Of unicorns and bubbles

One of the hot topics of today is the sighting of more and more unicorns, not the horned horse variety, but companies valued at more than a billion dollars, and even so-called decacorns, whose worth is estimated at above ten billion, and whether this means we’re headed toward another bubble.

Fortune magazine has some 80 companies on its unicorn list, with a lower number of decacorns that contains the usual suspects of Airbnb, Dropbox, Pinterest, Snapchat, and Uber. Many of the unicorns will not be familiar names, but both their number and size are growing amazingly fast.

And it is precisely this rapid growth, the continued financing rounds that garner ever-greater amounts, that has led two directors at Manhattan Venture Partners, Max Wolff and Santosh Rao to write an article called “Bubble warning: High valuations and late-stage rounds tell of coming trouble”, published on Venture Beat, which argues that all the signs are out there of an impending crash as a result of calculations of companies’ worth based on twisted mathematical logic, an upward spiral that venture capital funds cannot remain away from for fear of missing out. For the managers of these funds, the key goal is to obtain proper capital rotation, preferably associated with the highest possible return on investment, which means that doing nothing, staying away from companies looking for funding, is very hard.

Not everybody agrees. In a highly recommendable article with the unambiguous title “Bubble my ass: some unicorns might be overvalued, but all dinosaurs gonna die”, the entrepreneur and angel investor Dave McClure compares unicorns with dinosaurs, predicting an apocalypse in which the majority of the companies on the S&P 500 companies will be hit by the impact of the technological disruption caused by the unicorns financed by risk capital unless they are able to innovate at a fastest pace, or buy their competitors (which would only set off a price war that would drive the worth of the unicorns yet higher).

McClure describes these large companies as latter-day brontosauruses that refuse to innovate and that face huge problems in attracting and retaining talent, as well as having failed to understand the importance of internet marketing. Ignorant of the importance of software and new marketing, these companies are in reality becoming very vulnerable to the unicorns, which at any moment could turn up and steal their markets “at internet speed”, or in less than a decade, while these companies, and the market itself, still assume that they have another fifteen to twenty years peace and quiet. But in the face of disruption within five to ten years, what the market is doing is diverting a large part of its investment toward these unicorn and decacorn companies that generate value based on very different rules to their classic competitors, as Tom Goodwin, VP for Strategy and Innovation at Havas Media, in a recent article on TechCrunch called “The battle is for the customer interface”, notes:

“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”

So, take your pick: boom and bust; or the imminent ice age that will sweep away the dinosaurs, replacing them with new competitors. Either the unicorns will burst the bubble with their horns, or they’ll spear all those household names we’ve come to know. In either case, a lot of people are going to be losing a lot of sleep, and possible more than that…

(En español, aquí)