LBS logo London experience. World impact.

Too many unicorns?

10 Sep 2015


No longer the stuff of myth, billion dollar tech start-ups may have overbred


Too many unicorns

In the midst of the current technology boom, eyebrows are barely raised when an unknown start-up declares a private valuation in the multi-billion bracket.

The past few years alone have seen us grow accustomed to the likes of Uber, Airbnb, Snapchat, Dropbox, each dubbed a ‘unicorn’ for defying the myth that a humble start-up could never surge to a billion dollar valuation.

Driven by breakthroughs in software or disruptive technology - and venture capital (VC) fundraising - the unicorn population is now said to top 130. Doubtless more too await lift-off, on what is arguably now a somewhat less remarkable journey.

But in these crowded, unchartered waters, can everyone stay afloat?

John Mullins is Associate Professor of Management Practice in Marketing and Entrepreneurship, London Business School and author of The Customer-Funded Business, his latest book which challenges the assumption that VC investors should be an entrepreneur’s first call.

‘Billion is the new hundred million’

In a close-up in the Financial Times last month, Aaron Levie, co-founder and chief executive of cloud software company Box, essentially declared the very notion of the unicorn extinct.

A former such company itself, Box completed a public Wall Street listing earlier this year only to see its shares tumble by almost half, well below its initial public offering (IPO) price.

Levie argues the unicorn tag no longer fits start-ups in 2015, only working “if it implies some level of scarcity or rarity.”

“Billion is the new hundred million,” he commented in relation to start-up valuations, as the tech boom-riders, characterised by an ever-expanding army of ‘Fintech’ firms, draw bloated valuations in their early phases of conception.

John Mullins is one of the world’s foremost thought leaders in entrepreneurship. “It’s true that valuations for many still-private tech companies are very lofty by any measure,” he agrees.

“Are we in a bubble? One never knows until the bubble pops, but I expect to hear the popping sound in the not-very-distant future.”

Misleading valuations

Research provider CB Insights reports a total of 131 private tech companies currently valued above the magical $1 billion threshold.

In many ways, the Box story serves as a parable for the latest wave of bright young things and their ability to sink or swim.

John Mullins thinks there are two main challenges faced by today’s unicorns. “First, there are hardly any tech companies - think Google, Apple, Amazon - with large enough valuations of their own to be able to buy them.

“Second, the public markets, chastened by the post-IPO fall of Box and others, are unlikely to be receptive to the hoped-for IPOs of more than a handful of the now 131 unicorns.

“What, then, are the others to do? A few may succeed; many will suffer a very hard landing.”

Bill Gurley, a Silicon Valley venture capitalist and partner in Benchmark - investor in Uber and Snapchat - also predicts problems ahead.

When public share prices slump, it only serves to accentuate a gulf between them and the overblown private valuations - the very fate that befell Box. It almost sold shares in 2014, only to detect a fall in the shares of cloud computing firms. It was eventually valued in its IPO at far less than in its past round of private capital-raising.

So with more and more unicorns in the private realm, is a thirst for instant capital from the public arena now a likely stop-off for the modern-day start-up? And how do they protect themselves against the inevitability of being swallowed by a seriously big player?

Key decisions

According to John Mullins, current-day unicorns face increasingly limited choice in an oversaturated market.

“There are only three options: sell (but to whom?); do an IPO (unlikely for most, at least at today’s valuations); or stay private and build a real company that has customers, revenues, and positive cash-flow,” he argues.

“The latter means taking the foot off the accelerator in most of these companies.

“Doing so wouldn’t be all bad for those working to build such companies.

“For those who have already invested and paid too much, however, the ensuing haircut wouldn’t be pretty.”

For Box, and Levie at least, the future sounds simple. “We’re certainly not selling,” he told the FT.

“We have spent hundreds of millions of dollars building out the core technology and the sales and marketing to win in this market, and it’s going to be very expensive for anybody else to enter.”

John Mullins’ 2014 book The Customer-Funded Business is published by John Wiley & Sons and available now.