By Vlad Shapiro.
For those who are not in the know, a Unicorn is a company that has been valued at no less than $1 billion. In our age of startups, the CrunchBase Leaderboard provides an insightful breakdown of the companies that have been able to surpass the magic threshold. There is a lot of great insight within the Leaderboard but to me, the immediate aspect that catches the eye is the exponential growth of the number of Unicorns out there.
During the three years between 2005 and 2008, there were exactly three privately owned companies that surpassed the billion dollar mark. These companies are now household names such as Facebook and LinkedIn. Titans competing in a weight class of their own, these companies were the “patient-zero” of the current start-up craze. By 2010, the number of unicorns doubled to 6. The following year alone added another 13. The real rush began when 2014 brought forth another 55 and the first two quarters of this year have already spurred the valuation of 63 new billion-dollar companies. All in all, we now have 158 of these mystic animals in our financial world with 14 of them already having exited through IPOs or acquisitions.
The obvious question that comes to mind is whether this incredible increase in company valuations is a bubble spurred by the fantasies of investors or whether the money flows are based on company fundamentals tied to realistic future cash flows. A concerning element is the increase in stories similar to those of Fab. A silicon darling, it joined the unicorn club in 2011 only a year after its founding. Starting out as a dating sight for the gay community, it pivoted quickly to become a flash sale site for home décor. By December of 2012 it boasted 10 million active members, 5.4 sales per minute and a valuation of $1.5 billion. However, its fall was as dramatic as its rise: by 2014 it fired all but 30 of its 750 employees and was in talks of being acquired for 15 million USD, a number that would barely cover its monthly burn rate only a year earlier. While part of the downfall was brought by the loss of key founding members it was also an unsustainable business model and miscalculated risks by investors that brought the valuation of the company to 0.01% of its peak.
If such gurus of the VC world as the analysts of Andersson Horowitz failed to adequately assess the prospects of Fab, what can be said about the level of due diligence conducted by wealthy family funds looking for “the next big thing”? The problem doesn’t lie in the fact that start-ups fail after raising investor funds, that’s kind of what start-ups do. The problem lies in companies that sport solid business models and growing customer bases but which are valued dozens (if not hundreds) of times too generously because of unrealistic growth forecasts and hypothetical monetization schemes. If enough of such bubbles burst and enough investor money is lost, funding will dry up throughout the entire ecosystem.