Is The Mobile Bubble Getting Ready To Burst (For Real This Time)

It’s hard to imagine what exactly it was about tulips that drove the sort of mania where a single prime bulb was worth 10 times the annual salary of a skilled craftsmen.

It’s equally hard to get into the mindset of a dotcom bubble investor who looked at — a firm that lost money on every single sale and spectacularly imploded 258 days after going public — and thought “this is a good place to invest tens of millions of dollars.”

And, in fact, one could do this sort of Monday morning quarterbacking for most of history’s more famous bubbles. Hindsight is always 20/20; in retrospect, there always seems like there was some kind of logical question that one could have asked at the outset that would have exposed the (much later) obvious fallacy of the bubble in the making.

From the inside, however, the froth of the bubbly often masks the irrational exuberance — until the froth is no more.

Which bring us to that ever-expanding herd of unicorn startups grazing the lush mobile startup fields made very green by VC dollars.

From ride-sharing, to delivery, to service on demand, the mobile economy has been minting billion-dollar businesses at a rate so astonishing that the experts are becoming concerned that it may be just a little too astonishing.

“It’s a high-stakes game of Russian roulette,” Tom Taulli, a mergers-and-acquisitions consultant in Los Angeles, told Bloomberg. “A couple of VCs are going to win, and many VCs are going to lose. And that’s going to eventually shrink the funding into mobile and other areas.”

Predictions of death and destruction are not new, nor is this the first time bubble talk has started. Is it different this time? Well, it depends on who you ask.


Thus spoke Rajeev Chand, managing director and head of research at Rutberg & Co. LLC.

“There’s way too much money going into mobile delivery companies. The economics are fundamentally not sustainable.”

It’s not that mobile players shouldn’t be funded, Chand notes, just that the sheer volume of the funding is untethered to any rational evaluation criteria. Firms that, a short time ago, would have been pushing forward with $8 million and $10 million rounds are now capturing north of $50 million.

And those big rounds are netting big valuations. There are almost 90 mobile startups with valuations north of $1 billion — a figure that has swelled by one-third in the last eight months alone.

And that growth can’t all fairly be called irrational exuberance. In a very real and quantifiable sense, the digital marketplace has gotten much larger. The global mobile Web — most accessed by smartphones — in 2014 was 30 times the size of the entire Internet in the year 2000. The rush to monetize all of that new digital real estate has powered every imaginable variation of mobile business — buying, selling, scanning, shopping, comparing prices, finding new products, calling a cab, ordering groceries, finding vintage evening wear, getting hooch delivered, making dinner reservations, reserving a bar stool, getting pet presents delivered once a month — and that’s just a footnote to the list of all the mobile startups that PYMNTS has covered in the last three months alone.

That rush for digital gold has created a lot of spending. The 90 or so mobile startup unicorns have a collective value of $800 billion, according to Digi-Capital. In the last 12 months alone, investors have dropped over $50 billion into mobile.

Whoa, Momma.

But putting money into something is easy. It’s the getting it out (and more than was first put in) part where it gets tricky.

The Long Road To Cash Out

The problem with high-value startups is common to all high-cost items on the marketplace: They are harder to sell. And some of that difficulty is already being seen as those very generous investors are starting to try to take their money back out, and they are finding that it is taking longer than they might like.

According to Bloomberg, the ratio of mobile Internet exits — startups that are either sold or go public — to investments isn’t what it used to be. With the exception of one deal over the past six quarters, that ratio has consistently declined, according to Digi-Capital.

That outlier was Facebook’s acquisition of WhatsApp for $22 billion.

Unicorns, according to Matt Murphy, a managing director at Menlo Ventures, used to be rather rare — a “ten-in-a-decade” type of thing. In that environment, investors expect to see their money back within 5–7 years. In the current, far more saturated and expensive environment, that figure could expand by 2–3 years and not with the same level of return.

The problem is particularly pointed for late-stage investing firms who buy in bigger later in the game. Tom Taulli estimates that such firms could see their investment return drop by 25 percent in two years.

Before Hitting That Panic Button

“I do think you’ll see some dead unicorns this year.”

If that sounds familiar, think back to SXSW earlier this year, when tech investor Bill Gurley grabbed some headlines with that quote about the coming bubble burst.

Predicting the oncoming decline and fall of the mobile bubble has been in fashion since early 2015, with periodic swells in a chorus about how investors could not keep pouring so much into the mobile economy.

That would be the same time period that the number of unicorns has grown by a third.

“People are not going to cease to invest now because there’s a shortage of exits,” said Benedict Evans, a partner at venture firm Andreessen Horowitz in Menlo Park, California. “Yes, you have to think about how you are going to get liquidity from that. There are worse problems to have.”

Well, you know what they say. The quickest path to a billion is to have 2 billion and lose half.

For now there seems to be no easy answer in sight, though the rubber may well hit the road in the next several months with some very high-profile IPOs expected from Uber, Square and Snapchat.

“If one or two of these will evaporate, that’s going to create a lot of fear in the market,” Taulli said. “I see few signs that the IPO market is going to accommodate many heavy-losing companies with inflated valuations.”

And there is some evidence that IPOs are facing a slowdown. Genetic testmaker RainDance Technologies shelved plans for an initial public offering for roughly $60 million, an event that had been anticipated since its winter 2015 filing with the Securities and Exchange Commission. The reason cited? “Adverse market conditions.” There were no indications that the company will be looking to return to the public markets anytime soon.

So what’s next for all those mobile startups with big price tags and a marketplace maybe less than interested in paying retail for them?

PYMNTS will keep you posted.

Will It Be A September For Investment Tracker To Remember?

Let’s call it a late summer thaw.

August investment activity slowed to a glacial pace in the waning weeks of the month, but September showed some pickup, as the first week brought in a bit more than $1 billion in investment activity. That far outpaces the couple of hundred million dollar average weeks we saw recently.

The biggest news of the week, of course, came heading into the Labor Day weekend, when BlackBerry, that beleaguered smartphone company, said it would buy Good Technology for $425 million. That deal, according to the financial trade press, aims to wrap up in 2016 and strategically would help BlackBerry push its presence onto additional mobile platforms, most notably Apple’s. Roughly two-thirds of Good Technology’s mobile device management and other features are deployed across Apple’s iOS platform; the remainder is tied to Android.

The next biggest deal in the week: Mogo Finance Technology grabbed a $200 million credit facility from Fortress Credit Co. The company’s new revolving credit pact will be used to fund consumer installment loans up to $35,000 and that in turn is tied to the MogoLiquid platform. Mogo Finance has touted its algorithms as a methodology to help take credit scoring beyond the traditional risk model.

And in a nod to cybersecurity firms still getting interest (and funding) from investors, Tanium said it got $120 million in funding, less than six months after raising $52 million. That doubles the implied valuation of the company to $3.5 billion.

Finally, rounding out the “triple-digit” members of the past week’s investment activity, the Software-as-a-Service firm Apttus, focused on sale automation, raised $108 million in Series C financing, which was a round led by the Kuwait Investment Authority and carries a valuation of about $1 billion. Below is a table summarizing the top five investments of the week.

Broadly speaking, the FinTech industry dominated the first week of September, with 80 percent of investments through Sept. 4 and about $845 million in terms of dollar contribution. See below.

Despite the bulk of the week’s firepower coming from the FinTech sector, we can see that overall activity has dropped off sharply, with the rolling average falling rather sharply from a $400 million (total) tally, excluding large deals, to only slightly more than $200 million. It may not be coincidental that the sharp drop coincides with the market slide — in China and beyond — that hit over the summer, perhaps giving investors’ trigger fingers pause.

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