The frenetic era of
billion-dollar start-up unicorns is slowing significantly,
according to CB Insights. The first red flag was the
decline in "megarounds," of $100 million or more,
beginning in Q4 2015.
Unicorns are being dramatically
impacted in terms of share price by renewed market
volatility in 2018.
An end to the era of ultra-low interest rates from the
Federal Reserve will also weigh on these overvalued names.
As interest rates continue to rise throughout 2018, that
will accelerate the unicorn slowdown.
Expect
to see more dead unicorns. Several high-profile
billion-dollar start-ups missed their 2017 year-end revenue
targets, including BuzzFeed, Vice Media and Credit Karma,
according to the Wall Street Journal. That causes a rift
between the start-ups and their results-driven investors of
multiple share classes that makes it even harder to raise
late-stage capital. The WSJ found that after the second year
the returns of unprofitable companies gradually declined
even further.
Most
unicorn companies aren't producing billions of dollars of
revenue. Several financial models project that up to 80
percent of unicorn companies are set to fail within two
years. Uber, the highest-valued private technology company,
has rapidly growing revenue but remains highly unprofitable.
With revenue of $6.5 billion in 2016, it still registered a
net loss of $2.8 billion.
The
truth is, when a unicorn is overvalued, it doesn't take long
for the market to discover this fact. Great odds for a VC
batting .300, but not great for your average investor on
Main Street and potentially in one or more mutual funds that
have invested retirement assets in these companies.
If you intend to invest in a
unicorn IPO anytime soon, think twice. And if you haven't
taken a close look at your 401(k) or IRA retirement plan
investments, check to see what those mutual funds have
been dabbling in.
We
are now officially in a tech bubble larger than March of
2000. The
term unicorn in business parlance was created in 2013 by
venture capitalist Aileen Lee. This mythical animal
represented the statistical rarity of a start-up company
valued at over $1 billion dollars. The term may not last
much longer in the financial vernacular than many of the
start-ups that were — wrongly — branded with it.
— By Keith Wright, Instructor of
accounting and information services at the Villanova
School of Business