Venture capital funds are hot right now. In the first half of 2017, £1.1bn was invested into London start-ups alone, with the majority of the money being invested into the tech industry. Indeed, London’s tech startup growth, largely backed by VC funds, has defied the odds to continue staggering levels of development since what many perceive to be is birth point in 2008, in the aftermath of the financial crisis.
To say that this growth has defied expectations is an understatement. Even now, it is hard to find commentary on the startup tech industry without the phrase “bubble” appearing. However, whilst many predicted that the Silicon Roundabout (named after the location of many start-ups on London’s Old Street roundabout) would fall in 2016, where it was common to see a company being valued at 15-20x their EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization), the industry still remains strong. There are even predictions that the valuations of these fast-growth companies could exceed their current EBITDA multiples before the year is out.
With fast-moving growth, the threat of collapse is always a possibility. However, in this instance, the collapse might not necessarily result from a lack of money flowing into the industry to keep it afloat, but rather too much of it.
Just as a lack of investment in an industry can prove to be disastrous, so too can overinvestment – especially when the investment arises from independent parties expecting returns. In 2016, £5.7bn was raised by VC funds in Europe, with London based funds playing a significant part in increasing this figure. Indeed, even in recent months, firms (such as Felix Capital) are raising in excess of £100m, showing that there is far from a shortage of funding reaching the industry. Where a shortage could exist, however, is in the number of companies to invest in.
The Search for Unicorns
These monumental fundraising achievements are no doubt backed on funds’ recent abilities to command huge returns for their investors. However, investors must be wary for how long such returns can be delivered. As more and more money is pumped into the industry, an increasing number of funds search for the next “unicorn” to invest in, and with more funds on the hunt, the search becomes more frantic. The question that arises then is how many unicorns exist, and is the amount of money being pushed into the industry justified by the value of start-ups?
For a long time, the continual rising value of start-ups balanced out the influx of industry fundraising. However, whilst value and fundraising both continue to grow, it appears that fundraising is now growing at a faster rate. Whilst the issue of “too much investment” may not seem to be too much of a problem, it could, in reality, prove to be disastrous for the industry. Unless the industry is able to provide a constant supply of investment worthy companies, VC funds will be faced with some particularly tricky decisions to make.
Options to Open Funds
Realistically, there are two options open to a fund without investment ideas – either they will hold their investors’ money as dry powder (un-invested capital held in a fund’s account), or, under pressure from investors to make returns, they will invest in companies which otherwise would not be seen as investment worthy. Both of these instances represent losses for investors and, should they become an industry-wide trend, the appeal of VC fundraising would lessen. The overfunding of the tech industry could feasibly result in a funding shortage as, without constant returns, investors would seek other areas to place their money.
Fortunately, there are some redeemable aspects of the industry. Its tech-driven nature leads it to be innovation focused, meaning that new companies are constantly developing. Fund managers will have the tricky job, however, of deciphering which companies are propagating lasting technology and which companies are doomed to fail. As the industry grows this decision becomes harder, and as the fundraising grows, the onus on making the right investment decisions becomes critical.
Carillion’s Collapse: It’s The Management, Stupid!
When UK-based construction company Carillion PLC finally hit the buffers after months of pointless government efforts to prop up the public sector contractor, it wasn’t long before the finger of blame again pointed to Public Private Partnership (PPP) projects for the financial mess.
It’s a familiar argument that is promoted reflexively in a lot of the UK press because it fits an anti-corporate narrative. It follows the line that when public authorities invite private sector businesses to design, build and operate a public asset, the result will be huge profits for the contractor, its bankers and its shareholders while the public sector carries the bag for bailing out projects when they fail.
In the case of Carillion, that narrative got a boost from a National Audit Office report this week that stated that there’s still insufficient evidence to show that the UK’s Private Finance Initiative (PFI) program delivers value for money. It also said that the cost of PPP/PFI to taxpayers comes to £200bn, a particularly uninformative claim, considering that the equivalent public sector contracting almost always goes over budget and costs taxpayers untold billions of pounds through inefficiency, non-delivery and cost overruns, yet is rarely reported about in the press.
Boost for Nationalist Agenda
The NAO report will boost the Labour Party’s current position that all such projects should be nationalized, whatever the cost.
The only problem with the way that this has been reported is that PFI is not why Carillion collapsed.
In fact, the main reasons for Carillion’s collapse are that it failed to deliver on a wide range of contracted services, so it wasn’t being paid, even as it took on more projects and more and more debt, estimated to total £900m. The company also continued to boost dividends, despite a widening pension deficit, which now sits at £587m. Finally, Carillion incurred cost overruns and delays in the delivery of many public sector projects, of which only three were PFI.
The idea that PFI was to blame for Carillion’s collapse and that taxpayers are now on the hook for the many public sector projects is going to stick, even though it’s nearly as inaccurate as the claim that the company, its investors and its bank finance providers are profiting from the company’s demise.
The Guardian, for example, singled out three PFI investments, including two troubled hospital construction projects, for their contribution to the collapse of the company. These included the £335m rebuilding of the Royal Liverpool University Hospital and the £350m Midland Metropolitan Hospital, both of which ran into expensive delays.
But the media focus on Carillion’s mishandling of three PFI contracts ignores the larger issue, which is the company’s own inability to manage risks associated with the delivery of any of its services.
There is a legitimate debate around whether PFI and its successor, PF2, deliver value for money to public sector institutions such as The National Health Service (NHS). This is because of the higher financing costs for private sector borrowing and thus the significantly higher cost to NHS trusts of having the private sector operate and maintain these assets once they are built.
Bottom Line Focus
At the end of the day, what matters most is the company’s ability to deliver. We’ve seen this before when another opportunistic PFI company, Jarvis, got in over its head and collapsed.
There have been more than 130 health-related PPP projects in the UK since the PFI scheme was established in 1992. Almost all of the large hospital projects were delivered on time and on budget using PFI during the Labour government from 2001 to 2010. This was followed by a sharp fall in waiting lists for surgery and other essential healthcare services across the country.
The issue in this instance should not be the delivery model, but rather the company that is responsible. In Carillion’s case, there is ample evidence that when it came to running the projects that were at the core of its business, nobody effectively managed the rising costs and declining receivables, even as they inexcusably boosted the dividend in each of the 16 years since the company was founded.
The end result, while enriching a few investors, was a precipitous share price decline since the middle of 2017 that more than erased those gains. The company’s lenders are also reported to have started writing down the £835m of committed bank facilities and £140m in short-term facilities, though their exposure could be much higher.
Business as Usual?
Despite all the handwringing, there is no shortage of public sector contractors who will happily take over the many public sector construction and support service contracts that Carillion’s collapse will require the government to put up for tender.
This will follow an established protocol that is designed to ensure that essential services are not interrupted. The larger, more troubled Carillion projects will take longer to renegotiate but will ultimately find replacement companies to deliver them. Work interruptions are likely to be limited, and people who have been laid off as a result of the collapse will quickly find new work, particularly given the current healthy state of the labour market. The takeaway from all of this is simply that bad businesses, whatever their line of work, go to the wall and better ones replace them.
Whatsapp Launches New Venture Aimed at Businesses
Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.
This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.
Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.
Amex: Troubled Credit Card Company Reports $1.2bn Net Loss
On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.
Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.
For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.
In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90. JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.
“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.
American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.
More on Startups
Australian Startup Canva Hits $1bn Valuation
Australian graphic design startup Canva has now been valued at $1bn, after a new $40m investment from Sequoia Capital. Launched in...
Equity Crowdfunding: How Market Leaders Are Shaping the Future of the Industry
According to a new report, 17 crowdfunded companies have successfully exited over the past five years in Israel. Israel, also known...
Valuation in an Information Economy
Investment in intangible assets is growing at an ever-increasing rate, outpacing investment into capital machinery, equipment and all other tangible...
Cryptocurrencies5 days ago
XRP, NEO, Monero, IOTA: Can One of the New Kids on the Block Dislodge Bitcoin?
Cryptocurrencies12 hours ago
IOTA, the Tangle and the Future
Europe4 days ago
Silvio Berlusconi: Why Italy and Europe May Need Him
Cryptocurrencies4 days ago
ICOs: The New Gold Rush
America4 days ago
UN Drug Treaties Need to Rethink Cannabis
Cryptocurrencies5 days ago
Bitcoin Bubble: Cryptocurrency Values are Plunging
Cryptocurrencies4 days ago
Cryptocurrency Fever: Why ICOs Are Booming
Cryptocurrencies2 days ago
Two New Blockchain ETFs, So What?