Feeding Unicorns

I don't remember when I first saw a unicorn, although it might have been in the books about Narnia. Nowadays they seem to be everywhere, although they have much lost their looks. They also don't seem to be all that attracted to virgins anymore, but more interested in angels. Not many people want to kill them (except for the competition) but quite a lot of them end up dead anyhow.

In 2013, Aileen Lee, a veteran venture capitalist, identified 39 U.S. start-ups U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors. Since this is a tiny portion of the total amount of start-up companies, she called them unicorns to capture how extremely rare and magical they are. Some of them you've probably heard of since they are consumer-oriented such as Uber, Facebook, LinkedIn, Twitter and Instagram while others such as Nicira, Splunk and Tableau target enterprises. 

Since then the concept has caught on (even though many seem to have forgotten who coined it) and when searching on Google for unicorns you end up with more references to companies then to the mythical creature (or it might be just the way Google tweaks the search for me...).

In a recent count (Nov 2015), Lee found 84 U.S. unicorns, which means an increase of 115%. The picture illustrating the first article featured a single unicorn, whereas the 2015 article has a whole heard at the top. However, the numbers are changing all the time why there is a constantly updated unicorn leader-board. For those interested in unicorns from other countries as well, can take a look at Fortune's compilation or the CB Insights list updated in real time.

Since there is now a substantial group of unicorns, others than Lee and her team have been looking into what they have in common. Some like Adeo Ressi, claims to have found the recipe for success: using a cycle of three main tactics: (1) the Push, (2) the Markup, and (3) the Backfill. However, I must say that this looks exactly like what VC put us though in the 90ies. I believe Heidi Roizen fictive story is much more pedagogical, although it tells you what not to do.

As is usual when it comes to VC information, it is focused on valuation and capital raised and not so much about the company is doing in terms of sales, profits and customers. And it is also the question of how the valuation has been done, by investors (creating so called paper unicorns) or the market. At least one of the unicorn CEOs is not happy about being bunched together with the other creatures:

"Much the way all wildlife isn’t the same, all unicorn companies don't share the same degree of long-term promise. No one's interests are best served by prescribing the same, one-size-fits-all outlook to such a wide breadth of startups. And judging a category by valuation alone isn't just unfairly harming the reputations of the companies concerned. It's also exaggerating the popular impression of a tech bubble that's ready to burst." Kirk Krappe, chairman and CEO of Apttus

Since the birth rate of unicorn has started to decline, more and more articles have been published containing warnings about an increase in unicorn mortality. For example, The Economist claims that it has become clearer that the high valuations firms achieve in private are not always maintained when they go public. The Bloomberg View concludes that few unicorns have what it takes to protect an acquired monopoly. CNBC is concerned with the lack of public IPOs among the unicorns.

Doug Henwood compares the current situation to the dot. boom and at least takes comfort in that fewer households are now investing in stocks than before.

"Of course, when this bubble bursts—as it inevitably will, especially with the Fed having ended its massive money injections and now talking about raising interest rates in the fall—the narrow holding of tech investments means that fewer innocents will suffer collateral damage from the implosion." Doug Henwood

However, some claim there is no bubble at all. Miguel Helft at Forbes puts it like this:

"Taken as a whole, the 93 firms based in the U.S. (Americorns?) are worth $322 billion, 14% less than Microsoft and a bit more than Intel and Cisco combined. Which would you rather own long term? Microsoft or a basket that includes Uber, Airbnb, Snapchat and Pinterest along with scores of others, a few of which will surely emerge as future PayPals, Twitters or Fitbits? Is that even a hard decision? And if not, what are we worried about? Quite the contrary: If you’re looking for growth, the unicorns minted in the last few years may well be one of the most attractive investments anywhere." Miguel Helft

Well, similar to Andrew Chen I like companies that set out to live forever rather than to become unicorns. I suppose I simply like workhorses better than unicorns.

From Varnhem Autumn 2015