Wave of $1 Billion 'Unicorns' Sparks Fears of Tech Bubble


Startup "unicorns" are mythical creatures of an altogether different kind When social media software firm Sprinklr unveiled its latest funding round earlier this year, it was catapulted into the elite club of "unicorns," or tech startups worth at least $1 billion.

This came just days after Slack, the business software collaboration tool, entered the group of well-known names like Uber and Snapchat that are leading the new wave of tech giants. While unicorns are supposed to be rare, mythical creatures, the proliferation of these billion-dollar startups is beginning to cause concern in the very heart of the fast-moving technology sector, Silicon valley.

More than 80 tech firms can now be called unicorns, according to a new Forbes Magazine list. Venture capital research firm CB Insights lists 53 US-based unicorns, saying the enormous valuations are fuelled by growing excitement among private equity investors seeking to get a slice of the next tech superstar.

Unicorns or "decacorns"? VC slang grows weirder

The use of the term "unicorn" began with a blog from investor Aileen Lee of Cowboy Ventures in late 2013, when there were just 39 of the creatures and an average of four "born" each year. In 2014 the number rose to 48, according to CB Ventures.

While some startup unicorns seem destined for big things, unicorn fever has raised fears of a dot-com-like bubble.

"Dead unicorns"

The unicorns include a handful of startups worth at least $10 billion, a group sometimes called the "decacorns." These include China's Xiaomi, Airbnb, Pinterest and Dropbox, in addition to Uber and Snapchat.

Some equity investors are getting nervous over the trend.

"I do think you'll see some dead startup unicorns this year," said Bill Gurley, a partner at the Silicon Valley venture firm Benchmark, at the South by Southwest festival in March.

Leading tech investor Bill Gurley

Gurley, who has been a leading voice of caution on unicorns, said in a blog post that both investors and startups are pushing too hard, ignoring traditional standards of risk.

"We are in a risk bubble," he said. "Companies are taking on huge burn rates to justify spending the capital they are raising in these enormous financings, putting their long-term viability in jeopardy."

In a running Twitter conversation on the subject, Danielle Morrill of the research firm Mattermark said "I've narrowed it down to 61 potential dead unicorns. This is the stuff everyone is talking about but no one will publish."

Highly prominent venture capitalist Marc Andreessen, one of the founders of Netscape during the dot-com era, expressed similar concerns in a series of tweets last year, saying too many startups are "burning" cash too quickly.

"When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate companies will VAPORIZE," he said.

Mark Cuban, an early dot-com entrepreneur, said on his blog that the current situation is "worse than the tech bubble of 2000" because of "angel" investors investing in apps and tech firms with little scrutiny.

"I have absolutely no doubt in my mind that most of these individual angels and crowd funders are currently under water in their investments," he wrote. "Because there is ZERO liquidity for any of those investments. None. Zero. Zip."

Overview of the tech superstars, led by Uber, Whatsapp, Twitter and Snapchat

Heading for a fall

Perhaps the market shakedown has already begun. Online retail startup Fab.com, which raised $300 million and joined the unicorn club last year, ended up selling most of its assets in March to the manufacturing firm PCH in a deal reported to be worth just $15 million. Another former unicorn, the gaming service OnLive, was acquired recently by Sony for an undisclosed price.

Silicon Valley's culture has not always impressed outsiders

Many startups have been able to raise cash from eager investors without heading to Wall Street for a public share offering. This also means the firms are not subject to the same scrutiny and publicly traded company for finances and governance. There's a growing sense in Silicon Valley - particularly among the investor community - of a lack of transparency in the way these startups are being valued.

Anant Sundaram, a professor specialising in corporate valuations, said that while financial data on these unicorns is often limited he is nonetheless surprised by how few have demonstrated an ability to grow revenues and establish a sustainable business.

"Based on historical data, I wouldn't be surprised if a vast majority of these firms fail to live up to their valuations," Sundaram told AFP. Still, he said that these types of investments are part of the process of innovation and "creative destruction" which fuel the economy.

Google's new HQ in Silicon valley

If this is beginning to sound like the dot-com boom all over again, Sundaram noted that while in the last cycle there many businesses with high valuations going bust, this did produce some standout successes like Google and eBay.

There is no doubt that many of these valuations are based upon genuinely innovative technology and strong business potential. Peter Barris at the venture firm New Enterprise Associates said investment is flowing because "we are in the early days of one of the most robust periods of innovation I've seen in my lifetime."

In a blog post, Barris said he sees unicorns transforming the way we live.

"Perhaps there will even be a flameout or two spectacular enough to become Valley legend. But many companies will justify that valuation, and some will go much, much farther," he said.