Are Technology Unicorns More Myth Than Financial Fact?
December 2, 2015 Leave a comment
Did you know that a cowboy created the first unicorn? Aileen Lee, founder and partner of Cowboy Ventures, coined the term in an article she wrote for TechCrunch called, “Welcome to the Unicorn Club: Learning from Billion Dollar Startups.” In the venture capital industry a unicorn is any technology startup that achieves a $1 billion market value.
Dropbox, a cloud storage services that reached a $10 billion valuation nearly two years ago, is a famous unicorn and also an object lesson in the vicissitudes of valuation. Some analysts are beginning to question the validity of early big estimates. There have been predictions from some in the technology community that Dropbox is destined to disappoint and that their failure will usher in another dotcom bubble burst.
Valuations are built through rounds of private fundraising. Private investors often compete with one another to corner that market on a nascent startup that shows particular promise based on leadership, innovative technology, or a reboot of an essential service such as Uber or Airbnb.
Bill E Ford, Chief Executive Office of General Atlantic, leads a firm that was an early investor in Uber and Facebook. He’s advising a cautious response to the expectations for profit promised by unicorns.
In a recent interview in Bloomberg Business Ford had some thoughts to share based on the poor performance of Jack Dorsey’s second child, the mobile payment company Square. It was valued at $4.2 billion in its IPO—it had been suggested before the IPO that it had a value of $6 billion. Ford was critical of inflated expectations:
“There was so much enthusiasm pushing up private market values that I believe most of these growth companies will not live up to the promise of those high valuations,” Ford said of the industry in general. “But a number of them will.”
In a story from Silicon Valley Business Journal Ford expanded on his thoughts regarding overblown estimations while clarifying that some unicorns were actually quite stable:
“There is no question in my mind that the valuation environment has shifted,” Ford told Bloomberg. “A lot of the investors that were pushing up valuations were the folks that were really trying to just get ahead of the public markets. With the change in attitude towards valuations, they have really withdrawn from that.”
Despite the perception of risk suggested by overvaluation, technology startup companies will continue to receive investor funding. They represent the promise once posed by Apple, Google, Facebook, and Amazon. For many investors it’s too risky not to invest.