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Evolution of the Unicorn

November 13th 2015

Any young company that achieves a valuation in excess of $1bn is known as a unicorn, in an attempt to convey to such companies attributes of beauty, lure and rarity.  However, that rarity is open to question – at the last count Fortune listed over 80 such companies.

Part of the problem is that the herd instinct – amongst the investors, not the unicorns - is potentially creating a technology valuation bubble for these large companies.  There is a somewhat of an investment frenzy when a new start up apparently gains significant market share and is tipped to disrupt the status quo.

This is generating a new type of unicorn – ones that are valued at over $10bn.  In fact, there’s a new term – “decacorn” – that’s been coined by Bloomberg to describe such beasts.  The much smaller list of decacorns includes companies such as Airbnb, Dropbox, Pinterest, Snapchat, Uber and WhatsApp.  Uber's latest funding round values it at around $40 billion.

The Bloomberg analysis describes how investors justify those huge valuations through some dubious maths:

Valuation = ("founders hopes and dreams" X "how fast a company's actually growing") - ("downside protection" X "investor 'fear of missing out'')

Hope and fear is a powerful combination.

The problem is that many of the unicorns are already unsustainable.  Snapchat has already been written down by 25%.  The valuations rely on converting the size of the user base or network of the company into real cash. 

The picture seems to be that if you can acquire 60% of more of the market then you can monetise it.  However, with low barriers to entry, if you are a minority player then you end up in a race to the bottom.

There’s already talk of visions of dead unicorns.  The trick is to find the true beast – and not be tempted by a donkey in disguise.

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