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The new fund will focus on early-stage investments in technology and health care, and brings NEA’s total committed capital to nearly $24 billion.��

��NEA has invested in high-profile companies like , �� and . Most recently, it invested in ’s $22 million and ’ $105 million , both announced last week, according to Crunchbase.

Along with the new fund, the firm announced it named Liza Landsman as a general partner. Landsman joined NEA as a venture partner in 2018 after her time as president of Jet.com, an NEA portfolio company.

“We are deeply grateful to our limited partners for their commitment to NEA and their confidence in our ability to execute on the tremendous opportunity ahead,” NEA managing general partner Scott Sandell said in a statement. “As technology transforms every industry globally and life sciences innovation continues to accelerate, NEA is in a great position to continue doing what we do best—work alongside entrepreneurs to build great companies that will shape the future of how we live, work and play.”

NEA, which was founded in 1977, says it has had more than 230 of its portfolio companies go public and has been involved in more than 390 mergers and acquisitions.

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In the U.S., and IPOs were eye-openers for the industry, showing that the appetite for rapid-growth, money-losing businesses is on the wane. Every startup is pushing for extra diversification with hefty bets on food and grocery delivery, scooter and bike rentals, and even a proto-bank like the one launched by Uber through its new fintech division, Uber Money. In Europe, contenders for ride-sharing supremacy include American companies and those born on the continent, operating in a myriad of countries, all with their own linguistic, behavioural and legal particularities.

This might sound challenging for companies in the business–and it is. They wage a multipolar war, with several battlefields, all of them with their own specificities, to secure sustainability for each. Diversified weaponry, calculated retreats and fresh new starts–concerning brand and image–have been the approaches taken to reach out to new customers, consolidate old ones and control any potential damage to the bottom line, which is believed to be negative for all of them.

Steering away from taxis

�����ٴDzԾ���’s is an example of a company that ticks almost all the boxes in the list and is a case of the ride-hailing startups’ efforts to detach themselves from the taxi image. In fact, it changed its name in early 2019 from Taxify to the current brand, and is now diversifying to other business areas, some not so burdened with regulation.

Markus Willig, CEO and founder of Bolt, told Crunchbase News that “the rebranding brought our name and visual identity in line with the company’s broader vision of transportation that had already expanded from ride-hailing, with cars and motorbikes, to scooter sharing, and now also includes food delivery.”

took a different approach and seems to have folded to the market demands. The German app My Taxi was universally held as the ultimate weapon against the Uber invective in the taxi sector. However, under the new strategy taken by the Daimler-BMW joint-venture for transportation (a holding company which also includes French-born ride-hailing app , née Chauffeur Privé), bypassing the straitjacket of taxi laws ended up paying off in terms of profitability.

While maintaining the service that allows customers to ask for taxis, the company has released a new service called Lite, which allows taxis to operate as other transportation apps, showing a final price upfront and adopting the same remuneration model for drivers.

“The strategic rationale behind the rebranding was the expansion of our business with new services alongside the classic taxi service,” Mark Berg, Free Now Group CEO, told Crunchbase News, adding that “From a business perspective, it is also very important for us to be able to determine our own prices. Introducing Lite in Poland or Madrid, for example, made those markets grow extremely fast in the recent months,” as people get used to the predictability of ride-hailing prices shown upfront.

Diversify or die

Without disclosing data on rides, revenue and earnings, ride-hailing companies, based on the postulates of the much-touted sharing economy, have been dealing with strong headwinds in recent years. This has been brought on by standoffs with governments concerning workers’ rights and their business models which repatriate proceeds from the markets where they operate to tax-friendly countries.

Concerning competition, the environment isn’t rosy either, with a myriad of apps vying for supremacy in the most appealing cities for business, such as London and Paris, already overcrowded with cars. Spain’s , for example, retreated from the Portuguese market in late 2019–a natural foray since it is headquartered in Madrid–amid rife competition in Lisbon and Porto, Portugal’s largest cities, but mid-sized in comparison with other European capitals.

, an Amsterdam-based specialist in sharing economy platforms and founder of the consultancy firm Forget the Box, told Crunchbase News that “The idea of a European or global winner-take-all market is may be overrated,” pointing out the deadly sins of the business.

“It’s very easy for competitors to start [similar businesses],” he said, “and the switching costs of demand and supply are really low, it’s very easy to switch if somebody else offers a better deal.”

In most European markets, he said, there’s also a more ingrained culture of using public transportation, which does not happen as often in American markets.

“In Europe especially the public transport is really good,” said Arets.

The analyst does not think there will be space for more than three apps operating in one single country, but points out that competition will be made through gaining preponderance in cities and not as much in whole countries, which makes it more complex.

“That’s the question about the viability of the business model,” he added. “How much market do you need to get a model to be sustainable?”

The only way out is consolidation, Arets said. “I think they will merge, because I think that’s the only option. In the end there’s only place for a couple of players in the local market.”

Meanwhile, diversification is key. While Free Now, Cabify and Bolt doubled down on their investments in Latin American countries such as Mexico, Brazil and Colombia, whose largest cities represent an immense potential for rides–other lines of business have been launched such as food delivery.

Less labor-intensive and thus more profitable areas have also been a strong bet. Scooter and bicycle sharing services are now omnipresent in Europe’s main cities. Uber has taken the final step toward profitability, launching its fintech services in late 2019, opening the possibility of making payments exclusively through the Uber brand. But there are still legal hurdles to overcome concerning these companies’ main activity: giving rides to passengers.

“Uber and other apps were really smart: so we are not a street taxi and we are going to envision ourselves in this category,” Arets said. “In that category there was much easier regulation on prices. It was much easier to compete than in the traditional taxi industry. But in the end what you see happening is that both consist of cars that will take you from A to B. In fact there’s not so much difference.”

This isn’t lost on the local authorities who have been cracking down on ride-hailing apps, denying the claim that they operate as simple intermediaries and calling them out as pure taxi services.

London is the most high-profile example of this after the British capital’s transport authority refused a renewal of �������’s license to operate on grounds of safety, citing unreliability of driver identification–mainly due to the possibility of fake accounts.

And therein lies just one headline in what seems to be ongoing conflict in this new economy.

Article written for Crunchbase News by Pedro Garcia, a journalist based in Lisbon, Portugal, covering mainly business and economic themes.��Follow him on .

Blogroll Illustration: . Photo by Sorin Gheorghita on Unsplash

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Marcy Venture Partners, which was founded last year and is based in San Francisco, focuses on consumer brands. Its name is a nod to Brooklyn’s Marcy Houses where Jay-Z grew up.

The firm has already made a number of deals. It’s invested in six companies so far, leading the rounds for three, according to Crunchbase. Its most recent investment was in electric mobility startup in October 2019, and the largest round it’s led so far was a $70 million round for singer Rihanna’s lingerie line . The firm’s first investment since it was founded in March 2019 was ’s $8 million in April 2019.

It’s a quick pace of investing for the first seven months of a VC firm’s existence, but the co-founders are no strangers to the world of venture capital.

Jay Brown, who co-founded with Jay-Z and served as its CEO until late last year, has invested in companies like and . Jay-Z, , is also known for backing high-profile companies like and . And Larry Marcus is a seasoned venture capitalist. He’s the director of , which invested in companies like and , and he backed companies like and as an angel investor, according to Walden VC’s .

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From ride-hailing apps to driverless car technology, transportation startups have attracted unprecedented sums of investment capital from auto manufacturers in recent years. In the past few quarters, that trend has been accelerating.

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An analysis of Crunchbase data shows that since the beginning of 2019, the world’s largest car and truck manufacturers have led financing rounds valued at more than $6 billion. Over that period, they’ve participated in more than 50 deals for several million dollars and up, indicating an expanded willingness to pump significant sums into rounds.

“It has been a continuation of the trends for many of the automakers that have been particularly active over the past few years,” said , a partner at Detroit-based transport venture firm . “In 2019 and 2020, however, it has been interesting to see a few automakers—particularly those in Asia—aggressively ramping up their innovation efforts.”

Below, we take a more detailed look at where Big Auto is putting its capital, which companies are spending the most and where the current investment path is headed.

Hot Sectors, Big Rounds

First, let’s look at where the money’s going. The sectors driving away with the largest sums of automaker capital include autonomous driving technology, electric cars, batteries and ride-hailing.

We break out the largest funding recipients in Big Auto-led rounds in the chart below. (See full list of.)

For the most part, the same subsectors have been attracting automaker interest for years, but the funding dynamics have changed some in recent quarters.

In particular, we’re seeing more partnerships and joint investments involving multiple automakers. Examples include ’s participation in a $1.15 billion May round for ’s self-driving unit, , and Volkswagen’s $2.6 billion round for -backed .�� Even longtime rivals and BMW are teaming up by launching a .

“I’m not sure 5 to 10 years ago we would have imagined Ford and Volkswagen coming together to collaborate on electric and autonomous vehicles, or Daimler and BMW’s collaboration on mobility services,” Stallman said.

However, as the true cost of launching electric and autonomous vehicles—and competing against and on mobility services—has come into greater clarity, these partnerships make quite a bit of sense.

Another broad trend is a move toward components developers. The years 2016 to 2018 were active for acquiring full-stack autonomous vehicle technology companies, Stallman noted. But more recently, automakers are turning their attention to enabling and component technologies that align with in-house architectures. This isn’t broadly reflected in the largest deals chart above, but looking at a , it’s a more visible trend.

Most Active Investors

There’s wide variation among automakers in startup round counts. Several are, on average, participating in more than one sizable deal a month. Others are more sporadic.

Below, we take a look at the most active by deal count since the beginning of last year:

One key takeaway is that we’re seeing more startup capital coming from large auto manufacturers in Asia.

in particular has upped its game. The Korean auto giant wasn’t much involved in the startup space before 2017, according to Crunchbase data. In the last few years, however, the company has backed at least 35 rounds, including 18 since the beginning of 2019.

, meanwhile, tied with BMW as the second most active investor. The count for Toyota included several supergiant rounds of $100 million.

It’s also worth pointing out companies not in the rankings. , for instance, hasn’t been doing much startup investing, presumably preferring to innovate in-house. is also not active in venture-stage investing, nor are France’s or Japan’s and .

The Road Ahead

While automakers did a lot of startup investing in 2019, they didn’t do much acquiring.

There were a few deals: Honda bought Drivemode, a Silicon Valley developer of smartphone apps for drivers, in its first startup acquisition to date; Tesla snapped up , a computer vision startup; and PSA Group acquired , a platform for car rentals and parking it had previously backed.

Big Auto is, however, increasingly competing with Big Tech in the transport space. Just last week, for instance, bought , a developer of technology with applications in the automotive space, and over the summer picked up , a developer of autonomous driving software. also has made some transport acquisitions, as have Uber and other ride-hailing players.

Interest from Big Tech is a concern, as the most valuable technology companies are worth many multiples more than the biggest automakers, making M&A an unlevel playing field.

That said, automakers’ investment activity shows they’re serious about keeping abreast of innovation in spaces that impact them by putting more money than ever toward stakes in startups, even if they’re not buying them whole.

Main photo courtesy of Florian Steciuk via Unsplash.

News that had invested $200 million into the erstwhile-bootstrapped landed this week with a bang. The story was picked up by a , including Crunchbase News. We dug into the founding story of 1Password and peeked at the larger Canadian startup scene (the password-focused security company is based in Toronto).

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However, lost in nearly every story covering the round was the fact that the $200 million wasn’t all a primary investment into the company. Instead, a fraction of the money went to shares issued by the company while a large portion went to existing shareholders.

As :

At least one-third of the funds are going into the company and the balance to the founders, with the new investors getting a minority stake.

One-third of $200 million is between $66 and $67 million, still a huge check for a company that historically eschewed external capital. But the sum invested in the company itself is smaller than the headline figure would have you believe; the rest of the money effectively allowed existing shareholders to cash out a portion of their holdings.

Which, naturally, likely allows for a delayed liquidity event, such as an IPO.

Late-Stage Liquidity

Secondary sales allowing founders to cash out were once far more taboo than they are today; as companies stay private longer the pressure to keep founders and other executives has changed the narrative surrounding partial cash-outs of holdings before an often-delayed IPO.

While 1Password’s round does stick out a bit due to its utter lack of prior investment and reported consistent profitability, there are other examples of later-stage secondary sales that caught our memory this morning.

Let’s refresh our minds:

• : SoftBank became the company’s largest shareholder in a deal that involved SoftBank buying shares from existing shareholders and employees, according to .
• : CEO Travis VanderZanden sold some shares just one year in, according to
• : A little over two years ago, SoftBank invested $4.4 billion in WeWork, with $3 billion of that through primary and secondary shares, according to .
• : Qualtrics insiders cashed out $75 million in shares in the year preceding the company’s $8 billion sales, according to .

Startups are staying private now much longer than they had before. That’s in part because of the JOBS Act in 2012, which changed the point at which companies had to disclose certain information to the Securities and Exchange Commission, among other things. It made it easier for companies to raise more money and stay private longer.

Companies participating in liquidity efforts earlier in their lifecycle is a growing trend, according to a�� by , a platform that helps private companies with liquidity. The median age for a private company was 10 years for the past couple of years, but the “most common age range” for companies that came to the Nasdaq Private Market for liquidity solutions was six to seven years.

What triggers liquidity is a company not wanting to dilute itself too much, , Nasdaq Private Market’s head, told Crunchbase News recently. And once liquidity became more of a norm in the market, the cost of not addressing it earlier was employees leaving, Folkemer said.

So, we can infer from this whole situation that with there being so much capital in the market, investors want to put it to work, and are willing to buy secondary.

1Password stands out in this crowd, but more of it was secondary than we thought, and while that’s normal today, it’s not historically normal. The market has changed, that’s for sure.

Illustration:�� H/T

They are not alone, however.

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Today news broke that , an online search giant and mobile hardware aspirant, is joining the mix. Yes, it’s not just and and and and and and and . Banking now also encompasses Mountain View.

As :

Google will soon offer checking accounts to consumers, becoming the latest Silicon Valley heavyweight to push into finance. […] Google is setting its sights fairly low. Checking accounts are a commoditized product, and people don’t switch very often. But they contain a treasure trove of information, including how much money people make, where they shop and what bills they pay.

The story goes on to note that Google won’t “sell checking-account users’ financial data.” (Fellow technology giants and have for for ad targeting that was provided for security purposes; Google itself has a history of .) That point matters for both attracting customers (who, presumably, would rather their financial data remain private), and generating revenue (Google could resort to the sort of fees that some banks use to��monetize checking accounts).

Two quick points. First, the trend of tech companies adding banking features is spreading more widely than we expected. We should have thought bigger.

Second, a trend that I’ve kept tabs on for about a half-decade is continuing. Back in 2014, I wrote about how major tech giants were working to expand their product lines horizontally, that the most valuable tech shops were offering an increasingly broad array of products far from their core offerings.

Quoting briefly from that piece, here’s how I described the situation in light of a then-current Apple product decision:

Apple’s aggressive product expansion is hardly shocking. Along with the other platform companies, it is building a wider and more diverse set of offerings: If a product, program or service can run on Apple’s platform, it wants to build it in-house.

You can see this plainly in the case of cloud storage. Google, Amazon, Microsoft and, now, Apple all offer consumer-facing cloud storage, for example. They can bake it into their web products (Google) or their operating system and productivity apps (Microsoft) or use it to drive their device experience (Apple).

You can see the analogy between that point and Google moving into checking accounts.�� We’re seeing the collision of big tech’s platform push and the startup trend of adding checking accounts and debit cards.

Understanding what the giants might get out of a banking push isn’t clear. For startups, the move seems to be a simple focus on revenue and juicing more long-term value from already-acquired customers. What might Google get out of the same effort? I would have said data for targeting and the like, but as we’ve seen, Google doesn’t intend to roll in that direction. If checking accounts can generate enough revenue to be material to Google isn’t clear.

Illustration: .

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The joke is an homage to the oft-mocked truth that in the world of high-valuation startups, investors have historically favored growth above profits. Particularly in nascent sectors where early mover advantage matters, VCs have been all-too-willing to bankroll persistent losses in the pursuit of market dominance.

The expectation is that a least one of two things will happen. Ideally, the startup will get profitable as it grows up. If not that, then it will keep growing and public investors will eventually bankroll it at an even higher valuation.

In recent months, the WeWork fiasco, post-IPO performance, and a host of indicators of slowing growth in the unicorn set have upended these expectations. Public investors, it turns out, are not always willing to pay astronomical multiples for money-losing companies just because founders, VCs and investment bankers spin a great narrative about their world-changing potential.

That brings us to where we are now: VCs are talking about things like revenue quality, gross margins, and unit economics. Even SoftBank is a more cautious investment strategy should it manage to go forward with a second Vision Fund. The firm, the largest backer of Uber and , now wants to concentrate on companies with clearer pathways to profitability and public offerings.

It’s easy to see how we got here. Too many startups raised too much money to scale businesses with too many losses. While it’s easy to poke fun at imploded unicorns and their masterpieces of financial obfuscation, this is not a clearly helpful exercise.

Instead, we thought it might be useful to look for some signal amid the noise. That is: What level and type of losses are acceptable to public market investors these days? And how might those translate into good or at least non-catastrophic exits for the current pipeline of high valuation venture-backed startups?

Here are a few of the points public investors are making with wallets:

We Make The Valuations, Not You: At some points in the business cycle, startup IPOs are essentially a seller’s market. Public investors are eager for new offerings, and it’s relatively easy for IPO underwriters to sell shares their at desired price. First-day pops can be pretty common.

In a buyer’s market, investors are pickier about offers. There’s diminished urgency about getting in early, and a sense that wait-and-see could be the better strategy. It’s logical to feel this way when by simply waiting a few weeks, even an enthusiastic buyer of Uber, , and others could snap up shares at a steep discount to opening day prices.

Clean Up Your Numbers Before You Come Knocking: Continuing with the buyer’s market theme, let’s make an analogy to real estate. In a hot seller’s market, one can list a home with ugly pink bathroom tiles and still get multiple good offers in a few days. In a buyer’s market, it might sit for a while, and even interested buyers might demand a discount or some upgrades.

In recent months, public market investors have seen a lot of IPO filings with the financial equivalents of ugly pink bathroom tile. This includes things like meager growth coupled with massive losses, obfuscatory financial statements, a shrinking market, and even the ability to post negative gross margins while charging several dollars for a cup of coffee.

Now, we’re not in a full-on buyer’s market at the moment. U.S. indexes are still trading near multi-year highs, the IPO window is open, and public investors are looking for new growth stories. But while some balance sheet ugliness remains tolerable, do expect public investors to demand a discount.

Software Multiples Require Software Margins: This last point has been echoed by several in the venture business, and it makes sense. The unicorn boom has been replete with companies that pursued some of hybrid software-meets-real-world business model. There’s Uber – offering an app for the labor-intensive tasks of driving people and delivering their food. There’s – boosting returns on exercise equipment by adding connectivity and subscription classes. And so on.

Of course, there’s nothing wrong with hybrid models. Their revenue multiples, however, can’t be expected to compare to say, a SaaS company that incurs little-to-no cost for each additional customer. Markets are in the process of sorting out just what kinds of multiples these hybrid models should command. Early indications are they’re reasonable compared to non-software sectors, but not the lofty multiples venture investors originally targeted.

Losing Control Of The Narrative

Looking at the emerging standards of public market investors, a casual observer might say they seem pretty sensible.

For the unicorn private investor crowd, however, it’s a more ominous development than it seems. That’s because the entire unicorn phenomenon – the philosophy of scale fast and break things, the , scooters everywhere, massive losses, Adam Neumann – is predicated on being the opposite of sensible. The broad goal behind all of high-valuation startup dealmaking is to hopefully back that handful of entrepreneurs just crazy enough to be brilliant.

For now, expect the startup crowd to talk about how a successful bar investment now includes selling some drinks, preferably at more than it costs to pour them. To anyone not in Silicon Valley, this would sound perfectly normal. But for the venture crowd, it’s a far cry from big crowds and empty glasses.

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According to a , publicly-traded ride-hailing company is working to invest in building an ads business inside of , its food-delivery service. The move, TechCrunch notes, comes after Uber Eats allowed restaurants to offer discounts in exchange for better placement inside of the application itself.

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While an advertising business inside of Eats makes good sense for Uber, in our view, it is better understood from a profit perspective than from a growth orientation one. What’s more, the move underscores the fact that while Uber has scaled Eats quickly, the service’s losses have grown as well (more from Uber’s Q3 earnings here). If the ads experiment goes well for Uber, expect to see yet-private, on-demand companies also pursue similar monetization methods.

From the consumer perspective, don’t expect on-demand services to become cheaper; expect them instead to look for new sources of topline to staunch losses. Let’s explore the Uber example.

Uber Eats

Uber Eats is a quickly-growing portion of the larger Uber business. In the last quarter, Uber Eats pulled in $3.7 billion in gross bookings, representing a 73 percent increase year-over-year. Its revenue grew 64 percent year-over-year to $645 million and its adjusted net revenue also grew 105 percent to $392 million. Across most metrics, Uber Eats was the second-fastest-growing segment of the company in percentage terms, coming in only behind Freight. That makes sense, as Freight is a less mature division at Uber and therefore one growing from a smaller revenue base.

In the quarter, Uber Eats accounted for 22 percent of Uber’s total gross bookings, compared to the year-ago quarter when it made up 16.6 percent. In the third quarter, Uber Eats made up 11 percent of the company’s adjusted net revenue, compared to last year when it made up 7.2 percent of the adjusted net revenue.

It’s clear that Uber Eats is important to Uber’s growth story, as it’s one of the fastest-growing segments in the company while competing in the hot market of food delivery. It makes sense that Uber would double-down on the service by helping make it more commercially viable.

That being said, Uber Eats is deeply unprofitable. It lost $316 million in adjusted EBITDA in the third quarter. For reference, Rides brought in $631 million in positive adjusted EBITDA during the same period.

Uber Eats is a key driver of growth for the company while also a source of more red ink than Uber can stomach. The good is therefore also bad for Uber, a firm that very much wants to be valued on growth and not, say, GAAP profits. It’s stuck, therefore, pursuing Eats for the sake of growth while also trying to reach for profitability.

Enter ads, a business that can layer revenue into the Eats mix, lessening pressure on Uber to raise fees or dig deeper into the coffers of restaurants to help its must-work food delivery service become a viable long-term business.

Uber has a lot of cash, yes, but it also needs to start generating more of the stuff in time. If it doesn’t, it was never a real company to begin with.

Illustration:��

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The company, part mobile phone operator and part investment maven, put together a roughly $100 billion vehicle with the Vision Fund, largely fueled by foreign dollars and fit with a complicated makeup. In the Vision Fund’s early days, it made rapid-fire bets into companies of all sorts, looking to deploy hundreds of millions or billions per wager. Some of the bets are performing well, some less so. Awkward for SoftBank and its funded vision of taking huge stakes in some of the world’s most famous companies, it’s precisely those bets that have proved troublesome.

The Vision Fund put money into , for example, in a complicated transaction that has since lost value. Vision Fund money helped turn into the mess detailed in its S-1, only to, now, take a writedown on the cumulative investment. The Vision Fund also put money into , which has seen its value drop as the public markets’ enthusiasm for its long-term growth story, it seems, has slowed.

Notably, the Vision Fund is up from its base figure of invested capital, something that might come as a surprise. However, the recent issues with some Vision Fund bets has come home to roost in the form of negative earnings. And while the Vision Fund has made money on paper in aggregate and its future sibling one sits somewhere on the horizon, it wasn’t a good quarter for SoftBank.

Results

If you haven’t , here are the toplines that we care about from the corporate reports you can find , and :

• SoftBank, apart from the Vision Fund and its smaller companion fund (the Delta Fund), made money, including operating income of 265.9 billion Yen in Q2, and 557.1 billion Yen in H1 as a whole.
• Inclusive of the Vision Fund and Delta Fund’s results, the company’s Q2 operating income came to -704.4 billion Yen after a 970.03 billion Yen operating loss from the Vision and Delta Funds.
• What drove those huge losses? “Unrealized gain and loss on valuation of investments” of 982.2 billion Yen in the second quarter.
• What drove the unrealized losses? According to the company: “Loss from financial instruments at FVTPL (net) of ¥351.8 billion*; reflecting a valuation loss of ¥374.7 billion recorded for the investment in WeWork held by a wholly owned subsidiary of the Company.”��Or more simply: WeWork.
• More clearly, SoftBank states that following “WeWork’s business plan was revised significantly” the company “fair value of WeWork’s entire equity decreased to $7.8 billion as of the second quarter-end, and consequently the changes in the fair value of investments held by the Company’s wholly owned subsidiary and SoftBank Vision Fund were recorded as a loss in the second quarter.”

In dollars, SoftBank lost $6.5 billion in the quarter, including a $4.6 billion charge relating to the value of WeWork, who executed the currency conversions. All told the Vision Fund took .

That’s all pretty bad, but expectedly so. No one really thought SoftBank would be able to avoid a huge writedown regarding WeWork. It was always going to happen.

But if we knew all this was coming, why are we going over the bad news in detail? Partially because we’re living through a business case that’s among the most fascinating ever written. And because we should note the other side of the coin, the fact that the Vision Fund’s investments (a full list is on ) are doing kinda ok. Here’s the company, noting their performance, and underscoring its hope that the Vision Fund 2 will launch:

From $70.7 billion to $77.6 billion is about 10 percent. That’s not bad given the issues we’ve seen in some of the portfolio’s investments. I do not want to say that Vision Fund is doing fine and that the Vision Fund 2 is definitely coming; I don’t know enough to say that. But if SoftBank can tell people that even with a mistake like WeWork it can still generate returns, perhaps the Vision Fund 2 will launch after all.

Illustration: .

and represent enormous bets by venture capitalists and other private investors, wagers that the companies hit on a new sort of service that could not only generate tens of billions of dollars in global use but also, in time, profits.

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However, in the period after the two companies went public this year their share prices have struggled under the weight of slower-than-expected growth, and sharp, unrelenting unprofitably. Lyft and �������’s reported results changed the narrative surrounding the unicorns, shifting the public’s perception of the companies from impressive upstarts to expensive question marks.��

The struggles of Lyft and Uber as public companies made related, yet-private companies like , , and even seem like less-than-likely IPO candidates. The market reception that first Lyft, and, later, Uber received also has the potential to chill private market investment into on-demand companies more broadly.

But things have improved in the last few weeks for the two ride-hailing giants, at least in terms of operating results. Each company put a stake in the ground regarding future profitability, and their recent results came in ahead of expectations.��

Let’s examine the market reaction to all the news, and tie it back to the private companies who won’t be able to accept Uber and Lyft being their comps if and when they try to go public themselves.

Lyft

In late October, Lyft promised investors and the technology community at large that it would generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the final quarter of 2021. Its shares rose.

A week later the company , including quick revenue growth ($955.6 million, up 63 percent from $585.0 million), expanding losses ($463.5 million, up 86 percent from $249.2 million), and improving adjusted losses ($121.6 million, down 50 percent from $245.3 million).

The results , with adjusted losses per share coming in 9 cents per share better than expected ($1.57 per share instead of $1.66). Revenue also beat the $915 million street expectation.

Lyft also raised its Q4 revenue and 2018 revenue guidance, saying that it expects Q4 revenue to be between $975 million and $985 million, and revenue growth to be between 46 percent and 47 percent year-over-year. For its 2019 revenue guidance, Lyft said it expects to be between $3.57 billion and $3.58 billion, up from between $3.47 billion and $3.5 billion. Its annual revenue growth rate is also expected to be 66 percent, up from between 61 percent and 62 percent.

After rising some in the wake of the its adjusted profitability promise, the company’s shares have fallen since its earnings report. A good question is why. But before we try to answer that, let’s look at Uber.

Uber

This week Uber . As Uber is a more global company, and as it has more business lines than Lyft, it’s results are harder to parse out. So, let’s get ourselves a summary and then devote ourselves to the details.��

The first thing to know is that Uber made a similar profit promise during its earnings call. Namely that Uber will generate full-year adjusted EBITDA in 2021. That’s better than Lyft’s claim of reaching positive adjusted EBITDA by Q4 of the same year.

Let’s look at Q3. Here are :

Revenues of $3.8 billion were better than the $3.7 billion expected, up 30 percent year over year. And looking at the bottom line, the net loss of $1.1 billion included $400 million in stock-based compensation. The total net loss came in at 68 cents a share, better, in fact, than the 81 cents a share loss expected by the Street.��

Along with beating expectations, the company also drew a better picture of its full-year results. �������’s full-year profitability has improved, and it’s promising to see that its losses aren’t as bad as expected.

Very simple, and very clean to understand, right? Kinda. �������’s business is a mix of growth-y unprofitable revenue and slower-growth, more lucrative top line. Let’s quickly examine each of �������’s newly demarcated revenue segments:

• Rides: $12.6 billion in gross bookings (+20 percent, YoY), $2.9 billion in resulting adjusted net revenue (+23 percent YoY), and $631 million of adjusted EBITDA (+52 percent YoY).
• Eats: $3.7 billion in gross bookings (+73 percent, YoY), $392 million in adjusted net revenue (+105 percent, YoY), and negative $316 million of adjusted EBITDA (-67 percent YoY).
• Freight: $223 million in gross bookings (+81 percent YoY), $218 million in adjusted net revenue (+78 percent YoY), and negative $81 million of adjusted EBITDA (-161 percent YoY).
• Other Bets: $30 million in gross bookings, $38 million in adjusted net revenue, and negative $72 million of EBITDA.
• ATG and Other Technology Programs: $17 million in adjusted net revenue and negative $124 million of EBITDA (+6 percent YoY).

From this perspective we can see that �������’s core business (Rides being 76 percent of its revenue) generates quite a lot of adjusted profit. Enough, indeed, for Uber to claim that the sum “fully cover[s] Corporate G&A and Platform R&D” costs. That’s quite good!

What is less good is that as we’ve seen, Eats turns growing gross bookings into sharply negative (and worsening) adjusted EBITDA. Why does Uber invest in Eats, if the business is so unprofitable? Growth.

Uber has long been valued on growth. Sans Eats, �������’s growth rate is slow and its GAAP losses sticky. You can’t grow 20 percent year-over-year, give or take, and lose $1.16 billion in a quarter (30 percent of GAAP revenue). It’s too much. So, Uber needs a growth business, and thus Eats is a priority. And, therefore, the company’s adjusted EBITDA will remain negative for years to come as Uber endures longer losses to allow for greater revenue growth.

Dilution

It’s easy to forget how rich the two companies are in the shadow of their losses. Uber reported “[u]nrestricted cash and cash equivalents were $12.7 billion” at the end of Q3. Lyft’s tally is over the $3 billion mark at the same point in time.

The firms can therefore self-fund for ages; there’s little risk of either company running out of cash. To make that clearer, let’s examine the companies’ Q3 operating cash flow. Uber had $878 million in negative Q3 operating cash flow, giving it years of room to run, for example.

The question then becomes why Lyft and Uber are trading down now, just as the two companies are promising future profits and pushing their forecasts up. Two reasons, I think. First, it’s clear that the companies’ GAAP losses ($463.5 million in Q3 from Lyft, $1.16 billion in Q3 for Uber) are going to continue for the foreseeable future; neither company has made a commitment to staunching its GAAP red ink.��

Continuing, a big piece of each GAAP net loss figure is share-based compensation, telling public market investors that every quarter when Lyft and Uber report adjusted profit, they are looking past a lot of dilution to get to the better-seeming figure.��

Secondly, because it’s a little clearer than before that Uber and Lyft’s long-term estimates of 20 to 25 percent adjusted EBITDA margins are probably just about right. That means that the company’s future multiples will only be so high.

Today, according to , data, Lyft’s trailing revenue multiple before trading began was 2.9, while �������’s came in at 3.7. Those ratios probably don’t have much space to climb over time; investors looking for a bet with a higher chance at multiples expansion would therefore covet companies with higher gross, and profit-margins.

Throw in slowing revenue growth as the two firms continue to scale and you find a mix that isn’t as exciting as the firms were when they were fast-growing upstarts.��

One last thought. We’re seeing Lyft tout its product focus and slimmer losses as advantages. And Uber is putting its money into other businesses and a global presence. We don’t know which method will prove more long-term lucrative, but we’re seeing two divergent bets on the ride-hailing market harden around their differences. It’s going to be a very exciting few years.

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