“there’s less transparency as companies stay private longer (174 private companies are each worth $1 billion or more), and there’s an endless supply of legal gray areas to exploit as technology invades every sector, from fintech and med-tech to auto-tech and ed-tech.”
I worry about the trend of staying private. How many of those companies are total frauds like Theranos? How many have no path to profitability like Uber? How much of the current growth (facebook/google/etc) is being propped up by advertising $$$ from these shady unicorns? How many folks have bought private shares via sharepost?
In the dotcom days, unsound companies got huge evaluations from going public. That path is now gone, so many have managed to obtain huge evaluations whilst staying private. Is the end result the same?
If those 174 companies disappeared, what would it mean for the bay area? Does anyone have more quantitative info on these unicorns? What is the combined “market cap” ?
Companies may be less enthusiastic about listing in the public markets but there is way more M&A activity coming from the big public companies. I am not worried about exits. Especially if big techs like apple and Microsoft got tax holidays to get their offshore money back expect crazy hot M&A scene.
The public market is saying many of them aren’t worth what the public valuation is. We’ve had a lot of recent IPO losers. There’s no way they all end up winners. Too many are competing against each other.
I think these inflated unicorns aren’t good targets for M&A. A lot are trying to go head-to-head with the big boys, so the only reason for a big boy to gobble them up is if they are a real threat. If they are not a threat, why not wait for them to starve then pick the bones clean? I think for many of these unicorns, it is IPO or bust.
Agreed on this.
What worries me – what happens to the bay area when these unicorns start to starve? Surely the ripple effects could be pretty bad. I’ve been keeping my eyes open for the next big thing to cause a crash, and this may be it
I think it’s already more difficult to raise equity. Some are starting to use debt instead.
Also, 2-3 years ago you heard of pay being equal to established companies. I recently talked to some startups (unicorn and non-unicorn). Base pay was 10% lower, no annual bonus vs 20%, and equity that’s not liquid. No wonder we you hear about a talent shortage and jobs going unfilled. It’s more of a comp shortage. They have to get lucky enough to find people that think the pre-IPO equity will offset the 30% pay cut and liquid equity in a public company. Considering the payoff is a 3-5 year investmemt if things go well, I’d expect a return of at least 4x to be with the risk considering 80% of startups fail. Even ones that make it can turn out horrible for employees with lockup. By the time they can sell, the valuation is lower than when they were hired.
I would like to be the eternal optimist - but by summer 2017 I expect some startups in SF to either fold or layoff engineers. eg: startups in the food space. This is because a lot of them have not obtained their next round of funding in 2016. So laying off people is one way to try to show a breakeven or profit. I am still seeing Apple, Google, Amazon continue to hire well though. So overall joblessness might be limited.
You don’t think an IPO that’s valued below the last round is bad? It screws investors who usually control the company by that point. It will kill employee morale, since the rapid increase in employees is towards the end. They’ll realize the stock isn’t a retention tool or worth sticking around to vest.
If you stay private, you can cling to the valuation of your last round, so people feel optimistic. No one wants to the the next Twitter, go pro, Fitbit, box, and the list goes on. The private valuations got insane based on future projected growth. The problem is there are a ton of startups competing against each other and projecting the same growth. Only 1-3 in each segment will win. The other 30+ will fail. The problem is they are are valued as winners in the private market.
We have a secular trend towards the private market. Blue Niles is a recent example of leaving the public market and going private:
I just read this feature article on the Economist. Private Equity is raging hot. Companies are increasingly getting capital in the private market. Maybe the upcoming increasing rate cycle will finally do them in? Don’t know…
Bottom line is I don’t think IPO is really that reliable yardstick of sector health like 20 years ago. IPO has been trending down regardless.
How will employees cash out? If employees don’t see any upside, then it’ll get difficult to recruit talent. There are plenty of public companies that are growing and are generous with equity.
Going public is a two-way street. In exchange for raising capital, companies are forced to be transparent and open.
The trend towards staying private, and creating secondary markets for private shares (like SharesPost) is extremely dangerous. Where is the regulation and transparency? I didn’t even know it was legal to create a secondary market like SharesPost.
Is there anyway we can figure out the total “market cap” for these 174 unicorns? 500B? 1T? If many of these unicorns go under, it will have huge ripple effects. Think of all of the peripheral companies/industries that will be impacted.
What is also worrisome about this bubble, is that if it pops, unlike the last bubble, the bay area will probably be hit the hardest.
People actually are saying that there is no bubble since IPO market has been shut. I think it makes some sense.
The most foolish people are the public, the amateur mom and pop stock investors.
VC and private equity are professionals and they do not need the protection of the big Uncle Sam. VCs and private equity are smarter than Uncle Sam. In a perfect world of only smart people and no dumb fools, there will be no need to securities regulation.
Due to the lack of IPOs and the absence of dumb foolish public, I think the bubble is a really tame one. If we have a huge number of IPOs in the next few years, it could make the bubble and we will need to worry then.
Professional investors do lose money sometimes, but the magnitude is insignificant compared with the foolish and greedy public.
The problem is that there are secondary markets allowing non-professionals to buy equity in these over valued unicorns.
Additionally, when you have such huge private evaluations, it is impossible not to effect industries and adjacent companies. Public or private, if we’re looking at 500B (just guessing) of overvalued evaluation, that will be painful when it goes away. Sure, it may not be as bad as if they were public, but it will still be bad.
Secondary market is very small, most people are not aware of them. I guess the secondary market only serve the wealthy people who are allowed to buy private securities. Due to the small size of the secondary market, the unicorn bubble will have very little effect. Actually I think it may not even be a bubble, could be just a little froth. It could provide a disappointing return to VC, but no violent blow to real economy.
Btw, I want to buy some shares of snapchat. Where can I buy?
Good bet.