Browsing Twitter recently, I came across a charming graphic from Matt Levine.
It shows the value of 17 “unicorn” companies in the time since they floated on the stock market. As you can see, it’s not gone well. With the exception of Facebook and LinkedIn, all of them are worth less today than the day they floated on the market.
Unicorn companies are a modern phenomenon. They’re companies, valued at over $1bn, which haven’t yet floated on the stock market.
The valuation number comes from the deals these companies make with private investors. Take Uber for example, which at $62bn is the biggest unicorn. When Uber wants some money to fund its growth it goes to the investing community and offers a slice of itself in exchange for cash. The price paid for the slice of equity is what determines the valuation.
That’s very different from the way we value public companies. Thousands of different investors can have an opinion on what a publicly traded company is worth. Some will think the company is overvalued, others will think the company is undervalued. The share price reflects all those thousands of opinions.
But to take the Uber example – Uber’s now valued at $62bn because one person, the most generous backer Uber could find, was willing to pay up at that price.
I wrote about this back in December. Here’s what I said then:
There’s something in microeconomics called the winner’s curse. The winner’s curse happens when you have an auction for an asset of uncertain value. In those circumstances, the winner of the auction will tend to overpay because they’ll be the ones most willing to push and push their bidding. And by necessity the one who wins is the one who is willing offer the best terms or pay the most.
That could be what you’re seeing with a lot of these private tech companies which are being offered these huge valuations.
Now, if this were in the public markets you wouldn’t see that same dynamic where there’s, this auction for the capital. So that’s another thing to say about it. It’s almost certain that a lot of the investors who put money into these private companies are going to lose money.
But that’s fine. That doesn’t mean ordinary investors should be worried. It doesn’t mean that the tech industry or these start-ups are in any way sick. It just means that some financiers, not all of them, will have overpaid. End of story!
The way these Unicorns work is, the most prestigious venture capital funds get in on the early funding rounds. They get the sweetest deals, and the biggest amount of equity for their money.
But it’s been years now, and Uber is still relying on private investors for funding. The people who’ve gotten on board in the latest rounds aren’t slick Silicon Valley VCs – they’re pension funds and New York asset managers. Dumb money!
There’re something like 90 unicorns out there today which haven’t yet floated on the market. The biggest ones, like Uber and Airbnb, are worth tens of billions.
Looking in that chart, would you like to be one of the most recent investors in those companies?
Let me know. firstname.lastname@example.org