FAANG, Public Trust, Valuations, in 2019: The Read from Menlo Ventures

Xconomy San Francisco — 

The market caps of some of the most successful tech titans reach as high as $1 trillion. Yet in 2018, perceptions about these dominant companies often reflected uneasiness and doubt—and for some, so did their stock performance.

Maybe the mood shift has to do with the fact that the public and government leaders no longer evaluate these tech giants based solely on their spectacular market growth and multi-billion-dollar valuations, but also on the effects of their products, which are woven into almost every aspect of people’s lives.

Some of these platform companies, taken together, now have a shared nickname: “FAANG,” which stands for Facebook, Amazon, Apple, Netflix, and Google, a unit of parent company Alphabet. Industry observers see their fates tied together in some ways, and in the aggregate their market value had sunk by more than $700 billion as 2018 drew to a close.

Business conditions such as trade wars surely played a part in those losses, but at least some of that slide was due to public scrutiny over controversies like those that thrust Facebook (NASDAQ: FBunder the spotlight in 2018. The company, defending against criticisms over data privacy violations and the spread of false 2016 election campaign messages from fake accounts traced to Russia, found user growth slowing persistently. Its market cap plummeted by more than $100 billion on a single day in July, and hasn’t recovered since that period in the summer.

Some observers say the FAANG companies slumped because they had been overvalued. Others say these companies are facing new headwinds from regulators that could cut into their profits. Lawmakers are considering ways to rein in the power of global tech companies that control the personal data of millions of people, use it to reap billions in ad revenues and sales, and allegedly squeeze out competitors—or acquire them.

Ride-hailing pioneer Uber now hopes to take its place among the commanding platform giants that are publicly traded, through the IPO it plans for this year. But there’s speculation that Uber will fall short of the daring $120 billion valuation that some Wall Street bankers have suggested it could establish through the IPO.

Xconomy asked a number of business leaders to comment on the lessons of 2018, and forecast some of the patterns we may see in 2019. Two partners from Silicon Valley venture capital firm Menlo Ventures, Venky Ganesan (pictured, second from right) and Matt Murphy (pictured, second from left), were among those who offered their insights. They commented on the FAANG companies, the role of public trust in business success for tech companies, and the stress tests that fundraising will bring for companies with lofty private valuations.

Here are their comments, shared via e-mail:

Xconomy: What trend or event defined your industry in 2018? What are the implications for 2019?

Venky Ganesan: 2018 was a rough year for FAANG—the former kings of the stock market have been dethroned. While Amazon, Uber, and Microsoft lead the pack in terms of public-facing companies, I don’t believe there will be a “new FAANG.”

More companies are choosing to remain privately held than ever before. Big tech’s relationship with the public and the government is irrevocably changed. Expect regulation and governmental oversight, very similar to what happened to the banking sector.

X: World Wide Web founder Tim Berners-Lee has proposed the formulation of a “Contract for the Web” to mitigate the impacts of tech companies on individual privacy, national and regional strife, and other societal factors. He is asking companies and others to help write it, and pledge to honor it. If you were helping to write the “Contract for the Web,” what are some of the provisions or principles you would propose? Do you think companies will honor these principles?

Ganesan: All tech companies, whether they be consumer, enterprise, startup, or a Fortune 500 company, will need to prove that they can earn the public’s trust in 2019.

After seeing the very public and very negative backlash felt by the likes of Facebook and Google for their high-profile data breaches, it will be important for tech companies to promise customers that their information is protected. Privacy and how you use data will be key discussion topics going forward.

If the industry as a whole is going to evaluate how it treats consumer data, the first step is holding big tech accountable.

X: What are the emerging technologies that make it harder for you to predict how well your startup, your startup investment, or your company’s new initiatives might remain relevant in the market, for a time period long enough for them to succeed?

Matt Murphy: It’s less about the emerging technologies and more about the investment strategies behind them. Overall, things are getting harder, not easier, next year in terms of raising capital and fundraising because investors have been betting that any company with a bit of traction will make it big. Unfortunately, that’s just not the case for every startup. We’ll see a lot of over-investments play out this year, which reveal cracks in the foundation of these over-inflated expectations and valuations.

[Editor’s note: This is part of a series of posts sharing thoughts from technology leaders about 2018 trends and 2019 forecasts.]

Photo credit: Menlo Ventures