Launched in late 2013 by Aileen Lee from Cowboy Ventures seed-stage fund, the term unicorn designates those startups that rank over $ 1 billion dollars in value.
The denomination caught on and became a hot term in the IT world, ending up on the cover of Fortune magazine in February 2015. By the time this happened, it already had been associated with the idea of a new financial bubble (tech bubble) that might lead to another market depression. Fortune magazine was also the one that counted over 80 said startups in January 2015, and the numbers are still on the rise.
The live, updated list of current private companies that value at least $ 1 Billion is available here, and it holds 141 positions (and counting), out of which Uber occupies the top position with $ 51 billion, followed by Xiaomi ($ 46B) and Airbnb ($ 25,5B). Although the leading companies in this top are considered safe from any predictable developments, those closer to the $ 1 billion threshold are the ones who raise concerns regarding their stability.
Why do these companies, and for that matter, any other companies who aspire to go over this threshold, form the object of “unicorn” endangerment discussions?
A change of mind
from the venture-capital entities might lower the chances of taking risks with tech startups. A leading venture investor, Bill Gurley, warned about this in April 2015. Venture investors may become more reluctant in their decisions and thus achieving the unicorn status would be harder. The question of those businesses being viable or not will be answered by the transparent and interconnected markets – in a variable amount of time. Placing trust and money in such startups comes with inherent risks – and the investors might just become more precautionary.
There is a double reason here for slowing down the process of becoming a $ 1B startup: if the companies just over threshold do not deliver, their precedent might affect the decision-making process when it comes to the next candidates; on the other side, determining whether a brand new startup represents a viable business could become a more sophisticated and prudent endeavor. Simply put, more cautious investors could reduce the growth rate of “unicorns”, or eliminate some entities from the race itself.
Market struggles for unicorn startups
Stock price variation could reflect in the private markets insofar as to affect startups’ valuation and investment strategies. When investing in a tech startup based on a revolutionary idea and its future value, a non-fluctuating market is important both in the moment of the investment, as well as all along the ulterior stages, when the product or service should reach its public and be successful. Unpredictable or expected, but nevertheless demotivating, some financial markets movements are not auspicious for investments that expect a certain degree of stability in order to have a satisfactory ROI. Jason Lemkin, for example, who is managing director at Storm Ventures, makes a special mention of the startups that take years to generate investment return and are exposed to various market fluctuations.
The unbalanced equation of private financing and public success
Becoming a unicorn startup takes place in the realm of private financing and precedes the Initial Public Offer stage ( therefore it takes place pre-IPO). What this means is that these tech companies are not open to ownership by just any people/company who would like to invest, unlike the 1999 tech market situation.
As Time puts it – these investment rounds are only open to the elite. Yet in order to meet the financial expectations, these investments rely on their public impact. They aim to deliver products or offer services that need a future mass success. Forcing the many virtual customers only at one end of the equation does not create an equilibrium. Not only that the major moves are all made before the IPO, but it seems that the IPO moment is later pushed further and further to the future until it all happens outside its reach altogether. The same Time article notices that the list of expected-to-go-public companies from 2014 looked strikingly the same with the 2015 list (compiled by CBI Insights). That translates into such startups not actually planning to share their financial success with their consumers, or not taking such plans seriously.
Loss of credibility
We are not addressing here the product/services to-be-offered credibility – this would be a completely different discussion. The financial credibility of startups, however, was recently questioned by The Credit Suisse analysts – via the voice of Eugene Klerk. As Bloomberg noted, Klerk and his team have calculated that the number of ‘unicorns” has strongly accelerated since 2009 – so much that is pushes the boundaries of what is possible in the economical field.
This phenomenon is so obvious that it brings in the light another critical issue: as members of the same business “club”, investors and tech companies employ very complicated math algorithms when calculating the startups estimate values – and there are reasons to believe that the numbers are bigger than they should actually be. This practice is possible because of the closed/private nature of all the investments, and has been exposed in another Bloomberg article, only to be defended by some of the founders. Randy Komisar, a partner from Kleiner Perkins Caufield & Byers (one of the venture companies) even talked about these numbers being “just a middling shot at a valuation”.
Although this system might be accepted by the usual investors, while riding their own wave, some other more-traditionalist investors are considering it a reason for less credibility. This while still acknowledging that unicorn startups are still benefiting from their success and that some public companies partner with this private tech startups (in what might prove a risky move).
The uncertainty of what will happen to unicorn startups following IPO
Although listing this reason was inspired by a simple wordplay (unicorn hunt), the post-IPO situation nonetheless remains a risk factor. To explain: the non-VC (Venture Capital)-investors are vouching for the unicorn valuations, while waiting for the long-expected IPO. If the VC managers are the first-line startups hunters, these traditional investors represent the second line.
The non-VC investors reject the idea of another dot.com bubble on the basis of better current downside protection when it comes to today’s startups. In a Forbes article, Alex Lykken, editor of the PitchBook’s Unicorn report, talks about the risks, the return expectancy and the time-focus differences between the VC-investors and the mutual and hedge funds investors.
Although denying the immanency of a future tech bubble, Lykken cannot avoid the same critical question mentioned above: what will happen to the unicorn startups once confronted to the IPO stage – if ever? “Hunted” for a second time, will they thrive or will they fail?!
