Dan Lyons on Unicorns and the Investors Who (Probably Shouldn't) Love Them

September 29, 2016   Amanda Cantrell

The author of Disrupted explains why he feels many pre-IPO tech companies--several of which are popular with hedge funds--are way overvalued.

   Dan Lyons

Dan Lyons knows disruption. After spending decades as a tech reporter, eventually landing a plum position as a technology editor at Newsweek, in 2012, Lyons suddenly found himself out of a job at age 51 when the magazine eliminated his position. A father of two young children and the sole breadwinner of his family, Lyons decided, having spent a career chronicling the absurd fortunes of dot-com employees, to follow the money. He ditched journalism to take a job in marketing at a then-fledgling start-up, HubSpot, which makes inbound marketing and sales software. But almost from the moment he arrived, Lyons sensed he was a bad fit for HubSpot, which he found deeply dysfunctional, at best — and at worst, indicative of bigger problems with technology start-ups in general. Lyons tells Alpha why he’s more skeptical than ever of the valuations of many pre-IPO tech companies, some of which have become popular investments with hedge funds in recent years.

Q. You wrote that many of today’s tech start-ups don’t even have products behind them. Why is that?

A. My take on how it works was shaped by the early companies I covered. Compaq was created to build basically an IBM clone computer. Microsoft started off with a product, and so did Apple. Oracle’s Larry Ellison had the idea that you could build a company on a relational database; it started with a product. I think there are companies now that raise money that start with just the team, and they’re often just trying to figure out what the product is. They don’t even really know what the product is, and it’s fairly protean — in the early days, at least. That’s not the same thing as having a product and then doing a pivot. I mean there are companies that start really not knowing or caring what they’re going to make.

Q. What else do you find troubling about today’s start-ups?

A. Another thing that I’ve found interesting is this disregard for profit. I don’t know if I’m just the old Grampa Simpson guy shaking my fist and yelling at clouds or if the old rules do still apply and profit still does matter. Ultimately, you need to make a profit. I don’t tend to get into arguments with people on Twitter, but I certainly have seen the pro–Silicon Valley argument, which is that, "Oh no, you’re just stupid and naive and you don’t get it. These guys are investing in growth in the future and blah, blah, blah."

Q. Why are these companies raising so much money?

A. Because there’s just so much money floating around now looking for a home. It’s upside down from 20, 30 years ago, when you had more people looking for money than there was money. Now you have more money than there are ideas. So you have people looking to park money in any place they can. Now you find a team that has a track record in a previous company and think, "Well, that’s good enough; I’ll put money in them."

Q. If we’re truly in a bubble, when is it going to burst, and what happens then?

A. The thing I find fascinating is this time around a lot of companies haven’t gone public, or they’ve done late-stage [pre-IPO fundraising] — I don’t know who comes in, if it’s a Fidelity or a T. Rowe Price. The interesting thing this time is the amounts are so big and you don’t really know who’s holding the bag.

I watched The Big Short, and it’s kind of like that in the sense that you know all this money’s been put into these companies that aren’t really worth what anyone had said they were. And yet you don’t know who invested. It’s all kind of private and secret. It’s this big shadow bubble where you don’t know who’s committed to what. I feel like someone’s going to get stuck holding the bag. I just don’t know who.

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