Unicorns are no longer the stuff of legend — not the fanciful equines marked with elegant wings and prominent horns. Instead, at the mention of the term “unicorn”, the Silicon Valley tech startups valued between $1 and $10 billion, is evoked.
Supposed to be as rare as their namesake, unicorns have instead “[bred] like rabbits,” suggesting the health and vitality of the tech sector. Recently, however, with the disappointing failures and lower stock prices, unicorns are losing value, which could result in a sizeable death wave for these seemingly magical companies.
A Brief History of Unicorns
The advent of smartphones gave unicorns life. By putting the power of the internet in the palms of consumers’ hands, smartphones created unprecedented opportunities for unicorns to invent and deliver services that people did not even know they wanted. As of this year, there are 150 unicorns in the United States.
Since 2007, the tech sector has created thousands of jobs and opened brand new economic opportunities in a relatively new space — examples like Uber and AirBnB being two.
Moreover, it’s transformed the faces of entire cities like Austin and San Francisco. To this day, despite concern over unicorns’ health, downtown San Francisco is inundated with construction cranes building new housing aimed at the city’s tech workers.
With so much growth, tech startups self-valued their companies at billion dollar levels and spent extravagantly to outgrow their rivals. For a time, venture capitalists were eager to finance this spending, but with 2015-2016 stock prices falling below IPO levels the steady flow of money from mutual and hedge funds has receded into a trickle.
Is There Really a Tech Bubble?
Most experts think that there is.
Jay Ritter, a finance professor at the University of Florida whose expertise is in valuations and IPOs, defines a bubble “as something where assets have prices that cannot be justified with any reasonable assumption.”
Some of today’s hottest unicorns are valued in multiple multiples of 10 of their annual sales, indicating that they are indeed unreasonably overvalued. In a recent valuation of Uber, its investors calculated the company’s worth at a multiple of 100 times its sales. Though AirBnB’s $25.5 billion valuation is only 28 times its sales, the number nevertheless exceeds earlier record-breaking peak valuations that were only 6 times the number of sales.
As if to prove that unicorns are overvalued, Fidelity recently wrote down 19 Silicon Valley startups, signaling that tech is very likely in a bubble.
So Will the Bubble Burst and Kill the Unicorns?
It’s hard to say. Some think the bubble will burst in 2016, but there is also optimism that current conditions will, at worst, knock out only 50% of unicorns, thereby restoring proper valuations and merely deflating the bubble.
It is worth noting that, thus far, only one major unicorn, Fab.com, has failed and only one other, Evernote, may be on its way. Moreover, these setbacks are not the result of lower valuations but of poor management and lack of solid strategic vision. Fab did not understand the advertising game and failed to attract repeat customers. Evernote’s product is not streamlined and does not deliver exceptional service, especially when compared to its competitors.