As you may have noticed, and I know some of you have, I have talked a lot about unicorn fever a lot recently, and the rash of companies suddenly seeing themselves valued at alarming amounts of money.
To recap: in 2014 alone, 38 different companies entered the $1 billion club. That is more than the three previous years, when only 22 companies made it combined. That included Kabam, Tango, Eventbrite, and JustFab.
In just the first four months of this year, 16 companies already reached unicorn status. That included seven in March alone. There will likely be 50 new billion dollar companies by the end of this year.
Ok, with that established, the next question has to be how these types of numbers are affecting exits.
The answer, according to data from CB Insights, is that they are actually causing companies to put off being sold, in favor of what it calls “private IPOs.” In fact, so far this year there have only been two exits made by unicorn companies (the second of which occured after the CB Insights report was pubished).
The first was the acquisition of online learning company Lynda,com by LinkedIn for $1.5 billion in April. The company had raised $289 million in funding, including a $186 million round in January that valued it at $1 billion.
The second, which only occured on Tuesday, was the acquisition of cloud company Virtustream by data storage company EMC for $1.2 billion.
In comparison, by the same time last year, there were already six VC-backed companies that had exited for over $1 billion via M&A, with a total value of $30.9 billion.
That included Google buying Nest for $3.2 billion; Facebook acquiring WhatsApp for what turned out to be $22 billion; and VMWare buying AirWatch for $1.54 billion. In addition, CB Insights found that 18 different investors invested in unicorn M&A exits by May of last year, while just four investors including Accel, Spectrum Equity and Meritech Capital Partners invested in Lynda.com, and seven in Virtustream.
CB Insights blames what is happening on so-called “private IPOs,” which basically means that companies are able to stay solvent longer thanks to big fundraising from mutual funds, hedge funds, private equity investors and sovereign funds. It’s a term that was coined by Josh Kopelman of First Round Capital earlier this year.
Kopelman warned of the danger of letting these companies stay private longer than they shou.d
“I don’t think we’ll fully understand or appreciate the impact of the ‘private IPO’ phenomenon for another decade, or at least until a full cycle plays out,” he wrote in a blog post. “In my opinion, there isn’t nearly enough focus on ‘low frequency trading.’ Public companies reprice daily. Private companies don’t have to reprice for years on end.”
Ultimately, these extremely large companies are being priced on old data.
“By relying on private financing events as ‘comps,’ we risk pricing new financings (and creating new unicorns) based on stale valuations.”
(Image source: fineartamerica.com)
