Recently, in the financial environment, the term “unicorn” started to be utilized with reference to those private companies, mainly tech start-ups, most of which located in the Silicon Valley, which are valued at more than $1 billion.
The $1 billion valuation model first appeared a couple of years ago when the venture investor Aileen Lee noticed that many popular start-ups, such as Facebook and LinkedIn, often reached such a high valuation although they were still privately held. Due to the rarity of this phenomenon, she started labelling those companies under the name of “unicorns”, referring to the rarity and uniqueness of the mythological creatures. The term, initially coined to refer to a bunch of outsiders, month after month ended up encompassing a growing number of companies hit the $1 billion target and joined “the unicorn club”.
The current list of unicorns is extensive, including Uber, Airbnb, SnapChat, Just Eat and many others, reaching a number of about 150. Nevertheless, in the latest period rumors have been suggesting that Silicon Valley unicorns are at risk of dying off and becoming a myth as well. The number of unicorns has become so large that speculations have arisen regarding their effective “specialty”. Doubts on whether these companies are overvalued led investors and financial markets to fear that all this is only another tech bubble, just like the one in the late 1990s, now approaching its explosion.
Is there actual evidence on these conjectures? People started worrying about a second technology bubble right after the first one popped. They started questioning themselves about the actual value of companies such as Facebook, Skype, YouTube. Expectations proved to be wrong as these companies not only proved not to be overvalued but actually saw their value multiplied many and many times in the subsequent years. On the other side, it is worth saying that some others, such as Feedburner and aQuantive, turned out to be not as good as it seemed, even if in past years many were hugely underestimating how valuable high-profile internet companies would become. Of course, this is not enough to exclude a technology bubble today; however, these examples teach us that, even if on one hand technology stocks are at risk of loosing value, on the other there are also times when people say there's a bubble and then companies’ values keep going up. Rather than treating that as a sign that there was not any bubble, people interpret it as a sign that the bubble has further increased.
Coming back to present times, what made investors start worrying about unicorns’ overvaluation is the poor performance some of them post-IPO. One example could be Jack Dorsey’s Square, which went public some months ago with a price below its target range ($9 rather than the expected $11 to $13 expected), and then experienced a rise by 45% in the first day of trading closing at $13.07. The same happened for Twitter, which initially saw its price appreciating by a quite high percentage of its initial IPO price. Shortly after, things changed and both companies’ prices decreased by almost 10% of their value, leading to people’s growing concerns. Moreover, Dropbox saw its pre-IPO value being reduced by 24% from industry giant BlackRock Inc (BLK), an early Dropbox investor, and Fidelty wrote down the value of Snapchat by 25%; all of this signaling the deteriorating health of money-losing unicorns.
The future of these companies is not clear but, basing one’s opinion on recent facts, it could seem that there will soon be a crown of “zombie unicorns”. They should meet the expectations and goals they set when they became unicorns before they burn through the money they raised; as Aileen Lee said: “If they don’t do that, they’re in a dangerous position”.
Fiammetta Galzerano
The $1 billion valuation model first appeared a couple of years ago when the venture investor Aileen Lee noticed that many popular start-ups, such as Facebook and LinkedIn, often reached such a high valuation although they were still privately held. Due to the rarity of this phenomenon, she started labelling those companies under the name of “unicorns”, referring to the rarity and uniqueness of the mythological creatures. The term, initially coined to refer to a bunch of outsiders, month after month ended up encompassing a growing number of companies hit the $1 billion target and joined “the unicorn club”.
The current list of unicorns is extensive, including Uber, Airbnb, SnapChat, Just Eat and many others, reaching a number of about 150. Nevertheless, in the latest period rumors have been suggesting that Silicon Valley unicorns are at risk of dying off and becoming a myth as well. The number of unicorns has become so large that speculations have arisen regarding their effective “specialty”. Doubts on whether these companies are overvalued led investors and financial markets to fear that all this is only another tech bubble, just like the one in the late 1990s, now approaching its explosion.
Is there actual evidence on these conjectures? People started worrying about a second technology bubble right after the first one popped. They started questioning themselves about the actual value of companies such as Facebook, Skype, YouTube. Expectations proved to be wrong as these companies not only proved not to be overvalued but actually saw their value multiplied many and many times in the subsequent years. On the other side, it is worth saying that some others, such as Feedburner and aQuantive, turned out to be not as good as it seemed, even if in past years many were hugely underestimating how valuable high-profile internet companies would become. Of course, this is not enough to exclude a technology bubble today; however, these examples teach us that, even if on one hand technology stocks are at risk of loosing value, on the other there are also times when people say there's a bubble and then companies’ values keep going up. Rather than treating that as a sign that there was not any bubble, people interpret it as a sign that the bubble has further increased.
Coming back to present times, what made investors start worrying about unicorns’ overvaluation is the poor performance some of them post-IPO. One example could be Jack Dorsey’s Square, which went public some months ago with a price below its target range ($9 rather than the expected $11 to $13 expected), and then experienced a rise by 45% in the first day of trading closing at $13.07. The same happened for Twitter, which initially saw its price appreciating by a quite high percentage of its initial IPO price. Shortly after, things changed and both companies’ prices decreased by almost 10% of their value, leading to people’s growing concerns. Moreover, Dropbox saw its pre-IPO value being reduced by 24% from industry giant BlackRock Inc (BLK), an early Dropbox investor, and Fidelty wrote down the value of Snapchat by 25%; all of this signaling the deteriorating health of money-losing unicorns.
The future of these companies is not clear but, basing one’s opinion on recent facts, it could seem that there will soon be a crown of “zombie unicorns”. They should meet the expectations and goals they set when they became unicorns before they burn through the money they raised; as Aileen Lee said: “If they don’t do that, they’re in a dangerous position”.
Fiammetta Galzerano