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- Vincent Deluard, the director of global macro strategy at INTL FCStone, says Silicon Valley's business model is fundamentally unsustainable and primed for a collapse.
- In an interview with Real Vision, he explains why WeWork's contagion-like effect will make it harder for companies to IPO.
- Deluard doesn't see a "happy ending to this."
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To say that it's been a rough year for Silicon Valley investors would be putting it lightly.
Since their shares started trading on public exchanges, companies like SmileDirectClub, Uber, Lyft, and Slack have seen their valuations sink to mere fractions of their last private appraisals.
Vincent Deluard, the director of global macro strategy at INTL FCStone, thinks this is just the beginning - and that the repercussions from the fallout will be widespread.
"I think it's the entire model of the Bay area economy of rising asset prices, very high wages - most of that being stock-based - and very high real estate prices," he said on Real Vision. "It was somewhat of a virtuous cycle for most of the past ten years - and with the recent slaughtering of the unicorn, I think we're at the beginning of a massive unraveling of this model."
The unicorn that he's referencing is none other than WeWork. After the company's highly publicized fall from grace - in which its valuation was slashed by roughly $40 billion dollars - Silicon Valley investors don't seem nearly as giddy as they once were to put fresh capital to work.
To Deluard, these types of practices - where capital is indiscriminately thrown at unprofitable businesses - is unsustainable and mostly fluff. It's based on prognostications and comparables, not off of cold, hard business metrics. That's a problem - and he thinks WeWork was just the tip of the iceberg.
"If one [company] is to take a writedown, then the entire chain needs to work it's way down," he said. "A lot of this wealth is on paper. It's very hard to use traditional discounted cashflow models for companies that don't have cashflow, or have cashflows that are very negative for as far as the eye can see."
What Deluard is saying here is that investors are playing a game of best guesses, rules of thumb, and maybes with billions and billions of dollars - clearly a cause for concern.
Since every valuation is based off a comparable, one deal going bust sets forth a contagious, domino-like effect dragging down the values of other firms that have no hard evidence or metrics (profits, cashflows) to justify their valuations. It's a bit reminiscent of the tech bubble, when businesses were valued on the amount of "eyeballs" they attracted.
If Deluard's thinking is correct, some of Silicon Valley's favorite companies are worth far less than they're currently valued. What's more, this notion is going to pose major issues for those looking to go public in the near future.
"The road to public listing is now closed," he said. "The large investors that could bring them that liquidity - typically the Vision Fund - are just not doing so well."
Deluard makes an important distinction here. The days of Softbank swooping in to rescue these companies are coming to a close. This quarter, Softbank took a massive $6.5 billion hit related to its investments in WeWork and Uber. And nothing quite reduces the eagerness of putting fresh capital to work like an astronomical size loss.
"I don't see a happy ending to this," he concluded.
