Unicorns Start Looking for The Magic Mirror in The Forest

It’s about time. Jeremy G. Philips of Spark Capital calls it.

Unicorns are dead. Or at least the concept of wanting to emulate a mythological four-legged creature with a spiral horn has, like an X-Files episode, started to show signs that it would prefer instead to sheepishly vanish into a magical mirror hidden deep in the forest for another 10,000 years.

And along with the unicorn, all of those unicorn words: disruption, innovation, growth hacking. Farewell, lexicon of the over-valued. See you again in the wormhole when we reflect back on Uber’s IPO in a couple of years.

You see, the IPO markets are dead. This is a bit of a problem. Many investment bankers have been replaced by sources of private equity and now those private equity investors are complaining loudly that they want their money back.

Of course they do. We’re talking Uber’s investors here among many other investors in many other unicorns. The thing is, investment banks never complain because they make money either way: up or down.

Here’s an example. Before Facebook went public it was valued in the private markets at $85 billion. For those who do not recall the debacle that was the Facebook IPO (no fault of Morgan Stanley — the $FB was clearly overvalued in the pre-IPO market), Facebook shares were underwater for 14 months until Facebook shares finally reached the IPO price of $38.

It took a “blowout quarter” to demonstrate that Facebook’s mobile business had the right kind of muscle, and on that news the shares soared 40% thereby finally reaching the IPO price.

Which, coincidentally, was the exact same price everybody was talking about in the pre-IPO private share market: $38.

This, gentle reader, is the cycle of news-driven expectations and the value of guidance metrics. Live by the sword, die by the sword someone said about somebody else they didn’t like very much.

There were a lot of lessons learned during Facebook’s initial public offering.

There are also a lot of much more recent lessons, such as our wonderful LinkedIn taking a big hit (45% in one day) due to its downward revision of future expectations (this year is okay but next year…)

When you grow to the size of 100 Unicorns (or 85 as was the case with Facebook), the only trading strategy when an IPO does eventually occur is to short the stock. What’s the one number to look at to determine what direction the shares will trade?

I’ll tell you. The next time you look at an IPO term sheet, there’s a line called secondary shares. It states the percentage of shares for sale that are being sold by insiders looking to cash out. Generally, you want this to be close to zero. Facebook was 46.5%. The idea is that you want the insiders to stick around.

No, with Uber, you can bet investors are loading up on those shortable equities. Investment banks generate adequate fees for selling equities for the purposes of shorting (through overallotments) and we recently learned investors are buying into a $0.5 billion private round from Uber with zero financial disclosure.

Uber is currently valued at $65 Billion. That’s 65 unicorns. We won’t predict how crazy this thing is going to get, but Uber’s IPO does portend the future for a whole herd of mythical companies that drank the kool-aid. Hey, it tastes good! Heaven help you if you are still drinking it.

According to VentureBeat, many are.

As of January 2016 there were 208 separate unicorns representing $1.4 Trillion in funding.

That’s a lot of unicorns looking for a mirror in the forest hoping they can disappear to that mythical unicorn place because we now know that too many unicorns can’t live together for very long in the real world.


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