Q4 2018 New Markets Investor

Q3 2016
‘The combination of cheap
money and private IPOs has not
only changed the way start-ups are
being funded, but also insulating
investors from reality.
vulnerable to becoming mere features that other, larger
platforms could easily incorporate into their offering.
“This group of ‘Icarus’-class start-ups fly very close
to the burning sun: simultaneously attracting platform
company valuations while shouldering the huge
business risk of becoming low-value add-on features
during the next few years”, he said.
He even picked out a few unicorns he believed were
donkeys in disguise, such as the highly popular “catalogue
of ideas” site Pinterest, the productivity software
service Evernote, social media service Snapchat, and
the music identification app Shazam.
Of all these apps, the one Basta believed most likely
to be “embedded out of independent existence” was
Shazam. He contended that, because the app was reli
ant on a large amount of customer data, it would be far
more successful if it were gobbled up by a bigger platform
in the market. This larger player would be able
to use its dominant position in the market to deliver a
better experience for users.
“Surely this would dictate the best Shazam-like experience
would come from Apple or Google or another
broad-based vendor, and never from an independent
whose data and development resources can never be as
broad”, he said.
Basta was also quick to raise an eyebrow at Pinterest’s
unicorn status. So far, the company has received
around $1.3bn in venture capital and, as of February
2015, has a valuation of $11bn. But Basta is unconvinced
that the advertising revenue from the site’s
‘promoted pins’ or the revenue generated from its
buy buttons is large enough to justify the company’s
massive price tag.
“Facebook and Google are already garnering the lion’s
share of new mobile ad spend, leaving less room for
newbies”, he wrote. “Commerce revenues need to be
very large to be worth anything; even $500m of product
sales hardly validates a $1bn company value.
“Set these challenges alongside the innovation treadmill;
Twitter has shown how much damage a company
valuation can receive if innovation slows down for
even six months, so execution risks are huge.”
Basta did concede that the companies do have value,
however, stating that any business that is able to garner
the attention of more than 20 percent of online users,
as Pinterest has managed to do, is impressive and has
“strategic value to a larger player”. He just questioned
how an app that could so easily be “embedded out of
independent existence” could command a valuation of
over $1bn.
“Put another way, a business whose offering is at risk
of becoming a feature is only worth $1bn when it
proves it’s worth $1bn”, he said.
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New Markets Investor