The stunning announcement yesterday about mass layoffs (reported as 400 out of 3000 total UiPath employees) was a wakeup call. When I was a young entrepreneur Founder CEO of a VC-funded Internet tech company in 1999, I vividly recall meeting the CEO of a larger competitor. He declared that the key to a funded startup is to hire as many salespeople and knock on as many doors as possible. He was in a hiring frenzy. He was far more experienced, older, and better educated than me – and I took his strategy to heart. I made the mistake that most young companies make when they are well-funded: they hire an army-load of salespeople and client services staff – far more than they can manage. As many other Internet companies had to do, I too had to layoff people in my firm. Lesson learned: do not overhire.
The title of the above referenced article was UiPath Layoffs: 400 Lose Jobs Despite Startup Hitting $7 Billion Valuation and the quote in the article from the spokesperson of UiPath was “This has impacted less than 400 employees globally. But even with these changes, we have 50% more employees than on January 1, 2019.” In both, the title and the quote, we were being indirectly told that “$7 Billion Valuation” and “50% more employees [in 10 months]” are good things. Please allow me to question this assumption.
Overhire, crazy valuations, and misunderstood business models
As history has a nasty habit of repeating itself and with our short term memories and perpetually optimistic outlooks, we tend to ignore the realities of business. For instance, the article reported that UiPath, with $200 Million in revenues, was valued at $7 Billion. I can see that a common person can fail to connect the dots, but how can professional investors give such lofty valuation to a company that offers a technology that has been around for a long time?
To explain that I would have to jump back to the Internet times (apologies to those readers who were in elementary school at that time). A company named CommerceOne set out to redefine the world of procurement. It wanted to create the world’s most comprehensive marketplace. At its peak, it was valued at $21 Billion. In less than 4 years, it filed for bankruptcy. CommerceOne too went on a hiring frenzy and had to layoff (guess how many?) 400 employees in October of 2002.
Fast forward to October of 2019 and now we observe the same phenomenon unfolding in the RPA market. Overhire, crazy valuations, and misunderstood business models. It is easy to speculate what would have triggered the layoff. The cash burn rate with 3000 employees would have been somewhere around $300 to 550 million per year. With the article reporting $200 million in revenues, the company would have been burning cash like crazy. This means to choose between (not-so-lucky-as-before-valuation) recapitalization or getting the act together. The company, I assume, rightfully opted for the latter.
Freemarkets, another crazy valuation firm from the early Internet era, was able to convince the world that it was a technology company. Its name, its marketing, and its newness – all contributed to building an image that investors saw as the eBay for B2B. The reality was that the firm was doing online auctions – using a relatively simple auction engine – and using huge amounts of manual resources to support the auction. There was nothing automated about the firm – but in the minds of the investor community it was a tech firm. For the most part, the positioning of the firm as a tech firm was supported by the analysts, and most certainly by the market research firms. No one had the courage to ask “just how are you a tech firm when all you’re doing is simple auctions with an army of consultants to make it happen?”. Oh well, those were the early days of the Internet and it was hard to find facts as the world of the interconnected knowledge was still developing.
Oh wait … but what about now?
Aren’t we making the same mistake by marketing RPA as artificial intelligence and putting incredibly high valuations on companies? Let’s be fair. When you think AI, what comes to mind is Google Deepmind or AWS – and not RPA. So the entire positioning of RPA as AI is questionable. Both analysts and suppliers of RPA need to clarify that distinction.
But UiPath is not the only exception. Softbank dumped $300 million (yep seriously three hundred million!) in Automation Anywhere – another RPA firm. Apparently, that was the new model in venture funding i.e. go big and drop in a big load of cash in a startup. Give them all they need in one shot and help them become the 800 pound gorilla! Well, the reality is that when companies get cash, they get fat, inefficiencies appear, and their sharpness declines. From a risk management perspective, I do not understand how this dump-big-cash model could be the right thing for any firm which has the fiduciary responsibility to make investments. Masayoshi Son, CEO Softbank may need to rethink that strategy (hint WeWork).
Back to RPA. The future of RPA is bright – however – valuations should be considered in light of the market potential. The market size for RPA is estimated to be $4 billion by the year 2022. Let’s assume that is the market size today. On a 30% margin (which is a little high given the newness of the technology, with significant number of players, and pricing pressure due to competition) on the total sales, we get about $1.2 billion in profits. Assuming 35%, 30% and 25% desired return i.e. cost of capital (which should be expected from new technologies) – could put the valuation for all players combined at $3.4 Billion, $4 Billion, and $4.8 Billion respectively. While I understand that Gordon’s method may not be the best way to value tech, but it does provide some common sense, directional measure. If the whole market is valued at say $4.8 B – how can a single company be valued at $7 Billion? Go figure!
I believe that the future of RPA is good – but not as a standalone tech tool. I believe it is machine learning that is redefining the future of business. Unless companies have a path for total intelligent automation, RPA will just be another back office tool collecting dust on the walls of the tech-stack museum.
Prof. Al Naqvi teaches AI (technology and business courses) at the American Institute of AI. He has pioneered several AI Strategy, Analysis, Design, and Project Management tools. He helps executives on how to build their companies around AI.