The listing of ride-hailing giant Uber is perhaps the most anticipated initial public offering of the year. But wiser owls of the investing world are asking a different question: Does the Uber listing mark peak venture capital?

The numbers are all speculative at this stage, but the theory is that Uber might be valued on listing at $120-billion. That would mean the company would be trading at just less than twice the value of Volkswagen, four times the value of Ford, and more than twice the value even of Tesla, which itself seems at times to float on air.

Uber is in a race to list with its smaller rival Lyft, but for both companies the numbers are eye-popping, even by the standards of modern tech startups. The initial listing value for Lyft was estimated at about R18-billion. In fact it listed at $24-billion, about the same value as FiatChrysler.

The competing nature of the two start-ups and their race to the IPO line adds a twist to the familiar story of a loss-making new-wave company arriving on the public platform, only to steadily reduce its losses and explode into huge profitability on the back of the network effect, according to which the first mover gains the lion’s share of global revenue.

Recently, Jawad Mian, an investor and investment adviser based in the Middle East, published a long Twitter train which has formed the basis for some heated arguments in the investment world about the current state of venture capital. It must be said, Mian is something of a professional contrarian and, like many contrarians, he has been wrong some of the time.

But is he wrong this time?

The points he makes about venture capital are absorbing. Venture capital is the centre of this debate partly because when they go public, Lyft and Uber each will have raised more venture capital than any US startup that has ever gone public. Whether the markets generally are overvalued is a different argument, but the levels of venture capital funding are now extraordinary — so extraordinary they are attracting some critiques.

Mian notes:

“The AOL Time Warner merger in 2000 culminated in the tech crash, the Blackstone IPO in 2007 presaged the 2008 meltdown, and the Glencore listing in 2011 marked the peak in the commodity super-cycle. Uber, we believe, will mark the peak in Silicon Valley and tech valuations.”

The value of the Nasdaq, on which both Uber and Lyft will be listed, grew from around 1,000 points in 1995 to more than 5,000 in 2000 at the bubble peak. That mirrors the extreme jump in US unicorn valuations from $100-billion to about $500-billion in the past five years, he writes.

The median global VC deal size for late-stage companies was around $11-million in 2017, but now mega-rounds of $100-million-plus are more common.

“So much so that CB Insights (a company that monitors venture capital funding) is considering lifting its threshold of a mega-round to $200-million or more,” says Mian.

China is now home to 168 “unicorns” or recent startup companies worth more than $1-billion, worth a total $628-billion.

“It now takes just four years, on average, in China for a new company to achieve unicorn status compared to seven years in the US. In fact, nearly half of the Chinese unicorns became so just two years after launch.

So where is this money coming from? That is easy to answer. Mian says that because of quantitative easing – the unusual process of forcing debt interest rates below zero – capital has been abundant. But it had nowhere to go and be productive because the world was for a long time in a downturn. The scarce asset was “growth” and so it has created a bubble in the riskiest long-duration asset—venture-backed companies (VC’s).

VC companies are raising ever-larger funds at an increasing pace, despite a lack of viable opportunities. Sequoia Capital, a classic Silicon Valley venture capital fund which has invested in 250 companies since 1972 including Apple, Google, Oracle and the rest, recently raised $8-billion, largest ever by a US venture firm.

“It’s easier to raise money than any time I’ve been in the business,” said David Rubenstein, Co-Executive Chairman of The Carlyle Group, a private equity company.

That might be great for venture capital groups, but it doesn’t bode well for future returns, says Mian.

The problem with Mian’s argument is that it is been made some many times before, in different guises and in slightly different formats. But times have changed. The world has seen countless loss-making companies in the tech space listing, only to become behemoths. The most successful outlier has been Amazon which listed in 1997 for $18 a share, and it’s now trading around 11,000% higher. But Amazon only raised $8-million in venture capital before going public in 1997, when it posted a $31-million loss. Google raised $25-million and had a profit of $106-million in the year before its 2004 IPO.

Compare that to today’s numbers. Uber has been losing about $800-million per quarter. Lyft posted a loss of $911-million in 2018, more than any other US startup lost in the 12 months preceding its IPO, the Wall Street Journal has reported.

Lyft’s listing over the next week will test investor appetite for money-losing companies as never before. DM