over inflated tech sector

Unicorns & Fairy Tales

The Audit firm Deloitte has been fined 15m pounds for its role in Autonomy’s sale to HP. The fine follows the conviction of Autonomy CFO Sushovan Hussain of fraud and the recent trial of ex Autonomy CEO Mike Lynch in London’s high court, followed by his arrest and extradition request to the US. What a mess.

The downfall of the UK software darling and the damage it inflicted on HP will be a topic that will be discussed and dissected in legal and accounting circles for decades to come. The tech sector itself doesn’t like to talk about the debacle; most are happy to look the other way and pretend nothing happened. But as we all know, attitudes are changing, and the global reset will not leave the tech sector untouched. Autonomy was a highly visible example of some things we somehow accept in the industry that need fixing. What passed for ‘the law of Silicon Valley’ no longer works.

The concept of Silver Bullets went out of fashion a long time ago. Early-stage investors, industry analysts, and the press may love to hype the latest unicorn, but outside of this particular bubble, nobody believes the hype anymore. IT is not new, it can’t be ripped and replace quickly, and so-called digital transformations and revolutions happen at a (relative) snail’s pace. AI, 5G & Blockchain (for example) all hold immense promise, but they have some steep hills to climb before delivering their full impact.

Furthermore, spectacular multiples make for great headlines, but beyond the early-stage startup with immense but untapped potential, they don’t make sense. This past week alone, one such Unicorn (UIPath) raised a further $225m (series E), bringing its investment haul to $1.2B. This new investment comes on revenues of around $400m, giving it a valuation of $10.2B. Its not just UIPath of course, the $20B valuation of Palantir as it plans its IPO has also raised eyebrows. Such ‘amazing’ valuations seldom make any economic sense, other than to those planning to flip the firm onto others.

The fall out from the Autonomy deal should have been a seminal moment. But rather than a sober reckoning and an acceptance that the Emperor was naked, the industry collectively turned away and pretended to have seen nothing. That matters because we work hard to bring value to our client’s businesses at Deep Analysis. Some want to launch new products, some want to enter new markets, others are getting ready to exit or acquire. But in every case, we strive to be honest and realistic about what that business shift will entail and what it could return. As you might expect, not everyone likes to hear what we have to say. But that’s ok, for we believe in enterprise software’s power at the end of the day, and we see a great future for the industry. It’s just that we don’t believe in unicorns and fairy tales. I tracked the rise of Autonomy from its early days to its fall from grace. Too many people knew something was wrong, but few said or did anything about it.

If nothing else, the tech sector’s accounting and audit side may have learned a few lessons, and one hopes a repeat of this auditing debacle is unlikely to occur. But the underlying belief in growth by any means and a virtual echo chamber of industry hype remain, and that is unhealthy and worrying. We have enough to be excited about without flim-flam. We are on the cusp of a new digital revolution, the truth, the reality, the facts alone, are more than enough to generate plenty of honest future growth and success.

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