“Today we have herds of unicorns,” Fortune Magazine quotes Jason Green, a partner at venture capital firm Emergence Capital Partners, in its story about startups that have achieved billion dollar capitalisations.
When the ‘unicorn’ label was coined by Aileen Lee in November 2013 it was to highlight the rarity of the beasts – on 39 existed at the time.
Today, just on a year later, there are eighty unicorns and the growth doesn’t seem to be slowing as more companies are raising funds or looking at trade sales or IPOs that will value their business at over a billion dollars.
Betting on the unicorns
Some of the business on the Fortune 80 unicorns list – like Elon Musk’s SpaceX and medical testing venture Theranos – are big, brave bets on future technologies which could prove incredibly profitable if successful. These are to today’s market was Google was at the turn of the Century.
Others, such as Xiaomi, Meituan and Flipkart, are betting on massive growth in emerging markets which China’s AliBaba has shown to be huge opportunity.
Some are already profitable and showing great potential to deliver the multibillion dollar valuations; companies like data analytics firm Palantir, developer tools vendor Atlassian and Uber are in this camp.
Many though are platform based, transaction plays that hope to clip the tickets on fields such as rental accommodation, payment systems and e-commerce. Some will be insanely successful but most have a distinct whiff of irrational exuberance about them.
Frothy exuberance
Driving that irrational exuberance is the money tsunami which has overwhelmed the financial sector since the Global Financial Crisis. As Quantitive Easing has fattened the banks’ and corporate America’s coffers, managers have sought to get their lazy dollars doing some work and the startup sector is an attractive, and sexy, place.
That influx of money has in turn has driven a spiral; as companies like Facebook have found themselves cashed up, they’ve bought more companies – Instagram and WhatsApp are the best examples of this – which in turn has increased valuations and expectations across the board.
Some of the risks in this current mania are obvious, but the question of survival when your business is valued so high becomes a pressing issue as Twitter have found with the company flailing around looking for a revenue stream to justify its fifty billion dollar valuation.
Probably the best, or worst example, of struggling to justify massive valuations is found in one of the original unicorns; Google and its YouTube division.
Monetizing YouTube
Right now YouTube is trying to screw musicians with onerous terms in return for, in the case of most artists, will be a pittance. It’s necessary for YouTube to do this so the service can capture as much value as possible to justify the rates of return demanded from its management, particularly as it’s appearing the online display advertising market is beginning to plateau.
That dash to generate revenue may become more common when investor finance starts to dry up; faced with the need to generate cashflow and satisfy the needs of impatient investors who’ve been denied a profitable exit, many of today’s unicorns could find themselves in a difficult position in a tighter VC climate.
Unicorns were once mythical creatures; now they’re real, at least in Silicon Valley, they’re going to have to learn how to fight for survival.