Frank Thoughts: The Trojan Horse
Dave Canal
September 13, 2019

The current unicorn IPO market is reminiscent of the psychology used in the Trojan War.  Today the hidden “soldiers” are venture capitalists, investment bankers and corporate employees.  According to mythology, the “gift” to the Trojans was an 80’ wooden horse that seemingly marked the end of a ten year war.  We are now ten years into a bull market.  A market that has not been believed, nor participated in, by individual investors.  However, they are now being offered “gifts” of unicorn IPOs.  These companies are immense in size and … unprofitable.   

The companies are household names because venture capital firms (especially those in the Middle East) have invested billions in building brand awareness.  Yet, despite the amazing sales growth, the companies do not make money.  Most, if not all, have the same Field of Dreams business model; “if you build it, they will come.”  It’s a strategy that has worked well in building revenue … but not profits.  Yet, they are privately valued in the tens of billions and have gone public at even higher valuations.

A new representative IPO Trojan Horse that recently filed to go public is WeWork.  It, much as Uber and Lyft, has been in business ten years and like them, has yet to make money.  It’s in the real estate business (they rent space in office buildings) but envelops itself with the aura of technology.  They have even adopted tech phrases such as “Space as a Service.”  A takeoff of tech’s phrase, “Software as a Service.”  Moreover, according to the newly released IPO prospectus, the company currently shows, for every dollar increase in revenue, they lose a dollar.  That is not a sustainable business model.

Adam Neumann, the founder, must agree.  He sold $700M of stock ahead of this year’s coming IPO.  That sale reminded me of a meeting I sat in on many years ago at Alex. Brown & Sons.  The firm was a small investment banking firm that specialized in financing technology and biotechnology companies (it, along with Goldman Sachs, had brought Microsoft public in 1986).  It was hosted by two M.I.T people who had a super computer company and were looking to raise money.  They had “sold” 10 of their machines to prestigious institutions.  Hospitals, colleges and government institutions.  After listening to their presentation, I asked, “Why wouldn’t another computer company want to buy you?”  “Well we would certainly listen to an offer,” was the response.  I instantly lost interest.  I thought to myself, “If you think it has such a great future, why would you sell it?”  It turned out, that only a couple of computers were actually sold.  The rest were shipped to potential “customers” in the hope that they would like it and buy it.  Ultimately, the company was charged with fraud and disappeared.

Forgotten is that these unicorns were once talked about as never having to go public.  Never mentioned was their need to do so in order to benefit those who had originally funded the companies.  The three groups are the modern day “Greeks” in these mythically “gifted” IPO Trojan Horses.  They are cashing out while individual investors are being allowed to cash in.  If you have a business that does not make money it is a financial transaction.  You can become the dominant company in any “business” if you sell the product, or service, below cost and lose money.

There are many themes in the story of The Trojan Horse.  Foremost was the false perception of the horse as a gift.  Misperception is as true today as it was in ancient Troy.  Today we need to be aware of venture capitalists, investment bankers and technology cohorts bringing us gifts.  We must remember a business’s purpose is to make money for the sake of the business and for us as investors. 

-Francis Patrick Boland

Read more