If it seems like a new, billion-dollar tech unicorn is born every week, you’re not imagining things.
The number of private tech companies valued at $US1 billion or more worldwide has surged so much this year that on average 1.3 unicorns have been created every week in 2015, according to data from CB Insights.
The past week alone saw announcements that online messaging startup Kik and digital health company ZocDoc both raised new funding that valued the companies well over $US1 billion. It’s almost gotten to the point where you might think a tech company that isn’t a unicorn must have something wrong with it.
The number of new unicorns created in Q2 alone was equal to the entire class of 2014 unicorns. And CB Insights research analyst Nikhil Krishna notes that if the current rate were to hold steady, we could see another 40 to 50 more new unicorns before the year is up.
Of course that assumes that the current era of cheap money and the seemingly insatiable investor appetite for tech startups continues. But after two brutal days of trading in the public markets and a growing sense that the Fed could soon raise interest rates, a lot of voices are warning that the age of the unicorn could soon come to an end.
Winter is coming
Softbank president Nikesh Arora warned in a tweet on Friday that it’s time for entrepreneurs to “strap down” and preserve cash, which will no longer be abundantly available.
Time for entrepreneurs to strap down, don’t waste cash, not going to be as abundantly available as before. Build advantage, focus.
— Nikesh Arora (@nikesharora) August 21, 2015
Venture Capital investor Bill Gurley, who has long warned of a bubble in valuations of privately held tech companies, fired off his own ominous tweet storm on Thursday night, noting that the market could be at an “inflection point” in which investors value profitability above growth. “Which unicorn entrepreneurs are prepared for such a shift? Who can adjust quickly?”
Meanwhile, a report in The Information this week noted that some of the big institutional investors that have been ploughing money into tech startups and feeding the rich valuations are quietly marking down some of their investments.
Funds managed by Fidelity Investments and BlackRock both marked down the value of their investments in MongoDB, a database firm, according to the report which cites recent filings. GSV Capital did the same for its investment in online retailer Gilt Group, The Information noted.
The argument for keeping calm, which was advanced by venture capital firm Andreessen Horowitz earlier this year, is that the amount of money going to tech unicorns is still nowhere near the amount of money that was pumped into public dotcom companies during the 1999/2000 bubble. And the current crop of companies are addressing a market of Internet users that is vastly larger than the market that existed 15 years ago.
But even if this isn’t bubble 2.0, not every unicorn company will succeed. Some businesses will naturally struggle. And a rough market will exacerbate their problems.
Gurley has previously said he expects to see some dead unicorns this year.
That hasn’t happened yet. In fact, the total number of unicorns has increased significantly since Gurley’s prediction in March. But with the sudden change in market conditions, we could see something happen with the unicorns soon.
Where will all the unicorns go?
The trouble with the current glut of unicorns is that sooner or later the investors that funded the companies need to cash out.
“At a certain point there has to be some sort of liquidity in the market so that investors can see returns on the capital they have invested. Some of these unicorns have to exit at some point so that we can see that these valuations are not just paper valuations,” said CB Insight’s Krishna.
Usually that happens in one of two ways: When a company sells shares to the public in an IPO, or when a company is acquired.
The IPO market has been dormant for tech companies for quite some time already. There have only been 11 tech IPOs in the US this year compared to 30 unicorn fundings among US tech companies.
And with the public stock market going through a turbulent phase, the prospect of IPOs may be even more unlikely — save perhaps for the biggest companies like Uber, which plans to go public in 18 to 24 months according to a recent Reuters report.
That leaves acquisitions.
As it happens, many of the established tech giants, such as Apple, Google and Facebook have massive amounts of cash on their balance sheets. Google, for instance, has roughly $US70 billion in cash. Even Yahoo, a struggling Internet company, has $US7 billion in cash and short term investments.
Right now, unicorns are expensive beasts to wrangle.
But if business conditions continue to deteriorate, and private market valuations contract, we might see a unicorn trophy hunt.