According to venture capital data aggregator CB Insights, there are currently 143 “unicorns” (private companies valued at $1 billion or above) worldwide, with a combined value of $509 billion. Eighty of these start-ups are valued at less than $2 billion each. The two 10,000-pound unicorns include the transportation company Uber, which first attained its unicorn status in 2013 and is currently valued at $51 billion; and Chinese smart phone maker Xiaomi, which joined the unicorn club in 2011 and is currently valued at $46 billion. Those valuations put Uber and Xiaomi on par with the market capitalizations of more established companies such as Nissan Motor Company, FedEx, Caterpillar and Kraft Foods.
Many of the 143 unicorns reached their status only recently. Forty eight companies with an aggregate value of $137 billion joined the unicorn club last year and another 67 with a combined value of $113 million earned entry this year. The steep rise in the number of billion-dollar start-ups over the past 24 months begs the question: Is technology entering a bubble?1
In June, we discussed the “mutualization” of late-stage venture capital – non-traditional late-stage investors (often mutual funds and hedge funds), afraid of missing out on acquiring positions in possible unicorns. These investors have abandoned their traditional risk analysis and in many cases pushed late stage valuations out of whack with both public market comparables and with what the underlying business fundamentals of these companies would historically command in terms of value.
While this dynamic has caused many to reminisce about the dot-com bubble of the early 2000’s, most investors agree that technology, as a whole, is not entering a bubble. The issue is much more nuanced and stage/company specific. In his recent Venture Outlook 2016 blog post, Upfront Ventures managing partner Mark Suster wrote that the “late-stage, privately held technology market is clearly in a bubble [N.B., emphasis mine].” Marc Andreessen, general partner at Andreessen Horowitz is more bullish, however, believing that we are in a period of “creation of some incredibly important, vital and successful new technology companies.”
What is certain is that a number of these high fliers will fall from grace and become “unicorpses” (dead unicorns) as the influx of capital from non-traditional venture investors has led to capital inefficiency and a focus on growth, rather than profitability. On this point, Andreessen agrees, tweeting in September of last year: "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE." Bill Gurley of Benchmark Capital shared Andreessen’s view, predicting in March that we’d see “dead unicorns” this year, as a result of capital excess.
Key Takeaway: Since the downturn of 2009, times have been good for start-ups. These good times have been fueled by access to “easy” capital, which has enabled lower-quality companies to get funded for a lot longer than has traditionally been the case. The knock-on effect is that good companies have been forced to raise more capital and spend aggressively in order to keep up with their peers. Given this dynamic, when considering later-stage venture funds, allocators would be well-served to commit selectively to vehicles that are led by disciplined general partners who focus on winning technologies managed by capital efficient teams.
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