Benchmarks Bill Gurley says valuations are causing disappointing IPOs

  • Hundreds of investors and private company executives convened for a special summit meeting on Tuesday in the wake of a series of disappointing IPOs.
  • Some VCs are beating the drum for direct listings. And others are debating whether the recent IPO failures are due to old-economy companies posing as high-margin software companies.
  • Bill Gurley, general partner at Silicon Valley venture firm Benchmark, recently tweeted a response to venture capitalist Fred Wilson’s argument about what constitutes a software company.
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Venture Capital investors, startups and other Silicon Valley insiders are hastily recalibrating their views of the tech market and adjusting their approaches after a string of red hot startups have fizzled in the public markets or imploded before even listing their shares. 

From the disappointing post IPO performance of ride-sharing giants Uber and Lyft, to the shelving of WeWork’s highly-anticipated IPO, the ground rules once taken for granted are now up in the air. 

It’s not entirely surprising, then, that the private investors banking on liquidity events like IPOs are looking for lessons to explain the recent problems and for alternatives to avoid more of them. 

Hundreds of investors and private company executives convened for a special summit meeting on Tuesday, according to a report by Bloomberg. The meeting, organized by 12 VC firms and featuring speakers like author Michael Lewis, was organized to discuss the “benefits of direct listings,” a relatively new, alternative path to a public listing now en vogue.

“Expect to see the best companies separate the tasks of capital raising + listing by going public through direct listings,”tweeted tech banker Frank Quattrone on Tuesday. 

Meanwhile, other high-profile VCs, sought to explain why some of the most highly valued private companies have flopped among public market investors. 

What makes a “real” tech company? 

On Sunday, venture capitalist and Union Square Ventures founder Fred Wilson published a blog post that criticized his fellow investors for trying to make every startup a tech startup. Tech startups tend to have higher valuations, lower overhead costs, and higher revenues, a naturally appealing equation for investors

Read More: Tech IPO injury report: Some of the biggest names in tech have taken a beating after going public this year

“I believe that we have seen a narrative in the late stage private markets that as software is eating the world (real estate, music, exercise, transportation), every company should be valued as a software company at 10x revenues or more. And that narrative is now falling apart,” Wilson wrote.

WeWork founder Adam Neumann
Getty Images

The problem comes, Wilson argued, when investors try to force startups into the tech model when the business models are not inherently based on technology. In WeWork’s case, that means valuing it as a real estate company, not an innovative tech startup with tech margins.

That prompted a response from Bill Gurley, a partner at Benchmark, one of the VC firms that backed WeWork.

“The question isn’t, ‘are these tech companies?’. The right question is, are they capable of driving strong future cash flows,” Gurley responded to Wilson in a tweet (even as he noted in his tweet that he agreed with Wilson).

Gurley then linked to a blog post he wrote way back in May 2011 that outlines what he, apparently still, believes to the real problem: Private investors summarily value startups using a “crude 10X revenue multiple” rather than considering whether a particular startup’s business fundamentals truly justify it.

For Gurley, those fundamentals include factors like gross margin levels, revenue predictability and customer “lock in” potential.

“If it is relatively easy for your customer to switch back and forth from your products to you competitors, you will likely have a lower price/revenue multiple as your pricing power will be quite limited,” Gurley wrote. 

The comments are notable given Benchmark’s connection to two high-profile flops, Uber and WeWork. Benchmark sat on the boards of both companies and was involved in efforts that ultimately removed the startups’ controversial cofounders and CEOs. The management change has not been a silver bullet for Uber, which has seen its stock sink since its IPO and continues to bleed billions of dollars in losses. WeWork, for its part, has pulled its S-1 and has indefinitely shelved its IPO.

To be fair, it is in Gurley’s best interest to turn the tables back on negligent investors for miscalculations rather than admit that venture capital might be in its own bubble. If a similar problem was brewing in May 2011, it has only gotten worse in the years since, and venture investors may want to buckle up for some upcoming turbulence as large planned public listings, like Postmates and Airbnb, assess whether or not they will take the risk for a big investor payday.

Postmates was expected to IPO in September but its S-1 is missing in action. Airbnb meanwhile is likely to go public next year through a direct listing, according to Bloomberg. 

Both companies are high-profile gig-economy phenomenons that may or may not qualify as “tech” companies, depending on your definition. And with their recent moves, neither company appears to think an immediate IPO is the best way to answer the question.

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