Mom look, I’m a unicorn
For the benefit of those that aren’t familiar with the term, ‘unicorn’ is a colloquial reference to private companies that are valued at US$ 1 billion or more. It’s also the name of the latest Frappuccino drink introduced by Starbucks, but that’s a whole different story that I’ll leave for another time.
The irony is that the term unicorn emerged because start-ups that could be worth a billion dollars in a such a short span of time were considered rare. In fact, it was almost a myth. But as of January 31, 2017, CB Insights revealed that there are 185 private unicorn companies.
Their combined value is US$ 663 billion with a total funding of US$ 126 billion by 2800 investors, who have a stake in these businesses. Phew! Those are some mind-boggling numbers. What’s even more intriguing is that the unicorn club is quite diverse in its members — it’s hard to find an underlying trend or common factor. Yes, the largest share of these companies operates within the e-commerce space. No guesses there. And of course, the largest number of unicorns have come out of the USA. Yet, it’s hard to pin down one underlying strategy that has led them to their success.
For instance, we have the likes of Uber and Airbnb, who took an existing industry and improved the offering to capture a larger market share. On the other hand, we also have companies like Snapchat or Pinterest that have introduced a completely new idea to disrupt their industry. Finally, there are those that have built an attractive proposition to get acquired by large giants such as Jasper (by Cisco), Lazada (by Alibaba) and Gilt. Closer to home, we’ve all seen, heard and lived Souq.com’s rise to the top and its eventual acquisition to Amazon in March this year.
Value vs. valuations — It’s not easy being a unicorn!
What these companies do have in common is valuation. Their high valuations have given them entry to this elite membership. Looking back to 2015, getting a US$ 1 billion valuation was more about being recognised as a mover & shaker in the market, attracting press attention and poaching top talent. It wasn’t focused on the actual value of the company — it was merely a ‘guesstimate’ by the company’s investors.
Which brings me to another aspect of this interesting conversation — how apt are these valuations? Are they bloated? Are we edging on a fine line between actual value and proposed valuations? The simple answer: yes. The reason why this is happening is because investors are not betting on the profits these companies are making. They are betting on their growth potential — their ability to capture a large market share very quickly. Yes, these companies are forging new business models, but in the process, profit is completely forgotten. Their valuation is associated with future performance and their ability to demonstrate rapid growth.
Let’s look at an example. Snap Inc. (formerly known as Snapchat) has been facing a lot of criticism for its over stretched valuation. Analysts argue that the numbers don’t make sense — especially if you were to compare the company’s user base to more-established competitors such as Facebook, Twitter or Google. Since its inception in 2011, Snap Inc. has seen a total loss of US$ 1.2 billion. The company poised its valuation to be between US$ 20 to 25 billion. Finally, it made its public debut at US $ 17 per share and its market cap in March was estimated at US$ 34 billion. To put things into perspective, this means the company is worth more than Target. While things still have a question mark when it comes to Snap Inc., the future of the company remains to be seen.
2016, however, saw a shift for unicorns. The number of exits declined and the amount of unicorn IPOs we’ve seen over the last two years reduced. A lot of these companies have been postponing their IPO dates to preserve their inflated value. Out of the six tech companies that went public last year, all are trading below their initial valuation. Investors, on the other hand, are still acquiring companies — but not ones that already have a US$ 1 billion valuation because they are slowly catching on.
CB Insights reported that seven unicorns saw their valuations being lowered in 2016. Moreover, the deals offered to unicorns saw a 32 per cent decline in activity. But, don’t get me wrong. I’m not saying that this is the case for all unicorns.
The likes of Uber, Snapchat and Airbnb have succeeded to a certain extent in justifying their valuations and have shown the performance investors had placed their big bets on. It’s just a matter of differentiating the real deal from the hype.
And, how does one do that? Speaking from an investor’s point of view in an interview with LinkedIn’s Senior Editor, Rich Wong, Partner at Accel, said: “The perfect answer is only known in hindsight. I don’t think most people would have guessed that Facebook would become a US $300 billion company or that Google would either. That wasn’t obvious when they were private or when they went public. One of the things that has been part of the frothy environment is that things are “easy” when it comes to raising capital and there isn’t a need to prove out a truly sustainable business model. Companies that are much more speculative, maybe they lose money for every delivery that they make, will be in trouble.”
Beyond the labels
So, all this begs the question — is it time to move beyond the labels? From unicorns and gazelles to zebras and cockroaches (yes, that term exists!), we’ve heard it all. But, here’s the thing: what happened to the simple old “you make money, you get noticed” mantra? Let’s be honest, making money matters and it’s the best way to be taken seriously. Long-term growth needs to be based on revenues and monetization models.
Wong’s advice in this regard really hits home: “The world has woken up to reality that you have to have the right discipline and fundamentals when raising large chunks of capital. For the entrepreneurs who have the excitement to build a great business, we are still on the early innings of some exciting long trends. This is the first year that over 50 per cent of the world’s population is going to have access to a mobile phone. That is a big deal. That creates a huge opportunity for anybody who is building a mobile application. The great companies of the earlier era were all about building big data centers like Cisco and EMC. All of that is now shifting to the cloud and that is a transition that is really in the first or second inning. So, I wouldn’t overly buy into the doom and gloom because there still are some incredible companies with incredible innovations to be built in the next five to seven years.”
Looking to the future, unicorns really have two options: to go easy with their spending and focus on building a viable business model or to lower their valuations and get bought out at values lower than anticipated.
Back to basics? I sure do think so, unicorns.