Silicon Valley's land-grab capitalism comes to the ASX
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Updater chief executive David Greenberg. Supplied
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by Jonathan Shapiro
Ubiquity first, profits later, is the mantra by which Silicon Valley has thrived.
The biggest, best and now most profitable companies such as Amazon and Netflix all pursued a strategy of completely dominating their markets before they turned their attention to actually making money.
And such is the nature of capital markets that businesses – both public and private – are being rewarded with higher valuations and either supported or punished based on their progress in securing domination.
But this tussle between profitability and domination is creating tensions between the pools of capital that are competing for high-growth assets in a low-return world.
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Investors appear willing to fund Updater at a $US1 billion valuation, if it goes private. Supplied
And the most recent example of that is Updater, the $650 million ASX-listed tech play that is being wooed back to the private market by US venture funds.
These investors appear willing to fund the business at a $US1 billion valuation, if it goes private.
That's quite a stunning development given the scepticism attached to ASX-listed tech companies, which some believe only hit the bourse because they couldn't get funding from the more discerning local venture community.
What is interesting is that Updater was about to face its moment of truth with ASX investors after it said it would generate over $US19 million in annual revenue in 2018.
A delisting would reduce the pressure to deliver on that promise. But it could be that their new investors actually want them to break it.
Updater appears to be have an early lead in becoming the dominant player in the lucrative relocation industry. Updater's technology helps organise customers' home-moving tasks such as cancelling and signing up to utility services such as pay tv and broadband. So if it can secure a sizeable market share, it could become a powerful partner to these service providers.
So the attitude of venture funds is that the prioritisation of revenue at the expense of turbo-charging its market share grab has been misguided.
Land-grab investing is somewhat counter-intuitive. But the decision of entrepreneurs is made easier when financiers, and the stock market, are actively rewarding them to take this path.
And even executives of ASX-listed tech companies have privately admitted that the market doesn't want them to see a profit and will punish them accordingly for a perceived forgoing of growth.
Recently John Hempton of Bronte Capital even suggested that ASX-listed accounting software firm Xero was making a mistake by not raising more capital to capture as large a market share as possible.
The incredibly high pay-offs achieved by past venture successes does validate the strategy of going for growth.
So there is a logic that a focus on revenues, never mind profits, is pedestrian, antiquated and value destructive.
And more investors are beginning to accept that means of capital allocation is just the next phase of evolution from interest-bearing securities to joint stock companies to high-risk, high-reward venture investing.
Even short sellers that would otherwise bet against stocks with high valuations built on minuscule profits have realised its dangerous to take on ventures that are pitching enormous TAM or 'total addressable markets'.
But where does that leave Australia as a venture destination? The criticism is that companies listed on the ASX as a last resort, and companies with sub-standard prospects took advantage of the abundant pool of savings to access cheap funding.
But the prospect of Updater heading off the exchange raises the strange question as to whether listed companies are too conservative and too focused on, heaven forbid, profits!
Some founders have suggested the same may apply to local venture funds that aren't thinking big enough and hence holding businesses to revenue targets.
However, the bigger issue is the rise of private capital. Tech companies are remaining private for longer, and raising more funding at higher valuations. As more capital is raised and more value created in private hands, listed exchanges are losing their relevance.
But an element of caution is certainly warranted about the shift to private ownership.
Financial history has shown that investors – both large and small – overestimate the worth of privately owned assets and underestimate the cost of disposing them.
With a large amount of aggressively deployed capital determining ever-rising (and self-determined) valuations, the true extent of wealth creation has to be questioned. And at the end of the day, every investment has to pay its way.
But for now, the message from the market is clear – ubiquity first, revenues later!
UPD Price at posting:
$1.11 Sentiment: Hold Disclosure: Held
