A $1 billion company that doesn’t make any money? That’s a unicorn, and there’s never been more of them around.
There’s nothing mythological about a unicorn – at least not in the world of technology. A unicorn is a technology company that has a massive valuation, despite the fact it’s not really making any money. Difinitively, a unicorn is a $1 billion company, as valued by the venture capital industry. Groupon was the first of them, but now there are as many as 100 others which share this dubious honour.
It’s not all bad press for unicorns; they’re fast-growing with a valuation that reflects their prospects. There are several unicorn companies out there which are pretty exciting: DocuSign, Dropbox, Evernote and Hootsuite all have a strong market presence and positive customer reviews. To a pessimist, however, a unicorn company is over-hyped, with no chance of ever really coming good on its promises.
Facebook is a fine example of a unicorn company who made the leap into the realm of real business: this company managed to take its high number of non-paying users and translate them into a business that makes money. Fellow unicorns are often valued on the basis of their user numbers, as well as growth and engagement. These types of companies often operate on an advertising model, or a freemium model where most people use the service for free, while only some pay. But as many former unicorns have come to realise, there’s no guaranteed route for turning popularity into cash.
So for many unicorn founders, the best bet may well be to sell their company at the top price – that way they can cash out before having to deal with any of these problems. “It is easy to see why promising startups (and their backers) want to become a member of the unicorn club. It helps entrepreneurs gain credibility- their greatest hurdle – with future investors, business partners and, most importantly, their most talented staff,” writes The Economist.
Awareness that the valuations may be precarious does also seem to be high in the investor community, suggests a recent study by law firm Fenwick & West. After looking at 37 fundraising deals involving unicorn companies, the study found that each of them contained a clause where the investors protected themselves against losing money in a future acquisition or stockmarket float: “Investors received terms that provided a fair amount of downside protection for their investment, especially in the event of an acquisition.”.
So while creating a unicorn may make some founders rich, or at least get them their next job, one interesting question remains: are unicorns creating good tech businesses? Technology adviser Andrew Chen, who’s also an investor with AngelList, says no – we should be trying to build “forever companies” instead. “[Being a unicorn] is the ultimate vanity metric, because $1 billion of shareholder value is merely the lagging indicator that we’ve created something useful for the world. This should never, in itself, be the goal of starting up a company,” says Chen, arguing we have reached “peak” unicorn and should move on: “Let’s focus on the inputs for building impactful, lasting companies, where wealth creation is a side effect of doing a great job.”.
Of course, sometimes a “forever company” and a unicorn is the same thing – Facebook shows no signs of disappearing any time soon. Online craft retailer Etsy floated for $1.8 billion earlier this year; the hype was real then too. The point is that it’s very difficult to differentiate between a unicorn and a good company before things have had time to play out, so we may not see the end of this trend for a while yet. But to pull out an old-school investment truism to close off this post on a very modern investment phenomenon: “Only when the tide goes out do you discover who’s been swimming naked.”. Investment guru Warren Buffett said that, and he’s right this time too: if a unicorn can’t work out a way to make some hard cash, that hotshot valuation will disappear very, very soon.
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