Unicorn is a term in the investment industry, and in particular the venture capital industry, which denotes a start-up company whose valuation has exceeded (the somewhat arbitrary) $1 billion. The term has been popularized by Aileen Lee of Cowboy Ventures. Fortune magazine counted over 80 unicorns as of January 2015. Now its most likely past 100. But their journey lately has been bumpy.
There are signs of cooling the “lofty valuations” of these unicorns. Fidelity wrote down Dropbox by 20%; Snapchat by 25%; and Zenefits and MongoDB by around 50% each. Zenefits had raised money at a $4.5B valuation in May. The reason for the markdown is the slow growth in meeting their targets. Square which had its IPO earlier in November, was valued at $4 billion, about a third less than in its most recent private round. Several others besides Square have faced “markdowns”: Pure Storage, Box, GoPro, News Relic, Hottonworks, etc.
So what is going on? Some of it is due to stock market jitteriness. Some of the unicorns claim to be disruptive and a threat to the incumbents. This has not happened. Google, Facebook, Amazon have continued to grow impressively. Facebook has messaging apps that compete with Snapchat and Dropbox has a rival in Amazon with a fast growing cloud storage business. MongoDB claimed to disrupt Oracle’s business, but Oracle’s stock has been growing lately. Investors clearly see that profitless startups may not be as good as incumbents’ growth prospects. Also, the burn rates of the unicorns are way too high. Lyft suffered a loss of $130m during the first half of this year on less that $50m in revenue. Instacart is losing $10 on each order. Open source software companies like Cloudera, MongoDB or Cassandra have a tough time growing their revenue.
Also, there seems to be a competition to pump up the valuation of these unicorns. The velocity to get into the “unicorn club” is too high. New fund raising rounds get creative to boost the valuation with investors. There are too many companies in similar spaces, each claiming to be $20-30 billion dollar companies in future. This is not going to happen. In the past downturns, healthy and well capitalized firms have benefited. Airbnb has $2 Billion in cash with a burn rate of around $100m a year. Those firms that hoarded up cash during good times for the downturn will do well.
So unicorns, watch out before you become history.