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Axios Pro Rata

The age of unicorns may soon give way to the age of zombies.

Driving the news: These are startups that raised big cash at nosebleed prices over the past year, but which now will struggle to grow into their valuations.

They've likely got a few years of cash runway, so won't be taking new venture funding that would feel offensively dilutive.

The ultimate outcome could be a lot of private equity rollups, assuming the bulls are settling in for an extended hibernation.

"These zombie companies aren't going to shut down, because they're real businesses, and maybe they get extra time to figure some things out," says Justin Fishner-Wolfson, co-founder of 137 Ventures. "But they're not going to be worth anything to a lot of their [later-stage] investors, at least until the private equity guys show up."

For zombie companies, a big challenge will be maintaining morale among employees who’ve become accustomed to rising equity values. And in recruiting new talent when stock options are no longer a golden ticket.

There also could be some layoff waves, particularly if management teams based 2021 hiring on the assumption of 2022 VC raises at higher valuations.

For VCs, there could be some very tough talks with limited partners. Even though most venture funds don’t mark-to-market, there are enough crossover investors who do — and LPs pay attention.

The bottom line: Things have changed, and both sides of the startup funding equation must adapt to a new normal.

Many unicorn startups could become zombies

These are startups that raised big cash at huge prices over the past year, but which now will struggle to grow into their valuations.

Private equity

Stock market

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Private market investors might finally get to enjoy that thing known as summer vacation.

Between the lines: Deal activity has finally slowed down after years of frantic "up and to the right."

This doesn't feel like a short-term panic pause, like we experienced two years ago when the pandemic first hit. Namely because it began before Russia attacked Ukraine, which has served to throw more molasses on the tracks.

Venture capital: Recall that we (cautiously) called a startup valuation peak in mid-January, which so far has played out. That's led to fewer late-stage and expansion-stage deals, since many companies had been raising to take advantage of non-dilutive financing.

Private equity: It's tough to finance new leveraged buyouts when banks are struggling to find buyers for tens of billions of dollars worth of existing commitments.

IPOs: The window is mostly closed and someone's about to apply a fresh coat of paint. Until public equities rebound, including the Nasdaq exiting bear territory, don't expect this to change. Why buy a new name when there's so many existing discounts?

(I'm sorry... what I meant to say was that the macro environment when overlayed with... uh oh, here it comes again... 😂😂😂).

Fundraising: Get ready for a series of stories on the "denominator effect," as LPs calculate their Q1 returns. Private market exposure targets may remain the same, but still shrink in terms of real spending power.

The bottom line: The beaches may open early this year.

The great deals slowdown

Deal activity has finally slowed down after years of frantic "up and to the right."

Deals

Axios Markets

The tech-heavy Nasdaq composite fell into bear market territory after a 3.6% tumble Monday. 

Why it matters: A bear market is Wall Street's term for a 20% decline from a recent high. It's a more acute market slump than a "correction," which is a fall of 10% or more. 

But spiritually the onset of a bear market is much more. It marks a sharp shift in the mood music of the markets. The dour, the sour and the short-sellers of the world see their worldview validated by the market's inability to rally.

The big picture: So far, the Nasdaq composite has suffered a worse beating than the broader S&P 500, which is only down 12.4% from its Jan. 3 high.

That's probably because the tech stocks that drive the performance of the Nasdaq tend to be especially sensitive to rising interest rates, which we've had in recent months.

Nasdaq falls into bear market territory

So far, the Nasdaq composite has suffered a worse beating than the broader S&P 500.

NASDAQ

SEC chair Gary Gensler has a new target: ESG-focused funds.

Wait, what? No, Gensler doesn't oppose funds whose strategies include a focus on environmental, social and governance issues. But he does want ways to measure and verify that funds are using ESG as more than a buzzword to attract investment.

Many institutional investors have ESG allocation targets, so there's lots of incentive to affix the acronym.

This cuts across asset classes, including mutual funds, hedge funds, credit funds, private equity funds and venture capital funds.

By the numbers: The SEC estimates that there are at least 800 registered investment companies with more than $3 trillion in AUM, claiming to work toward ESG goals.

What he said: Gensler used a grocery analogy, explaining how he can look at ingredients to verify if something claiming to be “fat free” is actually free of fats. And then noted how, in the investment space, a high-yield bond fund will disclose summaries of underlying credit ratings. ESG funds, however, are all over the place.

“What we need are standards, measurement and transparency,” adds Case Foundation CEO Jean Case, who’s been beating this drum for years. “Today there's no criteria for labeling yourself an ESG fund.”

Case also tells Axios that there’s also an argument for breaking up the three letters – as a firm could be legitimately strong on climate but disastrous on diversity or governance. (As an aside, how many ESG funds really focus on governance?)

The bottom line: ESG is at the edge of becoming goopy jargon; something slapped onto investment funds for marketing purposes. The question now is if it can be pulled back from that cliff.

SEC chair pushing for greater transparency around ESG funds

He wants ways to measure and verify that funds are using ESG as more than a buzzword to attract investment.

Securities and Exchange Commission (SEC)

The sanctions that are now hammering Russia's currency, banks and economy are a vivid demonstration of the power of the U.S. dollar.

Why it matters: It provides a rare glimpse of the often invisible — but incredibly valuable — influence the greenback gives the U.S. 

Starting Feb. 24, the U.S., the E.U. and other allies imposed a range of particularly severe sanctions — from barring several Russian banks from using Swift, to freezing the assets of the Russian central bank.

State of play: The ruble has dropped 30% in the last 10 days, hitting a new record low. Russians are lining up to withdraw cash from ATMs . 

Russia's largest bank, Sberbank, suddenly said it was quitting Europe.          

Russia's government itself might not be able to make payments on its dollar-denominated bonds, analysts say. 

How it works: The sanctions only pack this kind of punch because they cut off Russia's unfettered access to the U.S. dollar, which a modern economy needs to function. 

Half of all international trade is done in dollars, and half of all global bonds and loans have to be paid back in dollars. About 90% of all currency trades involve the dollar.   

Russia relies on its central bank as well as its commercial banks to source the dollars it needs — which is why the U.S. and its allies have sanctioned large chunks of the financial system, and the central bank itself, to make finding those dollars difficult.  

Yes, but: Some say cutting off Russia's access to dollars — or weaponizing the currency — could push U.S. adversaries like China and Russia to create a parallel system that avoids using the buck.  

In theory, such a system would insulate these countries from precisely the kind of pressure the West is putting on Russia. 

In other words, the recent demonstration of the dollar's strength might actually mark the start of its decline.   

What they're saying: "Never seen weaponization of money on this scale before…you only get to play the card once," Dylan Grice, a hedge fund manager based in the U.K., tweeted. "It’s a turning point in monetary history: the end of USD hegemony."

Such ideas are having a moment. Bloomberg and the Financial Times both recently riffed on the era of dollar dominance, and how it could be shortened by recent sanctions.  

But don't bet on that any time soon, says Abraham Newman, a Georgetown University political science professor who has studied how global financial systems can become a source of power.  

He says the dollar system isn't a top down invention of world leaders. Rather, it organically developed over decades in which private investors, traders and businesses decided that they preferred to use greenbacks. 

That's because the dollar is a relatively stable, easily traded currency in a country with an accountable government and transparent legal system.

On the flip side: China's currency, the yuan — most widely seen as a potential rival to the dollar — has few of those advantages, largely because of the Chinese government's authoritarian nature. 

For instance, in order to keep control over the flow of money in and out of the economy, the yuan remains "non-convertible," meaning it can't be easily exchanged for other currencies.  

On top of that, China's financial system remains very much an arm of the Chinese government — and people considering where to keep their money know that, Newman says. 

The bottom line: There's a long history of people looking for alternatives to the dollar. It still doesn't exist. That's a major source of strength for the U.S. 

The dollar remains the West's ace in the hole

Russia's sanctions pain shows the power of the U.S. dollar.

Russian invasion of Ukraine

Russia's central bank said the Moscow Exchange wouldn't open for stock trading through at least Thursday. The exchange has been closed since Monday.

Why it matters: It's the latest financial fallout of Russia's invasion of Ukraine, which triggered massive sanctions from several other countries that have sent the ruble plummeting to record lows against the dollar.

Multiple Western corporations have also suspended their retail sales in Russia or have announced plans to exit the country entirely.

The big picture: Russia's central bank increased interest rates on Monday from 9.5% to 20% in response to the crashing ruble and to prevent a run on banks. It also resumed buying gold on the domestic market.

A series of other measures announced in response to the sanctions include requiring brokers to "suspend the execution of all orders by foreign legal entities and persons who want to sell off their Russian investments, such as stocks and shares."

What's next: The Bank of Russia said trading hours will be announced later this week.

Russian and Ukrainian delegations concluded a first round of peace talks at the Belarus border on Monday.

 Go deeper: The latest on the Russian invasion of Ukraine

Editor's note: This story has been updated to include that Russia's central bank closed the Moscow Exchange for a third day.

Russia closes its stock market for third straight day

It's the latest financial fallout of Russia's invasion of Ukraine.

The Moscow Exchange building in Moscow on Feb. 24.

The Moscow Exchange building on Feb. 24. Photo: Andrey Rudakov/Bloomberg via Getty Images

Russia

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

World

Stock, commodity and energy markets whipsawed on news of Russia's invasion of Ukraine. 

Why it matters: The violent reaction of financial markets suggests investors think Russia's aggression could further unsettle a world economy struggling to recover from the pandemic. 

By the numbers: The S&P 500 was down more than 2% at times in morning trading, before curtailing losses. 

The benchmark index is down more than 7% this month, putting February on track to be the worst month for the market since the start of the pandemic in March 2020. 

Our thought bubble: The most significant market impact of the invasion is in commodities markets, where Russia is a massive producer of a wide range of metals, grains and energy products. 

Prices for European natural gas  — most of which is supplied by Russia — soared by more than 50%. 

European crude oil prices surged by nearly 6% and briefly crossed $100 a barrel. 

Aluminum jumped more than 5% to a record high. 

Wheat prices jumped to their highest level in a decade.  

The bottom line: Commodities prices, in the short term, will worsen the worldwide struggle with inflation. Over the longer term, the erratic behavior of Russia could force a major shift of global trade networks, prompting Europe, especially, to rely less heavily on Russian raw materials. 

Putin's Ukraine invasion upends global markets

The most significant market impact of the invasion is in commodities markets.

It's increasingly harder to believe that anything can temper the flow of capital into private tech companies with their ballooning valuations — even the recent market sadness doesn't seem to have made a dent if you look at the latest figures.

Driving the news: Per Crunchbase's latest numbers, there are now 1,200 so-called unicorns (valued at $1 billion or more) globally, almost doubling the net count of 650 at the end of 2020.

Even more eye-popping: there are now 59 companies valued at $10 billion, up from 31 a year ago.

And ... now 46 dragons, Dan's term for startups valued at $12 billion and over. There were only 24 in January, and 19 last August.

Why it matters: Trends like this always raise questions of bubbles and whether the music might be close to an abrupt stop.

Yes, but: We're already seeing some pullback.

A number of outlets have reported that investors like Tiger Global — the most prolific unicorn investor, per Crunchbase — are shifting their focus to the public market from pre-IPO companies.

But at the same time, they're also investing in companies a bit earlier, so the steady flow of unicorns getting minted may not be over just yet.

We've also seen some fat unicorns lay off employees, a common and unfortunate side effect of boom-time growth.

Worth noting: Last year was also a record year in unicorn exits, per the data.

141 exited, either through IPOs or acquisitions, up from 58 companies in 2020. (You can thank SPACs for a small part of that.)

What we're watching: The path of these unicorn and dragon stats over the next six and 12 months.

Unicorn valuations continue growing

There are now 1,200 so-called unicorns (valued at $1 billion or more) globally, almost doubling the net count of 650 from 2020.

A unicorn with a trend line going through it

Stocks continue to struggle in the face of higher interest rates, climbing oil prices and the risks that Europe's largest land war since 1945 is about to start.

Driving the news: The S&P 500 closed at its second-lowest level this year on Friday, after falling 0.7%.

The broad market index is down 3.7% in February, and 8.8% in 2022.

Stocks are down 9.3% since their Jan. 3 record high, putting them within spitting distance of the 10% loss that defines a market "correction."

What to watch: This week may get off to a volatile start — equity futures are weaker this morning as investors digest the escalating Russia-Ukraine tensions.

Go deeper: What a Russian invasion of Ukraine would mean for the global economy

Russia tensions, interest rates push stocks toward correction territory

Stocks are down 9.3% since their Jan. 3 record high.

Trading.TV, a platform for live-streaming and stock trading, raised $8 million in Series A funding with Lightspeed Ventures leading the round and taking a board seat.

Why it matters: The company is tapping into the pandemic's surge of retail trading and social media engagement by combining the two into one platform. 

How it works: Trading.TV aims to be a financial superapp. The company, which launched out of Beta on Monday, is recruiting finance creators and economy wonks to discuss, via livestream, everything from stocks to crypto, NFTs to baseball cards, defi to sneakers.  

In March, Trading.TV plans to allow viewers to buy and sell stocks with a few mouse clicks, directly from a creator's video page. Fintech Alpaca is set to service the company's stock-trading tech.

Trading.TV also plans to eventually allow users to buy crypto, NFTs and other products. 

How it started: Growing up poor in Naples, Fla., CEO and founder Tobias Heaslip made it to college through an ice hockey scholarship, and later—as he puts it—begged his way into Goldman Sachs. His childhood left him with a passion for pushing the underserved to grow their wealth via the stock market.

Trading.TV was founded with a goal of financial education, and currently runs a stock-trading simulator, allowing users who may be too scared to approach the market to learn with low stakes.

"We did a lot of research on, why people are not invested," says Heaslip. "The first was they just didn't feel like they had the information to be able to do it successfully."

Of note: Creators who can attract eyeballs are key to the success of platforms like Trading.TV—and can define the audience it builds.

Trading.TV currently has a $1 million creator fund, and is planning to turn on tipping, subscriptions, and advertising for its creators through the year.

Context: The company's launch comes as so-called "finfluencers" have grown enormous followings through video platforms. 

Kyla Scanlon has some 116,000 fans on TikTok. Personal finance star Rose Han has 616,000 followers on YouTube. Austin Hankwitz meanwhile has 531,000 of his own on TikTok. 

Some creators have complained about the unclear content rules that lead to videos being demonetized or deleted, giving new social media players confidence they have a way in.

Yes, but: Challenges for Trading.TV include content moderation in the highly regulated stock-trading space and bringing more women and minorities into the fold. Trading.TV has incentives in place to get to 50% women and people of color in its Beta stage, but currently appears largely male dominated.

Lucinda goes deeper into the company and the funding round in today's Fintech Deals newsletter. Click here to sign up if you're not already a subscriber. 

Scoop: Trading.TV raises $8M to be Robinhood-Twitch combo

The company is tapping into the pandemic's surge of retail trading and social media engagement.

Tobias Heaslip, CEO and founder of Trading.TV. Photo: Trading.TV

Fintech

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Data: YCharts; Reproduced from Razum Capital; Chart: Axios Visuals

Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year. 

Why it matters: Anyone searching for evidence that the stock market and the real economy are not the same thing, should look no further.

Tesla’s frenzied ride in the capital markets culminated on Monday in the company being the largest entrant ever be included in the S&P 500, the main benchmark stock index.  

Tesla’s true believers are not paying for actual performance, but they are betting on Elon Musk as a visionary and the potential upside in the still nascent electric vehicle market.

The merits of that investment thesis diverge greatly from the current state of affairs in the automotive industry, and the broader economy. 

Reality check: The overall equity market’s meteoric rise in the face of a U.S. economy that will end 2020 3% smaller than it started the year, is just the latest example of the economic reality decoupling from stocks.

The equity market backdrop is a simple case of buyers needing to “invest in the market you have, and not the one that you want,” says  Quincy Krosby, chief market strategist for Prudential Financial. 

“It is a market that has been engineered by the liquidity of central banks. ... It is surprising how far we've come, and that includes Tesla," Krosby says.

Driving the news: While Tesla mania was once limited just to those who back Musk, after today anyone invested in an S&P index fund is essentially being forced along for the ride.  

After months of anticipation and active buying, technical pressure pushed the stock down about 6% after its S&P 500 debut.

That's happening alongside a broader market decline tied to a new wave of coronavirus concerns in the UK.

What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note. 

In the past two years, Tesla’s shares have risen more than 800% as analysts have increased average 12-month price targets more than fourfold and simultaneously lowered earnings per share estimates annually through 2024, Brinkman notes. 

Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities.  

Ives estimates that EV sales will grow from 3% of overall auto sales to 10% by 2025. "Many of the naysayers are probably the same individuals that thought LeBron wasn't going to be a good basketball player 15 years ago.” 

Tesla mania vs. economic reality

Evidence that the stock market and the real economy are not the same thing.

Business

Big businesses' corporate paradise may be coming to an end

Illustration of a beach chair and palm tree made out of money.

The decline of ExxonMobil has been remarkable in its magnitude and unexpectedness.

Why it matters: While all major oil companies are facing troubles, Exxon has fallen the farthest, in large part because it has made the biggest bets on oil and gas — and the smallest bets on renewable energy. 

While rival BP has recently promised to get to zero net emissions by 2050, Exxon has been doubling down on fossil fuels with moves like a spectacularly ill-timed $41 billion acquisition of XTO energy in 2009 and its major expansion in the Permian Basin in 2017.

Driving the news: Exxon reported a loss of $680 million in the third quarter of this year, bringing its losses for 2020 as a whole up to $2.37 billion. (In 2008, by contrast, it made a profit of $46 billion.)

The company also announced it would shed up to 15% of its workforce over the next two years, including roughly 1,900 U.S. layoffs, mostly at its Houston HQ. 

By the numbers: Exxon and Mobil combined had 390,000 employees in 1980. By 2017, that number had shrunk to less than 70,000.

Losses and layoffs notwithstanding, Exxon is still spending roughly $15 billion on sending a $3.48-per-share dividend to shareholders this year. 

Few if any analysts believe such a payout is sustainable. “We have doubts about the sanctity of the dividend longer-term,” Edward Jones analyst Jennifer Rowland told Reuters. 

The fall of an empire

All major oil companies are facing trouble. But Exxon has fallen the farthest, making the biggest bets on oil and gas — and the smallest bets on renewable energy.

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