The Age of Decadence?
Every now and then various social media platforms throw suggestions your way for articles that may be of interest. I recently read an opinion piece from the New York Times that first appeared in print in Feb 2020, while I was happily vacationing in the Virgin Islands, having exited my last company and not yet fully comprehending how dramatically our world would be impacted by a new coronavirus that had appeared in Wuhan and infected a few people in the US. So I never saw this two and a half years ago. It is on the lengthy side but well worth the time to read.
https://www.nytimes.com/2020/02/07/opinion/sunday/western-society-decadence.html
Reading it now, it reminds me of the issues we were dealing with in America pre-COVID19, and at least one person’s view of how this all indicated that our technology dominated society had descended into a period of “decadence.”
Part of Douthat’s essay focuses on the declining rate of innovation in the world of business, the impact of algorithms on the decisions we now make and the ideas we pursue, and investors fascination with companies that have potential, ones that may be worth something in the future, and that get rewarded for this whether or not their potential is ever realized. Douthat discusses a few very high profile stories of companies that failed to get to profitability, or went bankrupt after blowing through tons of investor capital, including now infamous Theranos, WeWork and Uber.
With respect to Uber, he concludes that the company
“is, for now, an example of a major 21st-century company invented entirely out of surplus, and floated by the hope that with enough money and market share, you can will a profitable company into existence. Which makes it another case study in what happens when an extraordinarily rich society can’t find enough new ideas that justify investing all its stockpiled wealth. We inflate bubbles and then pop them, invest in Theranos and then repent, and the supposed cutting edge of capitalism is increasingly defined by technologies that have almost arrived, business models that are on their way to profitability, by runways that go on and on without the plane achieving takeoff.
I thought this was a particularly insightful observation, and it’s interesting to see how things have changed in the VC world since this article was written. As the pandemic took hold we somewhat surprisingly entered a period where technology became even more valued, and especially biotechnology. Enormous amounts of money were raised and invested by funds, often in early stage companies with big visions, even bigger valuations, and with relatively little diligence. The fact that people weren’t traveling, combined with some FOMO, led to an extremely accelerated funding cycle, and as valuations rose so did the comparable numbers used to value every next investment.
Finally in mid-2021, 18 months into the pandemic, we hit a wall as some of these highly valued companies failed to deliver on milestones, others were clearly over-hyped, and global supply chain issues started to interfere with commerce in general making the future outlook cloudy for everyone. Tensions between red and blue factions in the US, and between the US and China, the Russian invasion of Ukraine, the resistance of worker bees to return to the office, and resultant global inflation all contributed to a slamming on the brakes. Valuations of biotech companies that had completed IPOs in the prior year fell by 50% or more. There was a ripple effect throughout the early stage financing ecosystem as valuations for new rounds and exits both plummeted and the window for IPOs slammed closed.
Instead of quickly throwing tons of money at companies with enormous valuations and fuzzy plans for the future, VCs were taking a step back. Investors started taking more time to complete diligence, and being more cautious in their evaluations. Companies needed to prepare for a potentially lengthy period where capital was more challenging to access. In many cases this meant abandoning some growth plans or even laying off employees.
Several articles have appeared recently promoting the notion that “flat is the new up”, that companies should be thrilled to raise money at just a flat valuation compared to the past, as opposed to a down round or an inability to raise at all. In biopharma the focus of investors and acquirers shifted from broad platforms, early in development, with many shots on goals, to companies with one or a few specific assets focused on addressing established targets, pretty far along in development, operating in a capital efficient manner, with a relatively low risk profile to get over the finish line for FDA approval.
This is not the first down market cycle I’ve lived through. Although I could not possibly have predicted when it would end, it was obvious to me during the boom that those valuations would not last forever. During early 2021 I urged clients to bear this in mind, and either secure several years of funding ASAP, or get to exit NOW.
Over the past week some have commented that things appear to be getting better in general, and perhaps equity markets have bottomed out. Maybe, maybe not. I really don’t envision a return to 2021 valuations any time soon, and the next few years may be a tough time for early stage companies to raise funds. Having said that, there are always investments getting done, and it’s been said that some of the best companies got started during the most difficult times. I don’t think that’s a coincidence. If you really have an outstanding startup, then you’ll rise like cream to the top when subjected to lengthy in depth diligence by well informed investors.
Whether we have entered an age of decadence or not, I continue to be very optimistic about the future new ventures in the life sciences. I believe in the ability of the next generation of young leaders to come up with real solutions to the truly enormous problems facing society going forward. Things may get pretty ugly in society at large before that happens, but I’m betting against an age of decadence that leads to a total crumbling of the developed world. Given the seriousness of some of the issues we all face going forward, I think it’s a refreshing and healthy change that more investors are now focused on real solutions and clear paths to achieving them, rather than big visions with no clear plan to achieve anything beyond an up round or two and an attractive exit for early investors.