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The demise of the unicorns is looming

10 December 2015 Stephane Teral

There are serious troubling signs in the Valley these days! If you live in the San Francisco Bay Area, you know the story because you are exposed to the daily mounting concerns about the unicorns, those private tech firms that are valued at $1 billion-plus. If you live somewhere else, chances are you picked The Economist of July 25th and read "The Empire of the Geeks" or more recently (November 21st), you read "The rise and fall of the unicorns."

Tuesday December 1st, John Doerr, the famed venture capitalist and partner at Kleiner Perkins Caufield & Byers in Menlo Park, CA, told the usual big crowd at the Post Seed conference in San Francisco that there are 90 unicorns in the United States alone and most of them will not go public. In fact, 5 out of 7 exits for tech unicorns this year earned a lower valuation than previous estimates, according to Los Angeles-based Upfront Ventures-the most recent one being the Square IPO at almost $2 billion below initial valuation. He also added that if you can't go public, you hope to cash out through an acquisition. However, the problem is: there are not that many potential acquirers who can afford to pay big cash for startups. Even Google sitting on a big pile of cash showed that it never overpays for companies. What does this mean then? Carnage is around the corner.

Chatting with VCs in the Valley on a regular basis at events and conferences, I can tell about the chill! The mood among VCs has become more cautious with some already worried about significant lack of returns. For sure, hearing from some of my startup clients, it has become extremely difficult to raise money for early stage startups because the madness comes from later-stage money. According to PricewaterhouseCoopers and the National Venture Association, investments in later-stage companies during 3Q15 increased 10% YoY while money invested in early-stage companies fell 7%. As John Doerr said "Having a $1 billion valuation can be a real problem and there is going to be a great disaster here."

As past downturns can teach, healthy and well-capitalized firms have always benefited and firms that have been loading up cash to weather a potential downturn will do well. For example, Airbnb currently valued at $25.5 billion (http://techcrunch.com/unicorn-leaderboard) will not go away. The firm has $2 billion in cash and a burn rate of $100M a year. Basically, let's say the unicorn top 10 will survive but for the rest, the future does not bode well and the crash will impact every one of us leaving in the San Francisco Bay Area, one way or another, as seen after the Great Telecom crash of 2000. And after this one, let's hope we learn the lesson that unicorns have set an unprecedented distortion in the market, I mean imbalance between early-stage and late-stage funding.

Stéphane Téral is a research director, mobile infrastructure & carrier economics for IHS
Posted on 10 December 2015

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