Unicorns, Dinosaurs & the Elephant in the Room - An Update on the Tech Animal Kingdom
Aug 19th, 2015
Source: Pacific Standard
Unicorns are the Kings of the new Jungle age and are being actively hunted [in this case by Venture Capitalists and not dentists]. In this post we’ll run through an update on the ‘Tech Animal Kingdom’ with new developments for Unicorns ($1Bn+ private companies), Dinosaurs (older public companies) and the Elephant in the room.
Though Unicorns are considered elusive creatures, they seem to be breeding more like rabbits lately. Out of the 124 Unicorn companies today, 47 of them joined the famed “three comma club” in 2015, according to CB Insights. This represents a 61% increase in the number of companies and a 20% increase in valuation from the previous year, bringing the aggregate valuation of all unicorns to $407Bn. Note: we’re only 8 months into 2015 – sound more like rabbits now eh?
What seems to be driving Unicorn valuations to such unprecedented growth? One answer is the increase in the size of late stage investments or the “quasi-IPO” driven largely by hedge funds and mutual funds that typically spurn venture-style investments. As Hedge Fund heavyweights like Tiger Global Management and Mutual Fund giants like T. Rowe Price Group Inc., Fidelity Investments & Wellington Management Co. become more active tech investors, the availability of capital seems infinite and is encouraging founders to delay IPOs. As Danielle Morrill (CEO of Mattermark) stated to the New York Times: “If you can get $200 million from private sources, then yeah, I don’t want my company under the scrutiny of the unwashed masses who don’t understand my business”.
The advantages to staying private are many. We've previously covered why VC-backed companies are punting on IPOs here and recently profiled the typical company at IPO here. Private companies are shielded from the scrutiny of public investors, allowing them to raise capital at their discretion and ensure shareholder and company interests are directly aligned. Although staying private may benefit founders as they can focus on building their business instead of fretting about quarterly earnings, this poses as a huge loss of opportunity for public investors. As companies stay private longer (3.1 years in 2000 to 7.9 years in 2014), returns are shifting rapidly from public markets to private markets.
Source: Andreessen Horowitz
The public markets have been volatile lately with China’s stock market swoon, Greece’s market collapse and several large tech companies reporting lower earnings in the past month. Through the mist of volatility, there are still returns to be made in the public markets as shown by the 1-month performance of a select few tech stocks below. The S&P IT Index is up 2.4% YTD as well.
Source: Google Finance
However, this does not tell the whole story. As these dinosaurs came to be, they took different paths and created value in different markets. Microsoft went public in 1986 at a Market Cap of $500M and is now at $374B, which represents an appreciation of ~511x in their stock price from IPO. On the other hand, Facebook went public in 2012 at a Market Cap of $100Bn. To match Microsoft’s public returns, Facebook’s market cap must amount to $51.1T, which is roughly the value of all publicly traded companies in the world. This exemplifies how public value creation is being dwarfed by its counterpart and represents the fundamental change in private vs. public returns.
Though there are many investors that believe this alludes to a bubble and impending doom, there are many that argue against one (or at least don't expect as severe a correction as the Dotcom Era). The arguments against overvaluation are supported by the idea that technology is no longer a vertical industry, with the number of users on the Internet growing rapidly and the vast differences in the performance of these companies at IPO. This sentiment is captured well in an article by the Economist comparing both eras here.
The Elephant in the room lies in the fact that the changing landscape of venture capital doesn’t only affect private and public investors – it also deeply affects employees of these companies (you know, those people who play a key role in creating all this value). As the trend continues, employees' liquidity timelines begin to diverge from that of the companies. In response, liquidity alternatives, like ours, have started to emerge. These should help CEOs make public/private decisions without the pressures of employee liquidity.
With the quasi-IPO movement, public value creation in a slump, and VC capital returns beating the stock market in 2014, it’s both interesting and increasingly difficult to predict how things will play out in the next 5 – 10 years. Here at EquityZen, we’re working hard to solve this three-sided problem, ensuring shareholders unlock the value of their equity compensation, providing investors access to a burgeoning market, all while accounting for the interests of the company, a key stakeholder in all of this.
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