Oct. 11, 2019 /The Globe and Mail The public-market landscape for the new cohort of tech companies seems to be crumbling more and more every day. WeWork Co. Inc., Peloton, Uber Technologies Inc. and Lyft Inc. are not experiencing the elation of their initial public offerings that the founders dreamed about when they first started those businesses. WeWork, especially, has seen its business erode significantly from the US$96-billion valuation promised by their Goldman Sachs advisers. Even at a US$15-billion price tag, investors were not keen.

In the United States, the number of publicly traded companies is about half as many as there were 20 years ago. According to Statista, public offerings are also down from 486 in 1999, before the dot-com value creation evaporated, to 190 in 2018. Companies are choosing to stay private longer and investors are looking for other means of liquidity.

For years, the venture-capital firms (VCs) that backed these emerging tech businesses have demanded high growth (customer acquisition and revenue), sometimes at all costs. That usually means the companies are burning through more cash than they are bringing in the front door, often many multiple times more.

In the early stages of a company, that’s okay, because until a business reaches proper scalability, it’s perfectly acceptable to spend money on foundational expenses and ramping up customer acquisition. That’s why VCs exist. Over time, however, for a business to thrive, there needs to be a path to self-sustainability with scalable unit economics, along with high growth – that’s the real definition of a strong business. And for companies to experience the juicy multiples of the tech sector, they need to show that operating expenses stay relatively flat (or grow slightly) as revenue increases. It’s on this last point where most of the recent tech giants begin to fall down.

Read more of Karim Gillani’s article in The Globe and Mail.  

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