The Fear-Greed Gap

Morning Markets is already out, which would normally mean that I’d stop writing from the hip and get back to more regular journalism, but I wanted to highlight something interesting that probably matters. So hear me out if you can.

Here at Crunchbase News, we’ve covered the gap between private investors, private investment, and private companies and their public counterparts ad nauseum. We track the earnings of public SaaS companies to get a feel for what private SaaS companies might be worth; we track the IPO market for late-stage private companies, to understand how investors might value mid-stage startups.

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We keep doing so because it’s a useful heuristic for understanding who might be over or undervaluing companies. Notably, the private and public markets don’t always agree on what things are worth. And, the gap between private markets and public markets’ opinions on the value of companies is often one of differing sentiments.

At times, for example, private investors are skittish. During other intervals, it might be public investors who are watching their shadows.

But the two halves of the global economy don’t have to be at odds. Sometimes, the public market and the private market are in sync; in a recession, for example, both sides of the IPO-divide might be pessimistic. Conversely, in the midst of a boom, we might see ribald optimism from private investors and public investors alike.

Today, however, it seems that the optimism gap between private and public investors has fully inverted from its prior norm. It’s an odd situation. Let’s explore what’s going on.

Backward

In retrospect, today’s situation seems long coming. As a year, 2019 has seen a number of private-market bets at least partially misfire. Dropbox is worth less than it was in 2014 as a public company, for example, a notable result. Uber is underwater as well. And, a number of other recent IPOs wound up mispricing and losing lots of altitude after their trading debut (SmileDirectClub, Peloton, Slack, and so forth).

But when WeWork imploded in spectacular fashion it seemed to have a bigger impact than those other episodes. The company’s aggressive growth push and staggering, resulting deficits were embarrassing; a near indictment of late-stage private investor excess, and a rude mark on the current chapter of founder-friendly investing in which corporate governance became gauche, WeWork’s deletion of tens of billions of dollars in putative value was shocking.

So large a shock, it turned out, that David Sacks, a famous entrepreneur-turned-investor, wrote that the “public market’s verdict on WeWork and other gross margin-challenged companies has trickled down to growth and venture investors. Growth capital has seemingly tightened overnight. Winter is here.” Damn.

Sacks wrote that at the end of October (our notes here). It’s not hard to find similar tracts. Also in October, for example, the New York Times wrote a piece titled “Silicon Valley Is Trying Out a New Mantra: Make a Profit.” And so on. All of a sudden, private companies losing money in the name of growth was not a medal to wear; it became a warning-label to endure among later-stage startups who want to raise big checks from private investors.

Contrast that with this, taken from CNBC this morning:

It seems that private investors are now more conservative than their public counterparts, at least when it comes to later-stage private investing.

It wasn’t this way before. Recall that we brought up Dropbox a few paragraphs ago. Private sentiment surrounding the company was so hot during its youth that it was worth billions more than it is today, despite being far larger in 2019 than it was a half-decade ago. Cloudera is a similar story, and there are a number of others.

I don’t expect private market pessimism to last while public market optimism holds, but today things do seem a bit upside down. More when we’re back to private investors being their sunny selves.

Illustration: Li-Anne Dias.