Watching The Unicorns, With An Eye On Gravity

Unicorn tech firms

Our inaugural issue of the Unicorn Watch discusses a few trends to bear in mind as valuations, down rounds and IPOs materialize (or don’t).

The tech unicorns are mythical, and we aim to take some of the myth away.

Welcome to the weekly Unicorn Watch, where we’ll gauge the health of tech firms valued at $1 billion or above, spanning the globe, in industries as diverse as FinTech, payments (of course), Big Data, cybersecurity and eCommerce. The overarching theme is that tracking valuations, down rounds and hiring trends can give insight into the general state of innovation, which, of course, needs money (and workers), in addition to software and hardware game-changers, to stay afloat.

The roughly 75 unicorns — with more to come, and possibly some to drop out, given the market climate — that bow on our watchlist show a heavy weighting toward the U.S. and China, which makes sense given the growth in FinTech and security firms in the former and the burgeoning eCommerce industry in the latter.

We’ll be building this rocket ship a bit as we fly it. But a few stats stand out. One is that the average unicorn is not all that big — at least, not as big as you might think. Our data does not include the most recent valuation of Ant Financial, which would, of course, skew that number, but for right now, the average valuation is just under $3 billion. Nothing to sneeze at but perhaps a bit of a deflator for those who think unicorns roam the earth with outsized hoof prints.

It’s worth thinking a bit about some general observations as we come to market.

First, the vaunted tech startup with billions in implied valuation dollars has become a cliché of sorts, and the reality is that they are not born all that often. Industry watchers showed that only five tech unicorns (not necessarily payments- or business-focused) were hatched in the first quarter of last year. That’s less than half of what was seen in the same period a year ago.

In the meantime, some companies that went public — the Nirvana, Holy Grail and endgame of many an entrepreneur — have not fared so well. Square has seen its valuation sliced in half, to $3 billion, before rebounding. Alibaba is well off peak levels. The public markets may be no salve for investors who got in at the ground floor and gave funding early on. In fact, according to one recent report by Silicon Valley Bank, only 17 percent of startups in The Valley — across hundreds of tech and life science firms and others — plan to go public. Could that mean that other returns have to sate investors? Yes. In that same survey, 56 percent of firms said they would look to be acquired. So ... watch for unicorns to start growing teeth and perhaps start nibbling on each other. We’ll track acquisitions here, too, along with IPOs, but the pace on the public offering front may be glacial.

The best way to think about the landscape for unicorns right now could be this: Uber and Airbnb are anomalies. Huge infiltration into huge markets, early and with no shortage of challenges ahead, is the terrain that lies ahead.

To be sure, the best way to get a handle on investor sentiment is to remember that down rounds have been here (and there), marking a temperance that has been, thus far, elusive. Temperance has also been a hallmark in dry powder raised by funds, yet kept dry. The general press has gotten into the act, noting that would-be investors want to see things like profits — or, at least, a plan for profits— where, once, valuations were based on price to sales, with no real margin mindfulness.

PYMNTS will take the unicorns by the horns, and it’ll be an interesting ride.



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