Year of the unicorn

Startups will need to prove their worth or face a cull, believes Alexandra Suich

Fri Nov 06 2015


Unicorns were once figments of fantasy. In 2016 they will be everywhere. Aileen Lee, a venture capitalist, coined the term “unicorn” to describe a private technology company valued at over $1 billion, an occurrence that used to be as unusual as spotting a mythical creature. No longer. In mid-October there were 141 unicorns worth a combined $504 billion globally, up from eight unicorns worth $21 billion in 2010.

Tech unicorns include headline-grabbing firms such as Uber (a taxi-hailing company valued at $51 billion), room-renting Airbnb ($25.5 billion) and Snapchat, a messaging firm ($16 billion). Investors have poured money into tech, sometimes indiscriminately, hoping to profit from the next big thing. FOMO (fear of missing out) is a sentiment so common in Silicon Valley that it has its own acronym.

All eyes should be on unicorns in 2016. With so many investors chasing growth in an environment of low interest rates, capital for startups has been easy to come by. “It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians,” said Stewart Butterfield, the boss of Slack, a $2.8 billion software unicorn, in 2015.

Such munificence will be harder to count on. Many unicorns have been given leeway by investors, who have emphasised growth and market share over profitability. In 2016 investors will grow impatient with unicorns that do not map out how they are going to start making profits. Some firms with high “burn rates”, which are churning through cash, will try to raise another round of financing and will be met with refusal. “On-demand” companies, which use smartphone apps to connect consumers with services like groceries, food delivery, shipping and home-cleaning, will have an especially tough time, because they are burning through lots of cash and face plenty of competition. So will many unicorns in China, where the economy is slowing.

Plenty of unicorn-“haters” predict that this elite group of startups will soon face a mass extinction, much like the gruesome fate that befell many firms when the last tech bubble burst in 2001. Those expecting a dramatic wipe-out, however, are going to be wrong. The addressable market for firms is much larger than it was during the dotcom bubble of 1999-2000, thanks to mobile smartphones; many of today’s unicorns have viable businesses that could be profitable if they stopped spending to gain market share. And many entrepreneurs have been quietly building up cash reserves, in case the market turns against them. Airbnb has an estimated $2 billion stored up.

Although those unicorns with lots of cash have no urgent need to go public, some will file for initial public offerings in 2016, giving a much larger group of investors the chance to assess their under­lying strength. Airbnb and Dropbox, a cloud-storage firm, are two that may list their shares in the year ahead and are worth watching. And firms that do not go public in 2016 will face pressure to do so in 2017, because private investors will want to see some serious cash returns.

Beware a techquake

Seeing more startups fail in 2016 will be no bad thing and is a natural occurrence in the tech industry. Any cull will helpfully reduce competition for strong startups and public companies, which have been battling private firms that are not held to the same rigorous financial standards as public ones. The unicorns have distorted the job market; public companies find it more difficult to hold on to top employees, lured elsewhere by the promise of equity and other venture-capital-funded perks.

While many are waiting to see tremors in the tech industry, they would be wise to consider the possibility of an actual quake too. San Francisco and Silicon Valley, where most of America’s unicorns have their headquarters, sit on a fault line. The area’s last large earthquake was in 1989 and—who knows—another one could come in 2016. Although the tech startups tend to be relatively light on physical infrastructure, running many of their operations in the cloud, a big earthquake could still disrupt their businesses. The timing of natural disasters and their impact are never predictable, but just as unicorns can turn out to be real, so can the big surprises known as “black swans”.

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