Given the disappointing performances of Uber and Lyft after their recent public market debuts, investors have extra reason to be wary of the high valuations that such so-called unicorns currently command.
That includes family offices, many of whose representatives gathered on Monday for AsianInvestor’s latest Family Office Forum in Hong Kong.
Unicorn valuations are being driven by capital raised from the likes of sovereign wealth funds and pension funds but they are expanding without necessarily knowing what the “end game” will be, Conrad Tsang, founder and chairman of Strategic Year Holdings, warned delegates.
He cited the example of Beyond Meat, a plant-based meat producer in Los Angeles, which at one point traded at 60 times its 2018 revenue and has seen its shares more treble in price so far this month.
“If you are a private investor going in at series A, it's good,” he said, but many of these companies might not yet end up as good investments even if they start off with good products and ideas.
Tsang likened in to the dot-com bubble of 20 years ago.
“There were a lot of companies that are like they are today – profit doesn't matter, no earnings, just a dream you buy. A lot of people burst it; some people survived,” he said. “If you invest a company back then and it becomes Amazon today that's fine.”
But Steven Cohen, founder of multi-family office Steven J Cohen CFA, said that there are still certain themes investors can follow.
Using Amazon as an example, Cohen said that even though it didn't make enough a profit for 20 years, it had the means to survive the hype because it was backed by a “big demand”.
In Tsang’s private equity programme, he said that they invest in earliest-stage companies, ranging from series A to series C rounds of funding, and that he tries to build them into value-added assets.
“Those are companies that are generally younger, less well-known, but we look at the team, we look at the business model and we get involved with their strategies, with their operations and roll our sleeves up,” he said.
As an early-stage investor, “[our role is] half a business development director plus half [chief financial officer].”
With markets becoming more volatile, trade tensions rising, and company valuations becoming more stretched, Tsang also also offered the audience some investment advice.
“If you are investing into any corporates, whether it be public equity, private equity, debt or things like that, my suggestion would be to focus on more defensive sectors or impact sectors, like education,” Tsang said.
There are opportunities still on the venture capital side too in China, even as the US steps up its efforts to limit Chinese access to US technology.
For family offices planning to invest in venture capital in China, the “basic layer of technologies” such as semiconductors will present interesting investment opportunities, he said. "This is something that the Chinese government wants and if Chinese want to reduce reliance on US or other technology, that's the way to go.”