WeWork has lost $1.25bn in this Q3.
That’s a quarter.
A single quarter!
For context:
That’s $13,888,888.00 a day. Everyday.
That’s R206, 000, 000.00 a day.
Everyday!
What is alarming is that WeWork is a symptom.
The virus is the private capital markets where investors perpetually push-up valuations of the business at each funding round without a material change in the business success metrics.
We, MyGrowthFund Venture Capital, have seen so many of these. Entrepreneurs & early-stage investors simply use the word “unicorn” (add to make the pitch more alluring, AI or AR) in a pitch deck & suddenly the valuation model doesn’t have to follow simple laws of logic.
So VCs are buying into high-risk businesses that often don’t have a clear path to margins (read profitability) but are in the undisciplined pursuit of more customers & more market shares, hoping to someday convert those to margin-rich customers with et infinitum revenue growth.
The “moral hazard” is born of the fact that many VCs, even in Africa, are rewarded on the capital they deploy (read manage) & the group-think of not wanting to miss the next big unicorn.
… often Because of the limited personal balance sheet exposure of the fund manager.
Just over the past month we, Mygrowthfund VC, have declined 2 (two) very exciting businesses because the entrepreneurs’ valuations are based on hubris, great reviews at conferences (conference delegates aren’t paying customers) & frankly, other VC firms that promise wild things.
We also have to deal with this culture of “celebrating a successful raise” rather than a “successful year of profits.”
The mindset is now that the raise is more important than delivering the strategy & proving the business model.
These shouldn’t be competing, but they are.
I am aware of the Amazon & Facebook examples. I know it’s hard to scale without external capital. I know that internal funding can stunt your rate of growth. I preach this to our LPs often.
But frankly, we now have a moral hazard in the market.
… And Africa is not immune.
Now, back to your regular scheduled program.
Vusi Thembekwayo
Speaker | Investor | Dragon Slayer
