Unicorns, Thoroughbreds and Work Horses

Sara Craven
There are now 142 start-ups with private valuations of more than $1 billion according to CB Insights. Most of these, so called, “unicorns” achieved these valuations in 2014 and 2015 – with nearly half joining the herd in 2015. But more recently the weaker members of the herd have seen their mythical enchantment luster diminished as market conditions appear more challenged and skepticism returns to the private markets.  
Private company valuations have soared for a variety of reasons.  For starters, private companies are now staying private for twice as long as historical averages with the median time for venture-backed start-ups to exit more than doubled from 3.1 years in 2000 to 7.4 years in 2013, according to the National Venture Capital Association.  The appeal of avoiding public company disclosures and being marked-to-market daily is a reasonable siren song for management teams to follow – assuming they have access to capital for growth and the ability for insiders to get liquidity.  Both trends fell firmly in place with significant liquidity provided by the venture capital community and new alternatives for employees and early investors to achieve liquidity. Finally, non-traditional late stage funding sources from investment firms such as Fidelity, Blackrock, Wells Fargo and Vanguard has entered the market. With the IPO market providing limited returns given the full price of offerings these days, large IPO participants are asking for access earlier in the path to going public.  It is likely that these less price-sensitive players have played a contributing role to the unicorn phenomenon.  
But the world is changing.  With these points in mind, let’s review the recent landscape of 2015. A main artery for the flow of capital to mid to late stage start-ups, VC investments, slowed in the fourth quarter of 2015. According to CB Insights, a venture capital research firm, global venture capital investment fell by 30% to $27.3 billion, in the fourth quarter. As a result, the number of newly minted unicorns fell to 9 in the fourth quarter, compared to 23 new unicorns in the fourth quarter of last year 
Meanwhile, volatility has returned to the public markets, lowering the valuation umbrella for private companies seeking financing.  Additionally, market volatility tends to shut down the IPO window, limiting funding options.  January 2016 did not see a single IPO come to market, the first month that’s happened since 2011. Those companies that did find their way out recently into the public markets have broadly suffered, including online handmade craft retailer, ETSY, Inc.  Etsy was offered to the market at $16 per share in April 2015 and ran all the way to almost $36 in its initial day of trading but since then, its share value has fallen by roughly half of its IPO price of $16 per share. Another example, Square Inc. went public at a price below its last private funding valuation. Square launched at $9 per share in the IPO, whereas a 2014 funding round of convertible preferred stock went for about $15.46 per share
Of course, welcome to the world of technology.  It’s tough to get a foothold, become the dominant player in the space, and then maintain that dominant position and the valuation levels that come with it.  And many do not make it all the way to dominance in any case. 
The bottom line?  It’s clear that the VC community and markets have become more skeptical. Perhaps the vernacular will change from unicorn to “work horse” as these once-enchanted companies must vigorously prove themselves if the market for new public companies continues to be slow. Venture Capital requires a long term commitment by investors, but when you think everything is a thoroughbred, you better take a closer look at the herd.  

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