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Pandemic tech bubbles echo those of the dotcom era

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Do you remember when $100bn was a lot of money? Twenty years ago, at the height of the dotcom bubble, that was how much was poured into venture capital investments in a single year. It was five times the amount seen two years before, and five times as much as two years later.

It turned out that much cash could not be forced into start-ups without a business model, and most of the money was lost. Another $42bn went into tech initial public offerings. Many of these were from revenue-less companies that would not have had a hope of making it to the public markets in normal times.

Compare that with what has now become a series of bubbles in and around the tech industry. These have found different forms in the likes of IPOs, initial coin offerings, Bitcoin and Tesla. But it is not hard to find the common denominators: The hunt for growth in an investment world awash with cash, and the kind of fear of missing out — or “fomo” — that takes hold at such times.

One clear echo of the dotcom bubble has come from the rise of the special purpose acquisition companies, or Spacs. The companies raise funds and then go in search of acquisitions. As in the dotcom era, much of the Spac money is finding its way into early-stage ventures, making this the first time since the start of the century that a channel has opened up to take a larger number of revenue-less companies to the public markets. “Auto-tech” start-ups are a particular favourite.

Nikola, which came to market after an acquisition by a Spac, has been the starkest example. The hydrogen-powered truck company had losses of $117m in the latest quarter and no revenues. Yet it rose to a market value of $25bn in the middle of last year. And despite the resignation of its chief executive and General Motors’ decision to scrap a planned $2bn partnership with the company, it is still valued at more than $6bn.

The race to raise cash last year has left Spacs with $70bn of firepower, according to Goldman Sachs. Given the way they structure their deals, that equates to future acquisitions worth $300bn. If the deals are not all crammed into the next two years, then that money has to be handed back to investors, creating classic incentives for a bubble.

There are other parallels with the dotcom period. In promising new tech markets, it is common for a winner-take-all mentality to take hold, points out Charles Giancarlo, a veteran Silicon Valley executive. Investors fail to imagine how competition will develop. The cloud software industry — where companies like Zoom have thrived — is full of supposed “category killers”, companies with a specialised service expected to dominate a global niche. The index of “emerging” cloud software companies on Nasdaq has risen around 150 per cent from its low point at the start of the pandemic, valuing the companies at $1.8tn.

Behind all this is the sheer weight of money looking for a home. The public markets offer few growth opportunities. The traditional venture capital industry cannot handle the weight of money, leading to a rash of experimentation in recent years. This included sales of digital tokens, or ICOs, made by cryptocurrency projects. These crowd-fundings by classic revenue-less software start-ups pulled in $20bn.

IPO investors have also made a belated bid to join the party. Going public fell out of fashion for an entire generation of tech start-ups. But the initial share price spikes at DoorDash and Airbnb last month show that the IPO speculators are back out in force.

To avoid the mania, gaming company Roblox has just scrapped its IPO for a quieter backdoor route to the market through a direct listing. But it still raised some extra cash in a deal that valued it at $29.5bn, or seven times what it was judged to be worth in a fundraising less than a year ago.

Much like squeezing a balloon full of water, the excess cash in the system is causing bulges that are becoming impossible to suppress. Consider two that have transfixed speculators.

The market value of all outstanding bitcoin has risen $580bn since the start of last year, hitting a new record this week of more than $700bn. That closely matches the trajectory of Tesla: the electric car maker has added $670bn in market cap in the same period, and is now valued at $750bn.

Tesla may one day dominate a global electric car market, and bitcoin may become a permanent fixture in the world of digital money. But as each soars towards $1tn, they look like the clearest examples of the pandemic era’s spreading financial bubbles.

richard.waters@ft.com



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IPOs / FFOs

Krispy Kreme: sugary valuation piles on the dollars

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Krispy Kreme declares in its listing prospectus that its purpose is to “touch and enhance lives” through doughnuts. Investors who consider swallowing this richly valued offering risk financial heartburn instead. For a fried dough merchant Krispy Kreme does not make a lot of dough.

The Charlotte-based company, which operates more than 1,700 shops in the US and overseas, is planning to sell almost 27m shares for $21 to $24 apiece. At the top end of the range, this values Krispy Kreme’s equity at almost $3.9bn. Throw in total debt of $1.2bn and the enterprise value is 35 times last year’s adjusted ebitda. 

This is a valuation as sickly sweet as a chocolate-iced custard filled doughnut. Inspire Brands paid 24 times for rival doughnut chain Dunkin’ Brands in October. Unlike lossmaking Krispy Kreme, Dunkin’ is consistently profitable.

Owner JAB Holding will try to drum up investor enthusiasm by fixing their gaze on Krispy Kreme’s sales growth. Revenue grew 17 per cent last year to top $1bn. But so did the tide of red ink. The company made a net loss of $64m in 2020, up from $37m in 2019 and $14m in 2018. Costs related to buying back franchises are partly to blame. But if Krispy Kreme has not been able to make a profit from selling sugary pastries in the past three years there is no reason to expect a sudden turnround.

It makes sense that JAB would want to cash in some of its stake now. The US initial public offering market is red-hot. Companies have already raised $70.6bn since the beginning of the year, a record start, according to Refinitiv. After taking Krispy Kreme private in 2016 for $1.35bn, JAB will continue to own almost 78 per cent of the company’s shares after the IPO. 

This is less tempting for investors. With salad chain Sweetgreen and coffee purveyor Dutch Bros also readying to go public, there are plenty of other opportunities to invest in America’s growing appetite.

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Nordgold pulls planned London listing

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Russian gold miner Nordgold has pulled its plan to list in London just two weeks after its announcement, citing volatility in the price of the precious metal.

Nordgold said on Tuesday it would “not be sensible to pursue an IPO at this particular juncture”, following a 6 per cent drop in the gold price since the company announced its intentions on June 3.

The miner, which is owned by the family of billionaire Alexei Mordashov, had planned to sell a 25 per cent stake to investors, including via a secondary listing in Moscow. The company held meetings with 220 investors, according to one person familiar with the deal.

Mordashov had targeted inclusion in the FTSE 100 index and his family were set to make about £1bn from the listing. There was a “strong appetite for gold stocks in the market, also gold stocks from Russia”, he told the Financial Times on announcing the London listing plans.

But the announcement last week by the Federal Reserve that it may raise interest rates in 2023 dented investor enthusiasm for gold, according to the company.

“Recent central bank comments indicating an acceleration in expected interest rate rises have created significant uncertainty and volatility in the resources sector, in particular impacting gold and gold equities,” Nikolai Zelenski, Nordgold chief executive, said in a statement.

Nordgold has nine mines — four in Russia, three in Burkina Faso and one each in Guinea and Kazakhstan. It produces more than 1m ounces of gold a year and reported earnings before interest, tax, depreciation and amortisation in excess of $1bn last year.

Nordgold was previously listed in London but left the exchange in 2017. “We delisted the company always with an intention to float it again under favourable conditions,” Mordashov said in an interview with the FT this month.

Nordgold had hoped to attract investors by paying higher dividends than its peers in North America. It is developing two new gold mines in the Far East of Russia, which will help it boost production by an expected 20 per cent over the next five years.

In contrast, production at the world’s largest gold miner, Newmont, is set to remain roughly flat until 2025.

Nordgold was only planning to sell existing shares and not raise any capital in the listing, which means it can wait for a better listing window, according to people familiar with the deal.

Many investors believe the Fed is in control of inflation and that they do not need gold as a hedge in their portfolio, according to people with knowledge of Nordgold’s listing plans.

Since the Fed’s comments, shares in gold miners as measured by the NYSE Arca Gold Bugs index have fallen 9 per cent.

Shares in Canadian gold miner Endeavour Mining have fallen 4 per cent since the company listed in London last week.



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Soho House owner files for New York flotation

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The owner of Soho House, the private members’ club, has filed for an initial public offering, as the company seeks to tap into investors’ growing interest in leisure stocks.

Membership Collective Group, which owns 28 Soho Houses worldwide among other properties and a retail brand, said on Monday that it plans to list its shares on the New York Stock Exchange under the ticker “MCG”.

The company said in a filing with the Securities and Exchange Commission that it intends to raise $100m, a figure that is often used as a place holder for calculating registration fees. It has yet to determine the number of shares it will offer or a price range for those shares.

A rebound in travel and dining demand heading into summer, bolstered by vaccinations against Covid-19, has stoked speculation that MCG will target a valuation greater than the $2bn marker set in a $100m funding round last year.

The hospitality group, backed by US billionaire Ron Burkle, said its membership numbers held steady through the pandemic. It retained 92 per cent of Soho House members in the 2020 financial year and received more than 30,000 applications for its membership brands, according to the S-1 filing.

Revenues in the first quarter of this year totalled $72m, down from $142m in the same period a year earlier. It also reported a net loss of $93m, compared with a $45m loss in 2020.



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