Unicorn Valuations Quadruple – Now Worth Almost $500B!

by the Curmudgeon

Introduction:

Unicorns (private start-ups worth over $1B each – see Note below) have quadrupled in total value since 2012.

According to CB Insights there are 118 private unicorns worth $447B, as of July 14th, 2015. Nearly 40 start-up companies joining the unicorn roster so far in 2015.

Note: The use of the term “unicorn” began with a blog from investor Aileen Lee of Cowboy Ventures in late 2013, when there were just 39 of the creatures and an average of four “born” each year. In 2014 the number rose to 48, according to CB Insights. The biggest percentage growth in total unicorn valuation occurred between 2010 and 2011, when those $1B and up valuations jumped by more than 7x due to Facebook’s Series E which valued the company at $80B (and subsequently fell at their IPO the next year).

2015 - The Year of the Unicorn:

2015 has been a stupendous year for growth in the number of unicorns and their huge valuations. Unicorns outside the U.S. have greatly contributed to the funding frenzy. For example, Tiger Global is making big bets on Indian start-ups. In five months, the hedge fund has disclosed investments in more than 17 Indian companies and has participated in rounds which total to about $1 billion.

According to CB Insights:

2015 has seen growth of $143B in combined unicorn valuations year-to-date, a 47% jump over the aggregate valuation at the end of last year.
That means 2015 is not too far from equaling the $167B in combined unicorn valuation added in full-year 2014, and this year is only half over.
That number of still private unicorns on the list has increased by 39 in 2015 YTD, a ~50% increase in the number of unicorns in just ~6.5 months.
Some $178B of the total $447B in valuation comes from the 46 non-US companies on the unicorn list.

VC Perspective:

Obviously, Venture Capitalists (VC's) don’t see a unicorn bubble, because they're the ones that are inflating it. They do see some areas of opportunity for investing. At a Tech Brainstorm conference in Aspen, CO, Fortune magazine asked VC's which sectors had opportunity for new investments. The VC's cited life sciences, the Internet of Things (IoT), and artificial intelligence.

Angel Investor: Unicorn Valuations Not Real

Unicorns may not really be worth as much as they appear to be, prior to an IPO, angel investor Esther Dyson told CNBC on July 15^th. “The valuations are not real,” she said. What will pop the bubble? “It's predictable that it will be something, but it's not predictable what it is (that will pop the bubble).”

The real problem for start-ups considering going public is there are just too many of them, Dyson said: "It's completely random. Some get amazing valuations. Some can't raise money. There are too many founders and CEOs and not enough actual workers."

Other Voices:

Caroline Craig of InfoWorld writes:

“Yes, this time is different: Private investors will take the bloodbath when -- not if -- this bubble bursts, the sky-high valuations for many unicorns crash, and there's no exit strategy.”

Bill Gurley at VC firm Benchmark warns: "We're in a risk bubble ... we're taking on a level of risk that we've never taken on before in the history of Silicon Valley startups......I do think you’ll see some dead startup unicorns this year....Companies are taking on huge burn rates to justify spending the capital they are raising in these enormous financings, putting their long-term viability in jeopardy.”

Darius Lahoutifard, founder of Business Hangouts, accused VCs of being too focused on building unicorns while great seed projects are denied. "We are not building the future anymore...Unlike the 2001 bubble, this one is on late-stage private startups. These billion-dollar startups don't even want to go public because they know they'll not get the same valuations at IPO. The burst will definitely hurt these companies, leading many of them to shut down. It will also hurt the venture capital funds that have heavily invested in them.”

In a running Twitter conversation on the subject, Danielle Morrill of the research firm Mattermark said “I’ve narrowed it down to 61 potential dead unicorns. This is the stuff everyone is talking about but no one will publish.” (That's why the CURMUDGEON columns exist!)

Closing Quote:

Dallas Mavericks owner Mark Cuban, an early dot-com entrepreneur, wrote on his blog that the current situation is “worse than the tech bubble of 2000″ because of “angel” investors investing in apps and tech firms with little scrutiny.

“I have absolutely no doubt in my mind that most of these individual angels and crowd funders are currently under water in their investments,” he wrote. “Because there is ZERO liquidity for any of those investments. None. Zero. Zip.”

We can't say it any better than that!

Till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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