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Unfortunate Unicorns

July 2nd 2019

Give the mythical nature of unicorns, it’s impossible to say how the creature is meant to have first emerged.  The term was commandeered in 2013 by Aileen Lee, a venture capitalist, to describe privately held tech startups that have achieved a valuation of $1bn or more.  Since then, unicorn evolution has been much more conventional.  Some say that these strange creatures have been proliferating like rabbits. At the last count, there are more than 300 of them worldwide with a cumulative value of around $1,050bn (£803bn).

The problem may be to do with valuation.  Many unicorns are still in the growth phase and may even have yet to post a profit.  Take Uber as an example.  It’s IPO earlier this year ended up being way down on the initial predictions of $120bn at just over $80bn.  Share price has been flat since.  And this valuation is all for a company that last year lost $2.8bn on revenues of $12bn.  And now, it’s engaged in a price war with rival Lyft which may see both companies dance a mutual death spiral.  Not the best win for investors.

Perhaps this is why couple of years ago, opinions started emerging that the focus on unicorns may not necessarily be a good thing ( ).  Apart from the obvious fact that high valuation unicorns seem the bear a strong resemblance to many dotcom boom companies, there’s also the issue that unicorns suck in too high a proportion of funding.

As Stuart Vale pointed out in the New Statesman last year, “the pervading influence of the unicorn has meant that we are already at risk of losing sight of the fundamental importance of patient investing.”  The problem is that only in a few situations does sky rocket market growth at any cost turn out to be the best option for investors.  Instead, the majority of value creation comes from a multi year, multi stage strategy that values patient capital.  The problem is that patient investing does not go hand-in-hand with building unicorns.

Take electric scooter supplier Bird.  Bird rose to unicorn status faster than any other startup, notching a $2 billion valuation in less than a year, according to PitchBook. To put that into perspective: Airbnb took nearly three years to reach a $1 billion valuation - and Uber needed four.  But Bird is an immature business and it’s not clear how the scooter rental income versus operating costs are going to produce consistent profits.

Perhaps the aura of unicorn size and rapid growth is what makes investors think they can’t fail - when the exact opposite may be true.  There’s a long list of unicorn failures: GiltGroup, NastyGal, and so on.  In the UK Powa Technologies, the London technology company once valued at £1.8 billion ($2.7 billion), collapsed into administration in 2016.  Investors ploughed in over £170M even though the company “was basically pre-revenue”.

So unicorns may be mythical but that doesn’t make them immortal.

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