It’s going to be a painful 2023 for these companies and some likely won’t make it or will be sold off in fire sales.
Not to sound cold but the market needs a good cleansing and some of these companies that had unrealistic valuations need to get flushed out of the system. It’s not pleasant for those that find themselves in the wrong place at the wrong time but there were just some completely baseless valuations set during funding rounds and IPOs in 2020-early 2022 and now that needs to get cleaned up.
Cash and profit are king again. Anyone without both (or a absolute ton of cash to get through the market cleanse without raising) is in for a painful ride.
It's actually quite common to see "heard thinning" like this. Even as far back as the dotcom bubble, tons of internet companies, many went bust, eBay and Amazon and a few others survived becoming the giants they are today. Or take rideshare companies, there were a number of alternatives to Uber and Lyft back in the day like Sidecar but those shuttered. Heck we just saw it (albiet for a different set of messed up reasons) the thinning of the heard in the crypto space, both on the project and the exchange side....
The cycle always seems to follow:
1. Cash enters the system through low interest rates by the fed and other economic factor (boom times).
2. Tons of new companies emerge, all hyped, all with shiny new products and tons of marketing.
3. Things are good for a while but eventually hard times hit. All the companies propped up by hype and that don't truly have a good business in place will fall the wayside.
4. The few companies that weather the storm tend to last longer and become established players in the space.
Crypto (really blockchain) isn't in the same category. 0% of crypto companies have viable business models after removing fraud. Chainalysis will be the last crypto company standing, and then it too will have lost its revenue stream.
Absolutely. For anyone that’s been for a while the last hype period was a case of “I’ve seen this play before and I know what happens in Act III.” It’s been a while since we’ve had a solid down market and thus there are a lot of people that haven’t seen how the play ends yet but are about to find out. The optimistic long term view is that after the storm the cycle begins anew and new companies rise from the ashes.
It's also worth noting how companies that lost 90%+ of value are close to unable to raise new cash due to dilution. Raising 100M at a 1B valuation is just 10%, but raising 100M for a 200M company is 50%, meaning founders lose control over the company.
At this point 'tech' is more an aesthetic than anything else. Just keep repeating the word 'disruptive' and light a pile of VC money on fire and you're 'tech.' Bonus points if that pile is at least a billion dollars and from some big name foreign entity looking to launder ill-gotten wealth. Whether or not you actually do anything productive or useful is besides the point.
It's the "not a tech company that markets itself as a tech company". Think WeWork, half of your direct to consumer companies, Uber (though that is debatable) and apparently whatever this company is.
I honestly can't decide if this is savvy or stupid. Basically the CEO's know that tech companies get outrageous valuations so even if they are say a commercial landlord (WeWork) or a oat milk manufacturer, they will bring in a tech department, build an app and a shiny website, start an engineering blog, and then probably work on some pointless but tangentially related project which most likely uses AI, Blockchain or some other hype tech.
I think they were trying to ride the beyond meat wave, which is arguably at least a company based on a novel proprietary food production process (tech?). But I agree a lot of companies got the tech label without having the actual benefits of being a tech company meaning a software company (high margins, low distribution costs) which is what was really attractive about tech companies the last 10+ years.
>We're way overdue a correction on tech stocks, the time for free, cheap money is over
These companies have been getting crushed for the past 6-12 months. Oatly is down 83% YTD. The economy has been tightening for months. I think you're a few steps behind the financial machinations in progress.
Right. With tech stock, I meant a startup venture capitals and investors were eager to give a lot of money to. Usually those are tech stocks, but plant-based ultra-processed food startups have become quite prominent in VC portfolios lately, see Beyond Meat.
An oat drink is even less tech-oriented than Tesla. I'm not sure in what universe Tesla is not only not a tech company, but so un-tech-like that they're closer to a drink company, but I don't think it's this one.
ESG as an investment thesis is a sad joke. I wonder how much of the money that was destroyed by investing in oatly was done because of virtue signaling. You couldn't seriously look at projections and think this company would ever be worth $10billion right?
I assume that almost all of these are SPAC stocks, which doesn't particularly surprise me. It turns out the whole IPO process is good for price discovery, and when you bypass it, you get some bad results.
Literally, in the next line of the article
> Many companies that went public in the surge of mergers involving SPACs, or special-purpose acquisition companies, also are faring poorly.
The companies that IPOed are the SPACS. The companies they acquired are the ones that are dragging them under.
Edit: To clarify, the company that IPOs is a company like "CFII" (CF Finance Acquisition Corp. II). These companies are called SPACs, but they go through an IPO process themselves. The IPO is pretty fast because everyone knows what the shares are worth, but it is an IPO nonetheless. Most of the SPACs IPOed in 2020-2021. If they buy a company and then fail, that would probably be counted as a failure of a company that IPOed in 2020.
To my mind, Juicero is iconic of the problem. It was a solution to a problem that didn't exist, but bunging on "With the Internet" somehow made it a darling. It's a pretty old trick; sprinkling some talismanic phrase over whatever nonsense it is you're flogging.
I wonder to what extent the chip issue will resolve itself as we realise that not everything has to be IoT. I'm probably being overly cynical on this, though. There's still a lot of genuine uses for chips.
I guess the trick is to wait for a year or two, THEN invest in new tech IPOs. We need a bit of time for the crap to be flushed from the system. Do that, and there's probably a fortune to be made, as the tech that will IPO'd is likely to be of much higher quality.
I missed a real trick in not buying Google, for example. When did that float? 2002, or thereabouts. The markets were in real value territory the, so it was a good time to invest. I figured that Google were just being flashy, but I was too cynical at the time. Hindsight is always 20/20 though.
Dunno, maybe they'll be someone out there doing something interesting with RISC-V that has a potential to exploit some
niche market. It doesn't have to be "Web 3.0".
I have wondered if there are predictors of when average returns of IPOs will be high. When the IPO market is hot and it is easy to list, that may be a bad time for retail investors to buy IPOs when they start trading.
I suspect IPOs are almost always dumping on the public. Some go on to perform great afterwards but on the whole if you think your shares are worth more than they’re priced why would you sell in an IPO?
Two reasons come to mind, and both applied in my case last year:
1. Diversification: the vast majority of individuals owning pre-IPO shares almost certainly hold options, and in tech companies at least where regular employees get these options few of these individuals are likely to have a large, diversified portfolio.
2. For those same individuals, it's often a life-changing event. (In my case, I went from servicing 6-figures of medical debt and 5-figures of student loan debt and contributing the minimum to my 401k to a 7-figure net worth with income producing, debt-serviced assets.)
That's true to some degree. Historically an IPO was to raise capital for the company, now, more often than not it is to create a market for the stock so that early stockholders can cash out.
VCs prop up money-losing unit economics to “reduce friction” while making the company grow quickly and dump on the public. Figure out the business model later. Rinse and repeat.
For example WeWork with Neumann or Uber with Kalanick.
Is negative unit economics better than a token with absolutely no utility?
I would say yes - because they often create a valuable marketplace that serves customers and pays providers. They just find out later that they are in a race to the bottom with other platforms. Which means healthy market competition.
However, if the stock continues to do well, it means the shareholder class (now representing public shareholders) continues to extract rents from both sides of the ecosystem. Uber is still extracting rents years later… drivers pay it half what we pay them.
An open source platform economy would have been better for the public, with none of the controversy of Big Tech platforms. All these Ubers could have been had source competitors a long time ago. Why don’t they?
This is exactly what I think as well and I got a serious education on this with the whole WeWork fiasco and that stopped me from losing my money investing in IPOs. I was going to invest in Snowflake and Airbnb. Also check out what GoPro stock IPO price was and today's price. The company can be fine but the stock can just not recover.
Let's say you own $10M in privately-held Stripe stock. You think that stock is probably worth $100M, but you'd like to buy a $2M house. The bank doesn't accept your privately-held stock as collateral for a mortgage. It'd make sense to sell some portion of your stock to buy that house.
Now, suppose instead you think there's a 95% chance the stock goes to 200M, but a 5% chance sketchy financials tank the entire company and it's worthless.
Especially in the aftermath of the FTX meltdown, I've heard plenty of second-hand stories about people who were fabulously wealthy on paper, and then suddenly not wealthy at all. Diversification would have limited some of the risk and preserved some of the wealth, at the cost of part of the upside. Your expected value might go down, but your worst-case scenario goes up.
Sounds like an overly pessimistic view. You IPO to allow early investors to exit and raise capital to expand. There are a lot of very successful IPOs from before 2020 and some of those that went public in the last two years will be ok
Stocks that trade under $5/share are considered "penny stocks", exchanges generally don't want penny stocks on their list because they don't want to endorse them. They're highly volatile, and can be easily manipulated.
I believe for DIJA if they have a valuation under $2 for longer than a year they get delisted.
This doesn't mean you can't trade them anymore, they just become OTC (over the counter) stocks. Many brokers offer access to OTC stocks, but liquidity is a real concern with those stocks.
Also, if a stock gets delisted that isn't necessarily permanent. If the company gets it act together it can be re-listed on the exchange. For example, Tandy Leather Factory was delisted from Nasdaq in 2020 because of accounting problems (I think) and was re-listed about 3 months ago.
It seems to be exchange-specific, I assume the main reason for this article is:
> For example, on the New York Stock Exchange (NYSE), if a security's price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.
It can be avoided via a "reverse stock-split", which seems to be easy enough to get approved (no owners of the stock want to be delisted!), so nothing hugely dangerous... But it's not a good sign for you company's general health I guess.
Just a wild guess, but I suspect that stocks below a certain price are too vulnerable to price manipulation via pump and dump schemes.
It's bad enough when stocks like GameStop were treated like a meme and turned into a casino game- you could create an entire industry out of doing that to sub-penny stocks because the low price per share makes even small changes in price very impactful.
surely price manipulation is a function of the market cap, not the share price.
again, people don't buy stocks with actual physical cash. theres no reason why we are tied to whole pennies. a 2c stock could rise or fall 1% in the same way as a $2 stock could.
plus lowering the number of shares in circulation isn't going to make it less susceptible to pump and dumps.
finance is populated by a lot of extremely well paid people, I can't believe everyone has a blind spot around 'bigger arbitrary token size == better'
if you have 100,000 shares in circulation at $10 each you have a market cap of $1,000,000.
the same as if you had 10 x $100,000 shares, or 1,000,000 x $1 shares.
but why the rule? theres no reason why my $1 share can't rise 0.1% just like the $10 share. they don't hand me a 1/10th penny coin. so why arbitrarily decide that stocks below $x are bad?
yes a 1c movement is proportionately more, but if youre saying that humans are so obviously psychologically anchored by such round numbers, then the least of humanities problems, and finances, and capitalisms, is the price of a share.
Readit News
Not to sound cold but the market needs a good cleansing and some of these companies that had unrealistic valuations need to get flushed out of the system. It’s not pleasant for those that find themselves in the wrong place at the wrong time but there were just some completely baseless valuations set during funding rounds and IPOs in 2020-early 2022 and now that needs to get cleaned up.
Cash and profit are king again. Anyone without both (or a absolute ton of cash to get through the market cleanse without raising) is in for a painful ride.
The cycle always seems to follow:
1. Cash enters the system through low interest rates by the fed and other economic factor (boom times).
2. Tons of new companies emerge, all hyped, all with shiny new products and tons of marketing.
3. Things are good for a while but eventually hard times hit. All the companies propped up by hype and that don't truly have a good business in place will fall the wayside.
4. The few companies that weather the storm tend to last longer and become established players in the space.
--
In June 2021, "Oatly priced its initial public offering at $17 per share, giving it an implied valuation of $10 billion."
10 billion dollars for an oat drink company. We're way overdue a correction on tech stocks, the time for free, cheap money is over.
Oat drink is tech? I am sometimes amazed how people can position a bog-standard business as 'disruptive tech'?
I honestly can't decide if this is savvy or stupid. Basically the CEO's know that tech companies get outrageous valuations so even if they are say a commercial landlord (WeWork) or a oat milk manufacturer, they will bring in a tech department, build an app and a shiny website, start an engineering blog, and then probably work on some pointless but tangentially related project which most likely uses AI, Blockchain or some other hype tech.
These companies have been getting crushed for the past 6-12 months. Oatly is down 83% YTD. The economy has been tightening for months. I think you're a few steps behind the financial machinations in progress.
> More than one in four of the nearly 600 companies that went public via a traditional IPO
Edit: To clarify, the company that IPOs is a company like "CFII" (CF Finance Acquisition Corp. II). These companies are called SPACs, but they go through an IPO process themselves. The IPO is pretty fast because everyone knows what the shares are worth, but it is an IPO nonetheless. Most of the SPACs IPOed in 2020-2021. If they buy a company and then fail, that would probably be counted as a failure of a company that IPOed in 2020.
I wonder to what extent the chip issue will resolve itself as we realise that not everything has to be IoT. I'm probably being overly cynical on this, though. There's still a lot of genuine uses for chips.
I guess the trick is to wait for a year or two, THEN invest in new tech IPOs. We need a bit of time for the crap to be flushed from the system. Do that, and there's probably a fortune to be made, as the tech that will IPO'd is likely to be of much higher quality.
I missed a real trick in not buying Google, for example. When did that float? 2002, or thereabouts. The markets were in real value territory the, so it was a good time to invest. I figured that Google were just being flashy, but I was too cynical at the time. Hindsight is always 20/20 though.
Dunno, maybe they'll be someone out there doing something interesting with RISC-V that has a potential to exploit some niche market. It doesn't have to be "Web 3.0".
I have wondered if there are predictors of when average returns of IPOs will be high. When the IPO market is hot and it is easy to list, that may be a bad time for retail investors to buy IPOs when they start trading.
1. Diversification: the vast majority of individuals owning pre-IPO shares almost certainly hold options, and in tech companies at least where regular employees get these options few of these individuals are likely to have a large, diversified portfolio.
2. For those same individuals, it's often a life-changing event. (In my case, I went from servicing 6-figures of medical debt and 5-figures of student loan debt and contributing the minimum to my 401k to a 7-figure net worth with income producing, debt-serviced assets.)
For example WeWork with Neumann or Uber with Kalanick.
Is negative unit economics better than a token with absolutely no utility?
I would say yes - because they often create a valuable marketplace that serves customers and pays providers. They just find out later that they are in a race to the bottom with other platforms. Which means healthy market competition.
However, if the stock continues to do well, it means the shareholder class (now representing public shareholders) continues to extract rents from both sides of the ecosystem. Uber is still extracting rents years later… drivers pay it half what we pay them.
An open source platform economy would have been better for the public, with none of the controversy of Big Tech platforms. All these Ubers could have been had source competitors a long time ago. Why don’t they?
Let's say you own $10M in privately-held Stripe stock. You think that stock is probably worth $100M, but you'd like to buy a $2M house. The bank doesn't accept your privately-held stock as collateral for a mortgage. It'd make sense to sell some portion of your stock to buy that house.
Now, suppose instead you think there's a 95% chance the stock goes to 200M, but a 5% chance sketchy financials tank the entire company and it's worthless.
Especially in the aftermath of the FTX meltdown, I've heard plenty of second-hand stories about people who were fabulously wealthy on paper, and then suddenly not wealthy at all. Diversification would have limited some of the risk and preserved some of the wealth, at the cost of part of the upside. Your expected value might go down, but your worst-case scenario goes up.
Yes, it's a known phenomenon that IPO's that list during periods of high activity perform worse over time. See https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991...
Why? I guess its something to do with rules about penny stocks. but in the modern world theres no reason why we can't have stocks at $0.00002.
I'm guessing this is a USian thing? here in the uk stocks are regularly priced under £2.
Lloyds Bank is a ftse 100 company currently below 45p
I believe for DIJA if they have a valuation under $2 for longer than a year they get delisted.
This doesn't mean you can't trade them anymore, they just become OTC (over the counter) stocks. Many brokers offer access to OTC stocks, but liquidity is a real concern with those stocks.
> For example, on the New York Stock Exchange (NYSE), if a security's price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.
It can be avoided via a "reverse stock-split", which seems to be easy enough to get approved (no owners of the stock want to be delisted!), so nothing hugely dangerous... But it's not a good sign for you company's general health I guess.
It's bad enough when stocks like GameStop were treated like a meme and turned into a casino game- you could create an entire industry out of doing that to sub-penny stocks because the low price per share makes even small changes in price very impactful.
It's likely just because for legacy reasons exchanges can't handle fractions of a cent, so below $1 the price becomes too discrete
again, people don't buy stocks with actual physical cash. theres no reason why we are tied to whole pennies. a 2c stock could rise or fall 1% in the same way as a $2 stock could.
plus lowering the number of shares in circulation isn't going to make it less susceptible to pump and dumps.
finance is populated by a lot of extremely well paid people, I can't believe everyone has a blind spot around 'bigger arbitrary token size == better'
if you have 100,000 shares in circulation at $10 each you have a market cap of $1,000,000.
the same as if you had 10 x $100,000 shares, or 1,000,000 x $1 shares.
but why the rule? theres no reason why my $1 share can't rise 0.1% just like the $10 share. they don't hand me a 1/10th penny coin. so why arbitrarily decide that stocks below $x are bad?
yes a 1c movement is proportionately more, but if youre saying that humans are so obviously psychologically anchored by such round numbers, then the least of humanities problems, and finances, and capitalisms, is the price of a share.
It should be illegal to bring a company public without proven positive unit economics.
Self driving, deep tech… all should stay within big corp R&D