Sillicon Valley

The Startup Bubble Deflation: A Story of Disproportionate Valuations

By Grace Tepley, J.D. Candidate 2022 | Posted on

The recent deflation of the startup bubble may be explained by Wall Street investors’ growing reluctance to buy into huge startup valuations. Recent IPO debut flops of hot companies with high valuations (Uber, Lyft and Peloton) have other companies like WeWork rethinking going public anytime soon. Peloton alone managed to lose $900 million of private investor wealth after their recent IPO. Similarly, with a price of $45 per share, Uber reached a valuation of $82.4 billion in their IPO, substantially less than its most recent $120 billion private valuation.

The reason these highly valued companies are struggling on the public market has to do with a new trend in venture capital (VC) investment. VC firms are increasingly flooding young startups with seemingly endless capital. Speculations as to which companies have the highest growth potential has resulted in VC firms dolling out enough money to keep young startups afloat. This holds true for startups lacking fundamentals such as the ability to turn a profit, maintain experienced leadership, and establish well-developed business plans.

Young companies that receive billion dollar valuations – once deemed “unicorns” for their rarity –  are the new norm in the startup community. VCs betting on future growth and market dominance rather than current and sustainable profitability has resulted in the overvalued bubble seen today. In fact, these practices have resulted in 49% of VC-backed unicorns boasting valuations far above their market value.

Public investors are increasingly becoming skeptical of these huge valuations because, despite creating massive revenue, some companies, like Uber, fail to make a profit. Overall, less than one fourth of all recent IPOs are from profitable companies. The IPO flops of Uber, Lyft and Peloton suggest that public investors may be shifting back to preferring tangible profitability as opposed to the path to profitability narrative that is being sold today.

However, there are notable exceptions to this flop phenomena that indicate public investors are still interested in interacting with unicorn-status companies that have their fundamentals in place. For example, Pinterest and Chewy sufficiently impressed public investors to survive their IPOs without losses. Likewise, Airbnb’s recent acquisition of talented leaders marks a clear investment in its business model that may welcome public investors.

It is likely that the recent deflation in the startup bubble is the market’s way of correcting itself from disproportionate valuations. Whether or not highly valued companies will continue to seek public investments may now depend on the reliability of their future profits. What is clear is that the discussion of overvaluation is increasingly important to both public and private investors, as well as the startups intending to raise capital from these sources.

The Startup Bubble Deflation- A Story of Disproportionate Valuations

SEC fines Zenefits and former CEO Parker Conrad

By Rujie Zhou, LL.M. Candidate 2018 | Posted on

On October 26, 2017, the Securities and Exchange Commission (the “SEC”) fined a Silicon Valley unicorn startup, Zenefits, and its former CEO Parker Conrad for “materially false and misleading statements and omissions” to the company’s investors regarding non-compliance with state insurance laws. This is a first for a Silicon Valley startup.

Zenefits and Conrad agreed to pay a combined nearly $1 million in fines to settle accusations. The company agreed to pay $450,000 and Conrad agreed to pay nearly $534,000, of which $350,000 represents disgorgement of ill-gotten gains and a penalty of $160,000. But Zenefits did not confirm or deny the SEC’s findings that they violated federal securities laws.

San Francisco-based Zenefits makes software for business to automate their human resources activities, but also acts as a health insurance broker. 90 percent of the company’s revenue comes from brokerage fees from their health insurance business.

The SEC claimed that Zenefits used inadequate compliance procedures under Conrad’s control, allowing employees to sell health insurance without the necessary state licenses. Conrad created and shared a program allowing employees to complete California licensing education requirements in fewer hours than the law required. Separately, in 2016, in a concession to investors, Zenefits slashed its valuation by more than half to $2 billion from $4.5 billion and investors agreed not to sue Zenefits. The SEC asserted that when Zenefits and Conrad raised funds in 2014 and 2015, they failed to adequately disclose their knowledge of these compliance lapses.

In contrast to the SEC’s broad authority to police behavior in public traded companies, it has relatively limited authority in the world of private companies; by law, it can only police misrepresentations and fraud in the sale of private company stock. Zenefits is the first case in which the SEC took action against a privately held Silicon Valley startup for misleading its investors. In the future, the SEC will keep a watchful eye on Zenefits.

SEC fines Zenefits and former CEO Parker Conrad

Rising Housing Prices Prompt New Political Response

By Lindsay Szymanski, J.D. Candidate 2019 | Posted on

It is no secret that growing housing prices have plagued Silicon Valley, and as the tech industry continues to expand, many worry that the problem will become more pronounced. Indeed, the median home price in Mountain View, headquarters of Google, stands at 1.4 million, while Cupertino, the hometown of Apple, offers homes at a median price of 1.6 million. These prices are driving even highly paid tech workers into neighboring cities where the homes are less expensive.

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BCLBE Law Firm Hot Topic: Peter Werner, Cooley

By Yao-Cheng Yang, LL.M. Candidate 2017 | Posted on

On October 24, 2016, Peter Werner, partner at Cooley LLP, spoke about what it’s like to practice in Silicon Valley. It was not a serious speech or boring esoteric lecture which might make you sleepy, but was instead an interesting, easy to understand, and profound sharing of his experiences as a lawyer.

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Tech Giants Invest in Local Cloud Infrastructure to Build Credibility in Europe

By Nicole Danesh, J.D. Candidate 2019 | Posted on

Silicon Valley’s tech giants, including Apple, Facebook, Microsoft, Amazon, and Google, have recently invested billions of dollars into Europe’s cloud market. Amazon, already running data centers in Germany, is planning on opening additional centers in France and Great Britain. Google is also opening a new data center in the Netherlands, adding to its already existing centers in Finland and Belgium. Apple, Facebook, and Microsoft are also working on similar projects. In doing so, these tech giants foster benefits for both themselves, their European customers, and the economies of European nations.

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The Risks of Insolvency in Venture Capital

By Alan Parker, LLM Candidate 2016 | Posted on

The venture capital industry has one goal: making startups incredibly lucrative and, thus, maximizing returns to venture capital investors. For the venture capital investor these outstanding returns are generally materialized 5 or 6 years after the Series A investment round, when the investor makes an exit and the startup either performs an initial public offering of its shares (IPO) or is sold to a strategic acquirer or a private equity fund.

However, in a business inherently risky as venture capital, there are also many examples of failures, where venture capital backed startups go insolvent or bankrupt. This happened recently with online retailor and Montreal-based Beyond the Rack, which had previously raised over U$90 million in venture capital investments and other financings. When the company was entering into insolvency, it pursued a sale with a potential buyer, but negotiations fell through, forcing it to file for creditor protection on March 23.

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The Future Is Small: One Silicon Valley Incubator Shoots for Quality over Quantity

By Martin Salvucci, J.D. Candidate 2018 | Posted on

In the wake of fresh reports of mixed economic signals, some Silicon Valley heavyweights are now placing large bets on a “small” plan. Last week, Expa – the “start-up studio” that was launched in 2013 by Uber co-founder Garrett Camp – announced the close of a $100 million fund to support a different sort of incubator. Dubbed “Expa Labs,” this new project will offer a high-touch, hands-on approach to growth and development.

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A New Era of Shareholder Activism in Silicon Valley

By Alan Parker, LLM Candidate 2016 | Posted on

We are all familiar with legendary hedge fund investors like Bill Ackman and many others making history with shareholder activism in Wall Street, but this trend is also starting to appear on a smaller scale in other places…notably venture capital in Silicon Valley.

Picture the following scenario: A venture-backed startup valued at $4.5 Billion in its latest investment round, a hotshot CEO, and venture capital investors with a history of acquiescence with its portfolio companies—contributing to growth without major interferences in management. It seems like the perfect Silicon Valley tale, until the California Department of Insurance starts to investigate the company and its CEO for allegedly circumventing California State regulations in connection with employee’s insurance training. Zenefits exemplifies this scenario as it was subject to an investigation of such practices.

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