across more opportunities. I’ve made around 100 early-stage investments at this point and plan to make another 15 or so this year. It’s working out quite well so far.

This is the strategy I outline in “The Angel Investing Bible.” If you haven’t checked it out yet, you can do so here.

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