When I visited WeWork’s San Francisco office a few years ago, I realized right away that there was nothing special about the company. It didn’t have any unique technology behind it; even the concept itself wasn’t unique. More importantly, it wasn’t clear to me why WeWork was valued as a tech company when, in fact, it just provides workspace for tech workers.
Since then, the more I’ve followed WeWork’s story, the more surprised I’ve become that so many investors--not just individuals, but also representatives of venture funds, who are generally smart and pragmatic people--have acted as if they’ve lost their ability to think clearly.
The deluded state of today’s venture capital market becomes even more evident if we compare WeWork with Regus. Regus is a company that’s based on the same concept of short-term office space rental, but has much more experience: It’s been in business since 1989. Also, it actually turns a profit. But in the fickle world of venture capital, Regus is worth considerably less than WeWork.
So who is to blame for WeWork’s bloated valuation? Certainly not WeWork itself--why would they refuse the billions of dollars handed to them by eager investors? WeWork has done a great job of promoting their business; that’s for sure. In this situation, only the venture capital industry is at fault: It shouldn’t have invested in WeWork in the first place, and it definitely shouldn’t have allowed the company’s valuation to balloon to $47 billion.
What eventually happened to WeWork was expected by many experts: Enough investors understand what’s actually going on in the market. Some of them have seen reason, and have started to exit the market so that they can invest their money in something more stable.
Meanwhile, WeWork’s IPO disaster has helped shine a light on the true nature of today’s venture capital market: It’s a Wild West of unsophisticated investors who promote bloated valuations as they hunt for the next unicorn.
There are, in my opinion, several factors that have created the current crisis in venture capital:
1. In the recent past, there were a number of prolific years for startups, when almost anything was virtually guaranteed to succeed. Since then, the landscape has changed, but many investors haven’t caught up. They don’t look at the real indicators, like price-to-earnings ratios--or even just profit growth rates, instead of revenue growth rates. As a result, shiny new startups keep trending and investors keep pouring dollars into their balance sheets.
2. Increasingly, startups are launching with really great PR teams. They can make beautiful marketing videos and persuade investors of their future success--even when their product or service is still at the pure concept stage. Many investors don’t need any further prompting; it’s enough for them simply to see that video.
3. The market is being flooded with inexperienced investors--like celebrities--who are getting involved with startups but don’t have the necessary background knowledge.
Put these factors together, and you get a venture capital market that’s overheated and likely headed for some tough times. At a certain point, the lack of professionalism in the VC industry will reach a tipping point and the current bubble will burst. It’s now up to the industry, as a whole, to stop being delusional--and to ensure that investing decisions are made responsibly, based on actual evidence. This is the only way to stop venture capital from failing.