I'm going to spill a dirty secret of technology startup investing. Brace yourselves.
Too many young tech companies have raised too much money, often at unjustifiably high valuations. Not all investors in private companies will make a profit from the bloated pool of startups. There will be (unicorn) blood.
There are understandable reasons that young technology companies are collecting more investment money than at any point in the past decade. Globally, people have few options to generate good investment returns, and they're grabbing slices of fast-growing startups that could become the next Facebook.
But those individually rational investor decisions have resulted in collective irrationality. Too many young companies have valuations far higher than reality can support.
For public companies, a common exercise is comparing how much investors are willing to pay as a multiple of earnings. Stock investors right now have determined that Facebook Inc. is worth 27 times its future earnings. Struggling, slow-growing General Electric Co. is worth less. We understand how this works.
Many startups say this cold investment logic doesn't apply to them. They say they're doing something fundamentally different from any company that came before and deserve to be valued more richly than similar public companies.
Stitch Fix Inc., the online personal stylist company, is about to tell stock market investors why it deserves a richer value than a traditional retail company. WeWork Cos. doesn't want to be considered in the same category as boring old office-leasing companies. Stripe Inc. doesn't want the stodgy stock multiples of traditional payments companies.
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