Unicorn valuation and social reach
Last couple of years we witnessed initiation, proliferation and eventual demise of the term “Unicorn”.
Initiation
It all started by Ann Lee and her famous blog post in Techcrunch. That blog post made the world go crazy about the multi-billion startups. The world started to compete who can product more Unicorns. Valuation of the companies was growing and more and more companies where entering the unicorn club. Every respective market that had unicorns “benefitted” from increased valuation. Valuations of each company in market that had unicorns would increase. Everything seemed like a very nice party and everything seems to going up and to the right.
Proliferation
Unicorn craze spread like a wildfire. They where on every continent, every major startup hub. From Hangzhou to Berlin and San Francisco. At the beginning of the craze, having unicorn in investor’s portfolio was like a medal of honor. As number of the unicorns grew, that changed. In order to standout from fellow colleagues, it became important that investors have decacorns in their portfolio (companies valued more then 10 billion dollars). In 2015, it seemed like everything is going right for everybody that was related to unicorns — employees, investors and markets itself.
Demise
As baby Unicorns started to grow and mature, they realized that they need more dough for all the rainbows and glitter they where spitting. Natural step in the startup lifecycle is to seek for additional funding in the public markets. As elder Unicorns started to IPO, we started to witness interesting trend.
The public markets where not that excited about financials they where seeing from recent Unicorn IPOs. Box(-23.4%), Etsy(-44.25%) and Square(-5%) among the others, witnessed the rough times in the public markets. On the one side, we had Unicorn induced increase in valuation. On the other side, we Unicorns that had IPOed where not performing good enough to make public markets happy. Result of Unicorn IPOs was that valuation correction was required. Privately held Unicorns where those that had to pay the price. Not only Unicorns, but all the companies that tried to raise more money where not able to do it at the current valuations. The best explanation of the whole situation and how it got resolved can be found here.
Effect of social reach to valuations
Venturepick core focus is on how interhuman relations shape the world around us. There are multiple reasons why world got into Unicorn craze. One those is hype. Hype created around Unicorns contributed to raise company awareness and spread wildfire faster.
Basic premise we start from is that are two basic factors that help information travel faster: strength / impact of the node and number of direct relations node has.
Venturepick reversed engineered social network of all investments that happen in last 10 years. Our data science model used modified version of Page Rank algo in order to figure out weight of each individual connection within the social graph of investments. We considered all employees, past employees, board member and lawyers that have relation with companies analyzed. The analysis has been plotted on the chart below.
We plotted valuation of the companies with the respect of their social reach. X-axis represent company valuation. Weight of the company social reach (hype factor) is represented with radius of the circle. Valuation was presented on y-axis.
Interesting observation we noticed was that mature decacorn have plateaued their social reach after certain round of funding. Uber, Airbnb and Palantir as the most mature companies and companies with the biggest valuation have plateaued their social reach at the similar level. Lyft and Spotify are not there yet, but they are getting there. Pinterest and Stripe seem like enjoying backseat and do not have too much exposure.
We can also notice outliers on this chart. Outliers are always the most interesting. Dropbox is huge outlier on this chart. Dropbox has the social reach way bigger then the companies from the similar valuation range. Even more strange, Dropbox has greater social reach then top valued companies.
Something is definitely strange in the case of Dropbox. Is it valuation? Recently, T. Rowe Price market down its holdings in the largest tech companies and Dropbox have been marked down by stunning 59%!
Dropbox was overvalued, we get it. But why was it overvalued? Could it be the hype? Dropbox hype machine was lead by Allison+Partners PR. In their portfolio you can find companies like Whats Up. For those that do not remember, Whats Up was sold to Facebook for $19B. Same company is leading PR for both Dropbox and Whats Up. Whats Up got acquired, but Dropbox did not. Seems like Dropbox has hard time to maintain high valuation.
What is important is to mention is that social reach might not be the only feature that determines valuation of the company, but certainly it important feature. Question that arises is how much would Whats Up cost TODAY if it was acquired in summer of 2016. Our impression is that that figure would be waaay less then $19B .
Social reach formula is work in progress, but we get excited about the initial results. Investors, partners, acquirers or even future employees should take it into the account. Whether you are getting a job offer, or contemplating to invest into a company - it is good to always remember that what you have been promised today may not be the something you will get at liquidation event. Stay safe!
