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.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
