It's no secret that something's been going on with unicorn valuations lately. There have been dozens of articles published recently about the topic - from a coming "unicorn apocalypse," or "unicorns losing their horns," to lukewarm reassurances that everything will be okay.
Unicorn /ˈjunɪkɔrn/: a private startup company with $1 billion valuation or higher, based on fundraising.
According to CB Insights there are 155 unicorns with a joint valuation of $550 billion. They are in all imaginable areas of industry - travel, work, healthcare, communication and so on. Several of these unicorns have seen either a decrease or a stagnation in their valuation in the past few months. In this post, I'm going to talk about the origin of unicorns and a few companies who have recently seen dips in valuation. Then, I'll discuss various reasons why this could be happening and if this trend is expected to continue.
Origin of the Unicorn
Why are there so many private companies around with such high valuations in the first place? There are a variety of factors which contribute to the high valuation of private companies which would have traditionally gone public at this point. Adam Lashinsky of Fortune outlines a probable cause:
Low interest rates have made capital cheap and have encouraged institutional investors to seek superior returns in riskier bets. In turn, with so much available cash, private companies have been in no hurry to seek the glare of public markets. As a result, they are able to raise ever greater amounts at ever higher valuations.
Not going public has been a growing trend for companies, and CNN Money reported that 2015 saw the lowest number of tech IPOs since 2009. This trend makes sense given with the significant incentives to stay in the private sector. Whatever the reason for not going public, unicorns across the board have been negatively affected by recent trends.
Now let's take a look at a few examples of what everyone has been worrying about.
Still Unicorns, Just With Smaller Horns
In this section, I'm going to run through a few recent decreased valuations. I am not intending to provide an in-depth account of each, but rather to provide you with examples of this trend from unicorns in different industries.
Dropbox is a file hosting service that allows users to synchronize their files and save them in cloud storage. According to Business Insider, T. Rowe Price marked down its stake in Dropbox by 51%. Share values were dropped to $9.40 in as of December 31, 2015, down from $19.10 paid by investors in 2014 during Dropbox's last funding round - when it was valued at $10B.
Snapchat is a video messaging application in which Fidelity invested $500M in Series F funding in 2015 at a valuation of $16B. Not too bad, for an app with over a 100 million daily active users. In November, it was reported that Snapchat saw a 25% decrease in valuation from Fidelity - with a new valuation of $12B.
Palantir Solutions is a global provider of integrated economic and planning products and services that provides a platform of software to integrate and visualize information for enterprises to predict and enhance their futures. After investing in Palantir in 2012 and 2013, a mutual fund from Morgan Stanley decreased the valuation of their shares in Palantir last month by 32%, according to Fortune. This is after Palantir was valued at $20B in their last funding round in July 2015.
Zenefits is a cloud-based Human Resources Information System (HRIS), which manages all HR, payroll and benefits from a single online dashboard. The company had a $4.5B valuation in May of 2015 after raising $550M in Series C funding. Between August 1 and September 30, 2015, Fidelity marked down the value of its Zenefits investments by 48%, meaning a new valuation of $2.34B.
Exceptions to the Trend
However, not all unicorn valuations have decreased significantly. After raising $100M in November 2015, AirBnB was again valued at its previous valuation of $25B, instead of an increase in valuation. Jet raised $350M in November 2015, and received a valuation of $1.5B, a hefty sum, although less than it was hoping for.
So, even though there are companies whose valuations haven't significantly decreased, it is worth noting that the exceptions are still disappointing and less than they otherwise would have been.
Why A Sudden Decrease In Valuations?
Although most believe that the recent trend in valuations is simply due to the downturn in the market, there are several other theories being discussed in business publications. I'll go through a few potential reasons here.
What Goes Up Must Come Down
A recent article in BloombergView gave a simple reason for the recent trend in decreasing valuations - that private companies are the new public companies. The author made the comparison that, as with stock in public companies, sometimes the valuation of a private company is simply going to decrease. The value of anything fluctuates, and private companies are not exempt from this trend.
Downturn In The Market
A more dramatic theory is presented in a New York Times article. The author warns that the recent downturn in the market will lead to the bursting of the unicorn bubble. The author writes of an apocalyptic Silicon Valley with rampant down-rounds, founders being removed or losing their shares, epic battles between common and preferred shareholders, and talented employees fleeing companies in search of greener horizons with more attractive opportunities.
Valuations Were Unrealistic To Begin With
It’s worth asking - are unicorns worth anything close to their valuation anyway? Many unicorns have yet to earn a profit, and the business models or others are questionable at best. Unicorn Theranos even had their core technology questioned. It's a confusing thing to begin with - why a company that isn't making money can be valued at over a billion dollars.
We can see evidence for this by looking at a few examples of former unicorns that are now public companies, as detailed by Fortune. Although Box and Hortonworks were both worth over a billion dollars before going public, they have failed to maintain values that match their previous valuations as private companies. This points to an unrealistic valuation while the company was private. It's possible that the unrealistic valuations are finally catching up with reality.
Will Valuations Continue To Plummet?
Last Thursday, TechCrunch published an article arguing that people have a misconception of unicorns by group them together indiscriminately and labeling them all as "tech" instead of realizing that they are in fact in a variety of different industries. Through conceptualizing the unicorn phenomena as many mini-bubbles, rather than a single mega-bubble, he provides a unique perspective.
The author, Mike Trigg, argues that many of these mini-bubbles have already experienced "adjustments" - such as with the daily deal sites or social gaming - and that these adjustments neither significantly impacted other mini-bubbles nor did it significantly effect the larger market. He writes that the new valuation can challenge companies to become profitable more quickly, and implies that the new valuations are more realistic.
That the author is not predicting the coming of the four horsemen anytime soon is a significant change in tone from his peers. While he believes that yes, the decrease in valuations will continue, he believes that the situation should be framed as a step towards a more realistic valuation. Additionally, the author posits that we reconsider how we conceptualize unicorns, and that we consider viewing this recent trend in decreasing valuations as a trend in "self-correction" of valuations.
Fluidity in Valuation
We must keep in mind that at the end of the day, the value of something is both relative and fluid. Be it a private or public company, the value of that company is going to fluctuate - and not always in the direction we want it to.
While there are many thoughts about what is causing the recent string of decreased valuations, one thing stands true: over the past few months there has been significant devaluation and stagnation in unicorn valuation. If what experts are writing is true, this trend is expected to continue.
Be sure to check out Zirra to see how current unicorn valuations compare to the benchmarked valuations predicted using Zirra's unique algorithm.