The latter description was in fact coined in 2013 by a leading Silicon Valley venture capitalist (VC), Aileen Lee, carefully chosen to reflect the rarity of start-ups flourishing into the billion-dollar-plus companies VC investors dream of discovering. When she first used the phrase, there were only 39 $1bn start-ups representing just 0.07 per cent of the technology VC universe – rare indeed. Now, however, there are 344 unicorns valued at a cumulative $1.16 trillion (roughly twice the aggregate value of the FTSE 250), with another 35 added in 2018 alone – about as rare as a unicorn lunchbox in a branch of Paperchase.
Yet when it comes to valuation of high-potential but currently profitless tech companies, we appear to have moved further into the realm of fantasy. Like any investment, VC-backed companies are only worth what investors are prepared to pay for them. In the case of private companies, that value is usually based on the price and proportion of the business sold at the last round of financing, the result of a negotiation between a small group of existing backers, business owners and potential new investors over a unicorn’s growth prospects.
But many observers argue that this process lacks the rigorous scrutiny of public markets and the glare of thousands of eyes. Valuations are an ‘art’ based on not much more than a few guys and gals in a room setting the price of their own stakes, in a world awash with cash from QE-struck investors chasing a return, and where ‘get big quick’ – rather than get profitable, ever – has become the all-consuming mantra. As Phil Oakley observes in his column this week, valuations don’t seem to matter any more – at least, not the approach to valuation grounded in the reality of long-term cash generation.
The big question, then, is: are these companies really worth what their owners believe? The answer we are increasingly seeing is: perhaps not. The likes of Snap and Lyft have seen the prices of their shares tumble after IPO, a worrying sign for backers trying to get the next lot of unicorns to market, not least Softbank, which is heavily invested in Nasdaq-bound Uber and WeWork (aka The We Company), respectively valued at $90- and $40-odd billion. Both companies have, as the VCs hoped, got big quickly, but so have losses – and that’s a reality that must surely come to bite the unicorn hunters at some point.
