Why Are the Wealthy Investing in Low-Quality Assets?

The TechCrunch Exchange: Startups, Markets, and Questionable Investments

Welcome to The TechCrunch Exchange, a weekly newsletter focused on the startup ecosystem and market trends. This newsletter is derived from the daily Extra Crunch column, but is freely available for your weekend reading. Interested in receiving it directly in your inbox every Saturday? Sign up here.

Are you prepared? Let's delve into discussions surrounding finances, startups, and emerging IPO speculation.

Recent Market Oddities and Investor Behavior

The past few weeks have presented unusual circumstances. Robinhood has secured substantial new funding to sustain its commission-free trading platform amidst volatile market conditions. Other newer brokerage firms are also adjusting their business strategies.

However, a concerning pattern has emerged: why are several affluent individuals promoting assets with questionable value? It is perfectly acceptable for individual investors to exchange trading ideas.

Influence and Risk

We’ve observed prominent figures like Elon Musk and Chamath Palihapitiya leveraging their influence to encourage others to invest in potentially unsound trades. These trades carry a significant risk of financial loss for those who may not have the resources to absorb such losses.

Consider Elon Musk’s renewed promotion of Dogecoin on Twitter. This cryptocurrency is known for its extreme volatility and limited practical application. Or Chamath Palihapitiya’s public investment in GameStop, a maneuver he was uniquely positioned to profit from.

He successfully capitalized on the situation, while many retail investors who followed suit have experienced losses. Caveat emptor applies, but it is troubling when individuals with considerable resources and expertise guide others toward risky investments lacking strong long-term fundamentals.

Concerns Regarding Tech Company Acquisitions

Shifting gears, Senator Hawley has recently proposed a plan to prevent large technology companies from acquiring smaller ones. As expected, the proposal lacks substantial detail and appears largely symbolic.

Bipartisan Interest in Regulation

Despite the proposal’s shortcomings, the growing bipartisan interest in limiting the acquisition power of big tech is noteworthy. For startups, this trend is unfavorable. Mergers and acquisitions represent crucial liquidity events, and larger companies typically possess the necessary capital.

While declining startup valuations are not a direct consequence of my actions, it’s clear that both Democrats and Republicans in the U.S. are considering measures to restrict tech M&A activity. This could have a detrimental effect on startup valuations and funding opportunities.

A reduction in funding could lead to fewer new companies entering the market to challenge established tech giants. This is a point worthy of consideration.

Food for thought.

Market Observations

Recently, The Exchange connected with Unity’s CFO, Kim Jabal, for an update. The conversation extended beyond casual discussion of gaming preferences, focusing instead on her perspective as the financial leader of a company transitioning from private to public status.

GAAP vs. Non-GAAP Reporting: I inquired about Unity’s recent Q4 net income, as calculated under generally accepted accounting principles (GAAP). Share-based compensation impacted these figures. Jabal emphasized that both her team and investors prioritize non-GAAP metrics. This is because these metrics exclude non-cash expenses, such as share-based compensation, offering a distinct view of the company’s performance. While common for rapidly growing startups post-IPO, this approach may shift if growth decelerates.
The COVID-19 Impact on Gaming: The question of whether the surge in gaming activity during the COVID-19 pandemic will be sustained was addressed. According to Jabal, historical increases in engagement haven’t typically reverted to previous levels. It remains to be seen if this pattern will hold true across the broader startup and big-tech sectors that benefited from the pandemic. Should it, the implications are notably positive.
Key Performance Indicators: Jabal identified non-GAAP operating margin and free cash flow as her primary metrics, alongside growth. This clarity is commendable. Startup CEOs should be prepared to articulate similarly concise key metrics during discussions regarding funding rounds.

Shifting focus to startups, Deepgram, a company I’ve been following, recently secured additional funding. I previously covered their Series A round of $12 million in March 2020. They have now raised a further $25 million, with Tiger Global leading the investment. This represents a significant investment in an early-stage company.

Deepgram’s success hinges on a specific speech recognition model and its target market. The new investment suggests that both of these initial assessments proved accurate.

In a recent conversation, the CEO of Databricks highlighted substantial advancements in artificial intelligence, particularly in areas like generative adversarial networks (GANs) and natural language processing (NLP). We anticipate a rise in funding rounds similar to Deepgram’s as AI and related data processing techniques become more integrated into various workflows.

Fintech company Payoneer is preparing to go public through a special purpose acquisition company (SPAC). Their investor presentation is available for review. Payoneer is not a pre-revenue entity seeking public funding; they reported expected revenues of $346 million in 2020. I bring this to your attention for two reasons.

First, examine the presentation and consider why SPAC decks consistently lack aesthetic appeal. This is a puzzling observation. Second, question why they opted for a SPAC instead of a traditional initial public offering (IPO). Relevant financial data can be found on pages 32 and 40. I welcome your insights on this matter; the most compelling response will receive a reward of Elon’s dogecoin.

A Collection of Updates

As the week concludes, TechCrunch is preparing to launch a new newsletter dedicated to the world of applications, promising to be a valuable resource. This newsletter will be authored by Sarah Perez.

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