Interested in the Unicorns? Beware!
Many unicorns have already achieved notable marketplace success and will undoubtedly survive and even thrive over the long term. Nevertheless, even in the case of those making considerable strides in the marketplace, some of their current valuations strain credulity. We believe that, in many cases, their late-round investors risk vulnerability to substantial losses, just like with early-stage deals, but without the huge return multiples possible with early-stage deals. We may be proven wrong, but really, how likely is a big win when the venture is already valued at $10 billion or $20 billion or even $50 billion or more?
Let’s look at Uber and its latest financing round valuation of $66 billion. According to Bloomberg Technology, Uber’s net revenue for the first half of 2016 reached about $2 billion. By net revenue, we mean the revenue they keep after the drivers are paid. At the bottom line, for the first half of 2016, Uber lost $1.2 billion before interest, taxes, depreciation, and amortization. In 2015, Uber lost at least $2 billion before interest, taxes, depreciation, and amortization. Uber, which is seven years old, has lost at least $4 billion in the history of the company. . . .
While Uber still has many markets left to conquer and its achievements to date are indeed impressive, do those results really point to a future justifying a $66 billion valuation? Remember, a future value of anything less than $66 billion will mean a financial loss for Uber’s latest investors. . . .
The respected venture capital industry tracking resource CB Insights believes, as we do, that many unicorn valuations, and hence price expectations, are simply too high. Those valuations were based on growth expectations that now in many cases seem far too optimistic. As CB Insights put it, they are “priced for perfection,” and, as we suggested earlier, such perfection—such ideal alignment of all the relevant forces—rarely happens. . . .
Getting in on a unicorn round is great for bragging rights, but for late-stage investors, getting out with a profit can be tough. We’re betting that FOMO results in lots of loudly bursting unicorn bubbles. . . .
We believe that following the traditional early-stage venture capital investment approach will continue to generate attractive returns for investors who partner with proven professional management and practice appropriate deal diversification. In contrast, we’re betting that late-stage investors in unicorn deals will increasingly find themselves under water.
Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund