Investors Weary As Unicorn Club Fizzles

Are tech unicorns really that magical anymore?

That’s the question on the docket for the booming startup space that’s put more unicorns in the pasture than perhaps the investor community can handle.

What’s happened, of course, as more of those companies hit the $1 billion value, they have fallen into the Silicon Valley trap of not being able to live up to the hype — and in many cases leaving investors disappointed. A CNBC article reveals that the unicorn club has passed 140 companies, which has created a slew of companies that cannot deliver to their valuations.

As a result of the boom, this year has actually seen more and more tech companies opt to stay private longer until they can build more stability. A Renaissance Capital statistic indicates that 2014’s tech company IPO was 55, whereas this year’s has only been 22.

That’s caused the analyst and investing communities to wonder: Has the tech bubble burst? Or, as some have suggested, is the bubble theory a bust? 2016 could be the year in which that debate is solved.

The most recent company to spark the debate has been Square, which posted a lackluster IPO price that had investors worrying if Square was going to be another bust after it was priced at $9, which was $2 below what it was expected to go for. Square managed to squeeze back into expectations and ended up opening at $11.20 on its first day of trading and managed to climb 51 percent during the day to above $13.

But other companies haven’t been so lucky. Etsy and GrubHub, to name a few, both flopped after being given higher valuations than investors were interested in.

What’s happened as a result is the birth of the concept of what’s referred to as a “private IPO,” which essentially involves the same type of capital investments without the pressure and risks of going public. Companies like Stripe, Uber and Postmates, are a few examples of companies who’ve chosen to go after massive amounts of private capital rounds and have left plans to go public up in the air until the market appears ready.

This tactic, however, is being viewed by some as the wrong route. For example, CEO Marc Benioff said while speaking to Jim Cramer on CNBC’s “Mad Money” last month that companies like that which can raise those amounts of capital should be going public.

For one, it’s a way to gauge what the company really should be valued at. After all, a potential $1 billion company is only worth a billion if investors are actually willing to back the vision. Instead, the benefit of an IPO for these companies is to give them what CNBC called a “check-and-balance” in order to evaluate if their perspective on what their own company is worth is on target.

“It’s the opportunity to let the market decide on their valuation and rationalize them,” Benioff said.

Perhaps there is still some magic left for certain unicorns?


New PYMNTS Report: The CFO’s Guide To Digitizing B2B Payments – August 2020 

The CFO’s Guide To Digitizing B2B Payments, a PYMNTS and Comdata collaboration, examines how companies are updating their AP approaches to protect their cash flows, support their vendors and enable their financial departments to operate remotely.