RUNNING WITH THE HERD OF UNICORNS
The emerging companies in the financial world are now called unicorns in recent media coverage. More precisely, investors and financial analysts are applying this image to a rapidly growing company with least $1 billion of capitalization. The term unicorn in the Wall Street lingo was made popular by Eileen Lee of Cowboy Ventures, a private equity fund, and is generally used in financial coverage of the designated companies that meet this criteria.
Why unicorn? In mythology, a unicorn is an evasive animal with a distinctive single horn on its forehead. Historical persons like Julius Caesar claim they had seen a unicorn, but it is generally agreed that if one ever existed it had become extinct some time ago.
I suppose the contemporary interpretation of unicorn for finance purposes can be justified in that these highflying startup companies are unique, evasive and are at risk of becoming extinct. The more conservative financial market writers predict that unicorns precede the bursting of another speculative bubble such as the market in 1990.
In the meantime, unicorns are the darlings of the private equity funds finding their market growth to be a better investment than the standard listed securities or many of the IPOs that failed to meet their market projection. Some analysts believe a unicorn is more akin to a zebra, exotic but not exactly rare, and represent a shift in money from tech IPOs to late-stage growth rounds sometimes referred to as “quasi-IPOs.”
“Fortune Magazine” analyzed unicorns and rated them by size of capitalization. The list has jumped to 100 headed by Uber, Airbnb, Xiaome, Plantir and Snapchat. Many of the top 20 firms have Asian roots and are not necessarily in the high-tech or digital business. Customer service innovations seem to be the rage today.
When venture capital firms came into the financial markets in a big way about 20 years ago, the managers were looking for innovative companies that had already exhausted their primary financing – families, friends and fools. As interest rates began dropping, private equity funds became more popular for the speculative investor. It is not unusual for a private equity fund to earn from 20% to 50% on its investment which is very lucrative for the investors in the fund.
It’s no wonder that two of the biggest unicorns, Uber and Airbnb, have been very successful without going to the public stock market for financing. With this reward the major underwriters of Wall Street earn handsome commissions from handling a new IPO.
If this new form of financing a growth company becomes more popular, the government may find a way to impose regulations in order to protect investors from fraudulent promoters of an equity fund. That’s the one advantage of this form of investment over the cost and regulation of going public and subject to reporting requirements of the Securities and Exchange Commission.
There’s been very little reference to the general category of unicorn companies in the general media. In fact I asked a veteran stockbroker about unicorns and the response was “never heard of them.” At least “Fortune Magazine” recognizes the viability of these heavily capitalized but non-public new companies by creating the index of over 100 unicorn companies.
The San Diego private equity market which was booming before the 2008 recession has begun to regain its activity. There still is opportunity for a startup company with private equity funding to consider going public with an IPO. This market is primarily focused in the new product development for high technology and medical research.
The unicorn approach spreads a wider net into personal service companies which don’t appear to have the sex appeal of a new digital gadget seeking a market with public investor support. As the economy improves as some economists are predicting, interest rates will begin to rise and take some of the steam away from private equity funding. Until major investors can see a better rate of return on traditional market securities of registered companies, the unicorn-form of growth will be appealing.
This expansion of the private equity market is clearly the product of advanced Internet and social media communication. An example of accessibility of information is the operation of CB Insights which tracks financing for private companies. The firm compiled a list of the most promising and highly valued private technology companies that identified 531 prospects that are either prime for public offering or are on the must-watch list.
CB Insights reported that 531 private companies on the firm’s top performers list have collected more than $89 billion to date and collected $36 billion in 2015. Historically most of these companies would have to go public to raise that kind of money. The median amount raised from public offering is $100 million. In comparison, private equity funding has averaged $182 million in the past year, according to CB Insights. These figures indicate that there is some serious money out there running with the herd of unicorns.
I find it interesting that the few articles about these highly successful nonpublic companies always refer to Uber as the poster child now valued at $51 billion and active worldwide. Airbnb started in 2008 by the two founders who rented out air mattresses in their living room with a free breakfast for businessmen attending conventions in San Francisco where the hotel rates were outrageous. In seven short years the company is worth $25 billion and still growing.
Financial unicorns may not be so rare, but they certainly are exotic. It will be interesting to follow how the government intends to impose regulations on this highlight of private enterprise.