Unmasking the reality of the Unicorn Bubble
The economy is no stranger to bubbles, with the earliest being The DutchTulip Bubble of 1630, where Tulips prices soared 20 folds before plunging 99% to the more recent to The Housing Bubble of 2008 where banks started handing out mortgages like Halloween candy, attracting investors, elevating the high payouts, which people started defaulting on, leading to the entire system crash down.
This sudden inflation of any of the lateral of the market is deemed to burst upon over-inflation causing financial and statistical damage for itself and its counterparts.
The new bubble in the market is the Unicorn Bubble. With experts and renowned journals completely certain of the next impending doom being attributed to the Unicorn phenomenon, there is a sense of frenzy amongst the population.
Right from Adam Neuman being crowned as the man who burst the bubble to the Unicorn Euphoria evaporating, there are multiple thought processes running around the ecosystem.
Where does Unicorn Bubble Fit?
What is its reality?
Throughout the history of bubbles, the common thread is the incessant pumping of funds from the investor’s end, without any foreseeable returns. These bubbles often rely on the greater fool theory, where the initial entry or investor may not necessarily believe what they are buying is useful, but rely on the notion of someone in the future will pay them more for it than what they paid themselves.
This theory directly translates to the plot of almost every Unicorn success story, till, WeWork came along. The crazy valuation and more exuberant predictions encompass this bubble that unicorn is now a part of. This establishes the existence of the Unicorn bubble.
Now that we have established that Unicorns is the new bubble sector, let’s see which phase of the bubble do they fit in right at the moment.
Phase I
Displacement
In the first phase of the bubble, displacement occurs when investors get enamored by the next big idea of the market which has low-interest rates. A classic example is a decline in the federal funds rate from 6.5% in May 2000, to 1% in June 2003. Over these three years, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic low of 5.21%, sowing the seeds for the housing bubble.
Where do Unicorns fit?
Unicorns of every sector and domain are way past the displacement stage. With valuation going through the rough, and euphoria now has somehow come to a standstill in terms of stock prices as well, with the Lyft being down almost 40% from its IPO price and Uber (UBER) charting a 30% decrease.
Phase II
Euphoria
The second phase of the bubble is about the wave reaching the masses. caution is thrown to the wind, as asset prices skyrocket. Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%
Where do Unicorns fit?
Unicorns were front runners in the ave of Euphoria back in 2017, when the likes of WeWork, AirBnB were churning numbers like $20Billion and $35Billion year-end valuations. Every unicorn was seeing furry of angle to venture-backed investment making them the most sought after projects in the market.
Phase III
Panic
The reality of the funds set in at the panic phase, where asset prices reverse course and descend as rapidly as they had ascended. As supply overwhelms demand, asset prices slide sharply. One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy, leading to the global equity markets losing a staggering $9.3 trillion of 22% of their combined market capitalization.
Where do Unicorns fit?
The current scenario is synonymous with the panic phase of the economic bubble. The disaster that has been the WeWork IPO seems like a tipping point for the market. In the past, investors have ignored red flags and bought high profile IPOs, but now public market investors seem to have awoken to the risks of overpriced companies with conflicted corporate governance, leading to a sense of panic setting within these multi-billion dollar entities.
Moving onto the reality of the Bubble Burst, which is Two-Fold.
First, The Reset Phenomenon
With the number of unicorns proliferating like rabbits and its cumulative valuation rounding above $1,050 Billion, it is the hype around the bubble that is thriving. The reality of the situation is that there is a sudden cushion in the market. Rather than Bursting, Adam Neuman provided the cushion in the form of aware investors.
With Investor sentiment being a huge part of the Unicorn Bubble, a sense of caution that has suddenly overtaken the mania of investment.
The money which at one point was pouring suddenly is almost trickling in.
The second reality, Evaporation from Valuation Haze
As a by-product of the reset, there is a sudden curtain drop from the charade of Valuation. The reality of the valuation game is becoming clearer by the day and managing expectations is the new mantra being disposed to the ecosystem aspirants.
Investors are going back to the basics with them banking on innovative ideas.
The existence of the bubble is a clear indicator of the need for viable business models. And its reality lies deeply rooted in pivoting the existing eco-system towards the profitable business model.
Innovative Idea.
Effective Pitch.
Profitable Business Model.
That is the real truth of the Unicorn bubble.
Or is it not?
