It’s Unicorn Writedown Season

Morning Markets: As JUUL and WeWork stumble, their missteps are causing financial pain amongst their backers.

While it’s generally agreed that many unicorn companies are healthy businesses, generating winsome gross margin against which they can array operating costs while growing neatly, not all highly-valued private companies are fairing well.

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Two unicorn stumbles are triggering writedowns, showing a slip in faith amidst some of their financial backers. Today, JUUL and WeWork are back in the news for reasons different than they might have hoped. Let’s start with JUUL. Here’s CNBC with the latest:

Tobacco giant Altria wrote down its $12.8 billion investment in troubled e-cigarette maker Juul by more than a third, recording a $4.5 billion pre-tax charge against its third-quarter earnings, the company said Thursday.

As Crunchbase News reported at the time of the JUUL-Altria deal last December, the deal came after vaping company had raised lots of money from other folks. Its then-attractive economics made it look like a safe bet. Things have gone sideways since, transforming Altria’s JUUL wager from a lucrative hedge against the future to a seeming example of overpriced optimism.

Continuing the theme, WeWork’s never-ending mess slopped onto other companies with a Fidelity fund taking a hit in the process. Here’s Reuters from this morning:

Fidelity Investments cut the value of Contrafund’s stake in WeWork Companies Inc by 35% in September amid turmoil surrounding the office-sharing startup’s failed initial public offering (IPO).

As Reuters goes on to note, the total value of the writedown is only a hundred million dollars. That’s a large loss, but not when compared to the value of the Contrafund itself which includes over $90 billion in net assets.

What It Means

We’ve seen large amounts of capital flooding in recent years, with funding round sizes swelling as investors make big bets on companies that look promising. High profile, seemingly sound companies stumbling so badly could change that in 2020. It could affect future valuations of startups, as investors have learned a hard lesson about what companies are actually worth through the WeWork saga (i.e. they were being far too optimistic with its valuation).

It’s also a lesson that shows just because a company’s economics look good, it doesn’t mean it will be a success. Juul could have healthy economics, but so long as there are outcries about its effect on public health, it will be very hard for them to succeed in the long term.

Illustration: Dom Guzman