VCs Matt Murphy and Santi Subotovsky talk about WeWorks collapse – Business Insider

  • WeWork’s dramatic collapse from the most valuable venture-backed startup to a nearly bankrupt company is affecting how the industry is approaching new investments, a pair of prominent VCs told Business Insider.
  • Investors are much more aware of what can go wrong at startups and more likely to focus on profitability rather than growth at all costs, they said.
  • But the full effects of its meltdown and the struggles of other prominent startups likely won’t be felt for several years, when venture firms try to raise new funds and have poor returns to show investors, said Emergence Capital’s Santi Subotovsky.
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WeWork’s implosion is reverberating in the venture capital industry well beyond SoftBank, its biggest backer, and the shockwave could continue to be felt for years to come.

That’s the take of a pair of prominent venture capitalists who spoke with Business Insider recently. The dramatic collapse of what, just six months ago, was the most valuable private, venture-backed company has forced the industry to re-evaluate investments and the premium investors were often paying for particular startups, they said.

WeWork’s debacle has “taken an edge off the craziness,” said Matt Murphy, a partner with Menlo Ventures with more than 20 years in the industry. “When something like WeWork happens,” he continued, “it recalibrates people a bit.”

A year ago, SoftBank, via a new funding round, bestowed on WeWork a $47 billion valuation. But when the company tried to go public last summer, public investors balked at valuing the company anywhere near that amount. After reportedly offering to sell shares to the public at a valuation of as little as $10 billion, the company pulled its offering. In October, mere weeks before WeWork was due to run out of cash, SoftBank bailed it out, valuing it at less than $8 billion.

In the wake of WeWork’s collapse, other SoftBank investments have also been struggling. Collectively, Zume, Wag, Oyo, Rappi, Getaround, and more have laid off thousands of workers, and some of those firms have dramatically scaled back or shifted their businesses.

The flood of capital has warped the enterprise startup sector

Emergence Capital general partner Santi Subotovsky

Emergence Capital general partner Santi Subotovsky thinks the worst effects of WeWork’s implosion on the venture industry won’t be felt for several years.
Emergence Capital

SoftBank, with its $100 billion Vision Fund, was one part — although a large one — of a flood of capital into the tech sector in recent years. And that flood had a big effect on the venture ecosystem, even beyond the startups SoftBank itself backed, said Santi Subotovsky, a general partner with Emergence Capital.

It wasn’t uncommon, even before SoftBank jumped in with its Vision Fund, for venture investors to pay a premium for consumer tech companies, Subotovsky said. Such investors could always bet that the company would be the next Facebook or Google and be an enormous success.

But enterprise software investors were traditionally more disciplined, said Subotovsky, who led his firm’s investment in Zoom, one of last year’s tech IPO standouts. They would focus on companies’ return on investment — if the startup spent $1 today to attract a new customer, how long would it take for the company to recoup that dollar from the revenue it got from the customer.

In recent years, investors have become less disciplined, and more willing to tolerate enterprise startups spending ever increasing amounts to attract customers and not see a return on that investment for three years or more.

That’s starting to change in the wake of the WeWork debacle and the struggle that other high-profile startups have had.

In late-stage enterprise software investing, “people stopped focusing on profitability, and we became the consumer play,” Subotovsky said. He continued: “Now we’re going back to the basics.”

WeWork’s collapse will be felt when firms raise their next funds

The WeWork meltdown isn’t having an immediate impact on valuations of startups, Murphy said. But it’s definitely having an effect on the mentality of investors. It’s a kind of cautionary tale, he said, illustrating quite dramatically that not every company succeeds without a hitch and not every growth or valuation curve goes continually up and to the right.

“There’s less hubris and more humility coming back into the business,” he said. WeWork shows that “even high-fliers can have a rough time if they’re not well-managed.”

The full effect of the stumbling of WeWork and other high-profile startups likely won’t be felt for several years, Subotovsky said. Many venture funds remain well capitalized and need to invest their money, he said. That’s likely to continue to fuel inflated valuations and irrational investments for some time to come, he said.

The true impact will start to be felt when those venture firms go back to raise capital for new funds and have poor results from their prior ones to show their previous investors, Subotovsky said. They’re likely going to have a tough time raising new funding and many firms may have to downsize their ambitions and operations, including laying off investors, he said. That’s what happened 20 years ago when the dot-com bubble burst, he said.

“You’re going to see a lot of that in the next few years,” Subotovsky said.

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