Authored by Mark St.Cyr,
Last week I wrote an article titled, “If Everything Is So Great, Where Are The Unicorn IPOs?” In that article I posited an idea, or reasoning, as to why some companies such as Facebook™ and Amazon™ are suddenly deciding to release more GAAP friendly earnings reports as to show both investors, as well as, regulators the numbers with greater transparency, as opposed to, their relentless white-knuckled grip to Non-GAAP. In it I made the following observations, to wit:
“Imagine for a second you’re a rival to Facebook like, Oh I don’t know, let’s say Snapchat™. If you have yet to IPO: what are the chances you’re going to get anywhere near those implied valuations (I believe its somewhere around $16 BILLION) if now you’ll need to report using GAAP? Are you beginning to see my point?
A move like this (if it actually was an intentionally executed tactic, to which I would commend from a business perspective as: brilliant) would all but surely close a door behind you stifling anyone rivaling your acquisitions or future customers. That and surely just as important – cutting off nearly all their future investment dollars.
Any upstart or potential rival that is “cash burn” sensitive would be all but scorched out of business in no time. Then, all one would need to do is wait for the bankruptcy trial and pick up any patents and more on the cheap. As in very cheap.”
Of course, that argument was made in the hypothetical. Yet, whether intentional or happenstance a true fact remained i.e., Such a move could very well create utter chaos for not only the competition, but also, a near guarantee of an ensuing valuation mark down crushing any, and all, competitors that were “cash burn sensitive.”
It seems that Apple™ just took that idea and turned it up to 11!
On Thursday Apple let fly the headline it had invested $1BILLION in a Chinese ride-hailing service named Didi Chuxing. The reports as to why range from “wanting to understand the Chinese consumer better” and more. Well, I’ll garner it has something to do with that. However, with so many iPhones® and factories producing those and other Apple products currently in China; it leaves the idea of that as the major reason – a little flat. However, if you put it into the idea I argued in my previous article? Everything changes. And I do mean – e-v-e-r-y-t-h-i-n-g. Here’s why…
If it was (as I insinuated in regards to the GAAP reporting) from a competitive advantage, first mover point of view; both in tactical as well as execution? I’ll say it again, from a business perspective, it’s brilliant.
Exactly who is this Didi “whatever” some maybe asking?
Didi is Uber’s™ business nemesis and competition in China. Whether or not this is a “good investment” for ride-sharing dominance in China from my perspective is irrelevant. What should be the focus here is what such a move brings to the entire Silicon Valley narrative. And, in particular; the entire “unicorn” mythical valuation story. For it just might be that Apple single-handedly opened the seal on the unicorn apocalypse.
One thing in business never changes: Cash burn is a death sentence only kept at bay by either generating net profits, or, raising additional funding via loans and/or investors. Without the former, the latter is a never-ending begging and pleading process that ultimately ends in disaster because focusing on “investors” as the customer, rather, than actual customers with the ability and willingness to pay is no longer paramount. Only funding.
But “funding” has the ultimate “Achilles’s heel”: Perception. And once perception changes? Like I stated earlier – everything changes along with it. And I do mean – everything.
I’ve read quite a bit about this Apple/Didi “partnership” but I think it was summed up best in a Pando™ article I read by Sarah Lacy. To wit:
“But there is of course a much bigger reason why Apple and Didi were so keen to join forces: The deal is an incredible “f### y##” to Uber, a company that neither Apple nor Didi want to get much more dominant in the US.”
“The clues that this was not just an investment but a Statement were easy to spot: A billion dollars isn’t a random number — it’s a headline-grabbing way to telegraph This Is A Big Deal.”
I agree with her premise, I’m just more inclined to think it’s even bigger than it appears at first blush. i.e., affects the entire unicorn universe.
Let’s remember “unicorns” exist primarily for one reason, and one reason only: to cash-out via an IPO rewarding everyone in-between.
$BILLION dollar valuations are built upon early (then subsequent) investor narratives as to help perpetuate buzz to cause an ensuing stock price bidding war in the “markets” once they debut. And that “narrative” is built upon metrics employed and reasoned by those initial investors. Or, said differently: “It’s worth Billions because we say it is.” Only in unicorn valuations can Non-GAAP accounting be made to look conservative.
So here we have what could be the poster-child for all unicorn valuation metrics (i.e., Uber) having their valuation story for future investment and/or IPO dreams gutted in one fell swoop by Apple.
For what is a valuation story for future investors worth if your largest “story” for potential growth has just been nixed by not only a competitor, but also, that competitor’s partner owns not only the platform most used by that country and demographic, it also sells the very device most held and used within it! (e.g., the IPhone®)
Couple that with it didn’t invest a few $Million to then have that spun in unicorn fashion to represent adding a $Billion to its valuation. No, they invested (or you could imply Didi raised) $1BILLION. Using unicorn math doesn’t that now make Didi worth Oh, let’s say – 1/4 of a $TRILLION? Talk about cutting the legs off from under a running unicorn with one fell swoop. Like I said, if it were intentional as I’m positing, it borders on tactical, as well as, execution brilliance when it comes to business strategy. For it goes so much deeper.
If you damage the narrative of unicorns in any way at this point; you not only can cut down rivals before they get too strong; you can also gut most unicorns before they even IPO, enabling you (if you have the cash) to buy them up as you wait for the courts to clear the remains at glue factory. Sorry, I mean auction after the bankruptcy process. For remember: cash burn sensitive companies are toast without the ability to continue funding rounds at satisfactory or business competitive terms. And to think the vast array of current unicorns don’t fit into this category, in my opinion, would be erroneous.
If the Uber valuation narrative gets tarnished or out-rightly questioned (e.g., what are current valuations without #1 positioning in China) what does that do to all the remaining?
After all, if you’re asked to invest further into any other: are they worth it if their direct competitor has a cozy relationship with another tech giant with the means (and willingness) to invest? After all – Apple just opened the door of “unicorn investing” using amounts that start and begin with B’s. Or, maybe better said: investing with amounts that require three commas to accurately describe. Not two hoping to be able to spin into a three comma narrative. Let alone having to use what would now invoke an underwhelming response. i.e., $Millions.
Again, I can’t stress enough how this must be looked at from a bigger picture narrative and not focus too myopic on just this one investment per se. The consequences, as well as, the resulting positioning within the tech space in general can be completely upended with this one transaction in ways far too many might just gloss over.
Remember: if suddenly there is any (and I do mean any) downdraft in the “markets.” The ability to raise funds for budding unicorns, as well as, those wanting to remain in the club not only gets more difficult. It can get near impossible at terms it can live with.
Earlier investors can get diluted in ways they may, or may not, fully understand. Employees also can find their “big cash out” dreams have been reduced to “Sorry – we’re just out of cash” in ways never anticipated. Again, once a meme gets upended, and the results of that upending are seen in cold hard facts (as in IPO’s never taking place, share dilution, etc., etc.) much like Humpty Dumpty – it doesn’t go back together all that easy. And it can get worse, much worse depending.
As I iterated in my previous article, imagine you’re Facebook just waiting to see if there is a downdraft in IPO valuations contemplating or imaging being able to have the possibility to maybe purchase a Snapchat™ or other possible rival at some ridiculous valuation because of mayhem in the IPO market, or “markets” in general. However, let’s take that process one step further, for here it gets a lot more interesting for my money.
Imagine you’re Apple. And you’ve looked at the current malaise in both your stock, price as well as, narrative and come back to the realization much as Jobs did once he returned from “the wilderness.” That trying to please Wall Street was a losing game. (To paraphrase) “If we create the products or enhance the business to the delight of our customers – the stock price will take care of itself.”
I would hope that Tim Cook and company have finally realized all that bending over backwards, and mushy talk, he has blathered endlessly upon Wall Street has, in the end, caused Apple the company more headaches than it was worth. He needs to get out from being: Apple the once darling of Wall Street. And back to: Apple the darling of its customers. That is what will consistently provide the metrics for net profits that pay dividends to both shareholders as well as customers. Not the other way around.
In a downturn of the “markets” let alone the IPO market. Apple has one thing most other companies don’t: $200BILLION plus of capital to spend.
If Apple sold only half as many products, and the markets went down by half (of course in theory) Apple would still have $200+BILLION to spend.
Imagine who, or what they could buy at a discount in that environment. (Don’t let this point be lost. It truly is something rivaling any other competitive advantage.)
Consequently: If the same happened to Oh, let’s say Facebook? Would they even be worth half as much as they are today? Or what about let’s say SnapChat? What would they be worth in that environment? How about others? Yahoo™? ___________ ? (fill in the blank)
Apple could invest $1Billion in each of the top rivals of any competitor they wanted to harm and still have possibly $200BILLION left in the bank. Again, they have some $230ish if I’m not mistaken. They could bring the entire unicorn stable to its knees in a way others may not even realize. And by others, I mean: rivals. Both current as well as potential.
It could be that Tim Cook and Apple is finally beginning to get it once again. And if they are I applaud it, for as I’ve stated many times I’m what many consider a “fan boy” for I use all their products to near exclusion. It just seems, as always, it sometimes takes being thrown under the bus to realize it. But then again, living through, from, and past the ordeal is where the mettle and money is once again tested and made in my book.
Just imagine if Apple causes the exact environment in which it may exclusively be able to dominate regardless of market turmoil (with acquisitions) all because it invested the same amount that was once so coveted, and so sought, as to be in the unicorn club to begin with: $1BILLION.
Talk about irony.