Dollar Shave Club sold for $1 billion, marking the beginning of the "tech-enabled" startup apocalypse.
Last year I wrote about why I think venture capital valuations are out of control, using a recent investment round in Dollar Shave Club to make a point. I argued that their $615 million valuation was absurd, and that they were the poster child for over-valued "tech-enabled" startups everywhere.
I guess I was wrong. Last week Unilever bought Dollar Shave Club for $1 billion. Those investors that I mocked made a 63% return on their money in just one year.
Well, now I'm back to double down and defend my position. I still think that valuations are too high and that Unilever paid too much. Here's why:
A 6x-7x multiple on sales is very high
Regardless of the industry, a sales multiple that high is almost unheard of, and the 5x forward multiple on sales that was often quoted by the media doesn't make it much better.
Dollar Shave club is not a tech company and shouldn't be valued like one
Dollar Shave Club is a subscription box service. They were originally just a middleman selling cheap Korean razors. Now they have some of their own products, and ultimately their success will be tied to the success of those products. Which makes them no different than any other consumer goods company. So why are they being valued like a tech company?
Yes, they use the internet to sell their product. But so does everyone else. Don't mistake "tech-enabled" companies for technology companies. Technology companies receive higher valuations because they often produce products that didn't exist and, in doing so, create new markets. Dollar Shave Club sells razors and cosmetic products; this is not a new market.
Dollar Shave Club is still unprofitable
Yes, yes, I know. Many young, fast-growing companies are unprofitable. And if you assume that a company is investing wisely into future growth, then being unprofitable can be okay.
But I don't think Dollar Shave Club is necessarily investing wisely in the future. Assuming they are operationally profitable (which I'm not even sure of), they're spending close to $200 million annually. Where's it going? Here's a few possibilities:
- People. No doubt they've hired more people. But unfortunately, this doesn't have the same impact as it would for a tech company, where talent and intellectual property are key drivers of value.
- Manufacturing. To my knowledge, they haven't built their own manufacturing facilities (unlike their competitors), but I could be wrong.
- Marketing. I'm sure a lot of it is marketing expense, but this is the company that supposedly "pioneered" cheap viral video marketing, so it's counter-intuitive that they'd be spending a ton of money on ads.
- Product R&D. Perhaps they are putting a lot of money into developing new products. But once again, this would make them no different from any other consumer goods company. And those companies don't receive valuation multiples this high.
Profits may not be viewed as essential in a company's early years, but Unilever needs Dollar Shave Club to eventually turn a large enough profit to justify the purchase price. I just don't see how that happens without fundamentally changing their business model.
M&A activity is at its highest level since before the crash in 2007. While there isn't a direct cause and effect, it's certainly something to be cognizant of and cautious about.
It seems to me like the influence of tech M&A is spilling over into other industries, leading to a pattern of over-valuation. You can liken this to back in 1998 when anything remotely tech-related (i.e., pets.com) received crazy high valuations.
If I'm right, then at some point within the next few years valuations will come crashing back down to Earth.
If I'm wrong, well then who cares? That's the beauty about apocalyptic predictions like this.
Do you think the VC-driven, "tech-enabled" startup apocalypse is coming? Think the bubble will burst? Let me know on Twitter @cschidle.