A Blessing of Unicorns…?

 

I was in the US recently, and there was much talk of Unicorns.  So much so, in fact, that I felt the need to put fingers to keyboard.

 

 

What is a unicorn, and why are people obsessed with them?

The top VCs and PEs have become rich by driving huge returns from a few companies that make it big, and unicorn is the term that is used to describe the start-ups whose valuation is at or above US $1 billion, because they are both supposedly magical and rare.

 

Uber (transportation) is currently the largest of the lot, being the only unicorn currently valued above $50 billion  ($51bn as of August 2015). Other well known unicorns include Snapchat ($16bn, photo sharing), Airbnb ($25.5bn, lodging), and Spotify ($8.53bn, music).

 

In the last few years, the industry has become fanatical about unicorn hunting; to catch one young is any VC or PE’s ultimate dream.

 

 

Is this the Year of the Unicorn?

According to CB Insights:The Unicorn List, updated in real time on , there are 140 private companies valued at $1 billion or above, with a total cumulative value of $505 billion. Not as uncommon as its name suggests – and perhaps more of a herd. Some VCs & PEs are even going so far as to redirect their focus to hunt companies they think have the potential to reach a $10bn valuation –  there are now so many companies with vaulations of $10bn or more that the industry has coined a new term for them, “Decacorns”.

 

 

Valuations are sky high right now. Why?

 

Technology

Rapid advancements in technology have given start-ups the platform to build an unprecedented network of mass market consumer users, with much lower capital requirements than were previously possible.

 

On the other hand, this makes the barriers to entry really low. The tech industry is quickly becoming saturated with similar products; as it stands, anyone who’s written some code and has a marketing campaign is able to call themselves a start-up. Ring any bells? During the late 90s, investors were encouraged to invest in any start-up with a “.com” or an “e-something” in its business plan, due to the roaring success of the earlier Internet start-ups. Numerous internet startups formed in order to cash in on all the capital flowing around, competing away profit margins. History could be due for a re-run.

 

Companies are taking longer to go public

In the last 20 years, the time it takes for a company to IPO has grown from 5 years to 8 years. A recent driver for this is the JOBS Act, signed in law in April 2012, which allows companies to take on a larger number of shareholders before they are required to be publicly listed in the US. This essentially makes it easier for small businesses to raise capital, without the large cost of going, and being, public. Now that companies stay private and grow for longer, and enjoy a higher number of funding rounds, valuations of later-stage start-ups have been hugely inflated.

 

This presents risks. At the end of the day, investors need a return; the longer the time to exit, the larger the chance of the company collapsing. Ecommerce start-up Fab (e-commerce) is just one example. The company raised over $300 million in funding, and at its peak had a value of $1.5 billion; after burning through more than $200m of the money, in March this year it was acquired by PCH for a measly $15 million. What happened to Fab didn’t bring about severe consequences for the broader market; however if VCs get burned by collapsing companies, their money could dry up very quickly.

 

 

 

Record low interest rates

With interest rates remaining at a minimal 0.5%, investors are taking their money out of cash savings and bond markets, and pumping it into venture funds in order to get better returns, albeit at a higher risk. As a result, there is a lot more capital flowing around in venture funds. For example, Goldman Sachs is becoming an influential investor in technology start-ups; according to CB Insights, Goldman has participated in 132 financing rounds since 2009, with 77 of those since the start of 2013.

 

Fearsome competitors

VCs and PEs have formidable competitors in the form of Facebook, Google, Apple and the like. And start-ups like them – what’s not to like about money now plus stock in a valuable company like Apple?  And competition drives up valuations.

 

 

FinTech unicorns?

Naturally, there have been a “blessing” (the collective term for unicorns) of unicorns in the FinTech sector. The UK is leading the FinTech charge, with $5.4bn having been invested in financial technology since 2010, more than in the rest of Europe put together. In China, ‘internet finance’ companies are booming. Lufax (P2P lending), Chinese peer-to-peer lender, has financed loans with a transaction value of $2.5 billion in total, while OnDeck, a financial platform that provides loan financing to SMEs in the United States, who listed on the NYSE in 2014 at $1.3 billion, has financed $3 billion worth of loans. However, following its IPO,  OnDeck’s shares have fallen to $9.66, less than 50% of its IPO price of $20 per share. Furthermore Lending Club (P2P lending), who also IPO’d on the NYSE at $8.9 billion in December 2014, is now only worth half of that at $4.5 billion.

 

 

A moderate perspective

The trick is not to be blinded by the glitz and the glamour of the unicorn, and not to become starry-eyed in the face of their frothy valuations.

 

Focus instead on finding those businesses which have strong and sturdy genes, which are built to scale, and which operate in markets that are unaffected by fashion – markets which will be there in fair winds and in foul weather. 

 

__________

 

Dr Louise Beaumont is Head of Public Affairs and Marketing at , which is a leading investor in SME alternative finance.

Louise has over twenty years experience in growing companies - from initial spark, to operationalisation, results delivered, and value created. Having previously worked for organisations such as Siemens, Hewlett Packard, Microsoft, and Capgemini, Louise has focused on the UK’s fast growing alternative finance sector since 2010, including co-founding one of GLI’s investees. Louise has advised key UK government departments and units on FinTech and AltFin including; HM Treasury, British Business Bank, Government Office for Science, Cabinet Office, UK Trade & Industry, Department for Business, Innovation & Skills, and Number 10 Downing Street's Policy Unit.