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This year, I'm thankful that unicorns are starting to fade

Sanity is finally returning to the market!

Financial trends and news by Steven Loeb
November 25, 2015
Short URL: http://vator.tv/n/41a5

To be totally honest with you, I've never gotten the fascination that people have with unicorns. Call me curmudgeon (I prefer realist), but it's just a horse with an extra thingy on its head, right? Doesn't seem that special to me. Also, I think it would be super dangerous to have an animal with a giant spike on its head running around.

Anyway, unicorns are not real. They are the stuff of fantasy, and they should remain there. That is why, this year, I am thankful that the unicorn trend finally seems to be slowing down, if not coming to an end altogether.

We've covered the proliferation of unicorns quite extensively here, with the huge rash of companies suddenly being worth at least a billion dollars. In 2014 alone, 38 different companies entered the $1 billion club, more than the three previous years, when only 22 companies made it combined. And it's only gotten worse from there, as at least 70 more companies became unicorns this year. 

So many companies entered into that club that the name itself started to seem ridiculous. To quote Reid Hoffman,"Indeed, if the unicorn is by definition the rarest creature in the universe, how can there be a herd of them? Talk about an ontological oxymoron." 

The rise of unicorns led to the rise of bubble talk, though this time in the private markets. And the speculation was that it would be investors who got hurt this time, when the companies inevitably went public at a lower valuation than the private market had given them.

Eventually the evidence came out that, yep, that's exactly what was happening, as 40% of unicorn IPOs since 2011 are now under pre-IPO valuation. Companies in 2003 were seeing returns of over 6 times pre-IPO valuation, now it's less than 2 times their value.

So what did those investors do? They decided to downsize their investments. 

Fidelity, for example invested in Snapchat's $538 million round this past May, which valued the company at $15 billion, a round that made Snapchat the fourth most valuable private company in the United States, behind Uber, Airbnb and Palantir. Then, earlier this moth firm decided to write down the value of its stake by 25 percent, dropping it from $13.9 billion to $10.4 billion.

The firm also cut the value of its shares in Zenefits by 48 percent, and marked down the value of its share in Dataminr by 35 percent.

The same thing happened to Dropbox earlier this year, when of its investors, BlackRock, cut its estimate of the company’s per-share value by 24 percent.

It's smart way to do things, allowing for the market to unwind, versus crashing. Perhaps this is a sign of the sophistication of the market, especially after what happened back in 2000.

Let's be clear, though, there are still big questions looming, like whats going to happen to companies like Uber and Airbnb when they go public. And what this downsize means for the rest other investment stages, and if it will trickle down to them as well. 

It is safe to say, though, that all of this brings some rationality back to a market that could really use some. And it means that things will likely stabalize pretty soon.

And for that I am thankful.

Also, a fun fact for you to impress everyone at your Thanksgiving table: Scotland's official animal is the unicorn. No, I'm not making that up. You can look it up yourself. You're welcome. 

We are having our second annual Post Seed event on December 1st. Our speakers will be Alfred Lin (Sequoia Capital) John Doerr (Kleiner Perkins), Rebecca Lynn (Canvas Venture Fund), Paige Craig (Arena Ventures), Satya Patel (Homebrew), Scott Kupor (Andreessen Horowitz) and Vinod Khosla (Khosla Ventures). We're also excited to have Cory Johnson, anchor at Bloomberg West, broadcasting live from 7 am to 11 am PST. It should be a riveting day! Register here: Post Seed 2015.


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