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90% of the billion dollar unicorn startups are in trouble
- wrong_variable 11y agoThis is a classic example of simpson's paradox. Market's across the board are doing pretty bad this month - It would be interesting to how bad tech is doing relatively to oil futures and other commodities.
- pc86 11y agoWhy is it important how tech is doing relative to other unrelated markets? Edit: I don't know why I'm being downvoted for asking a question. I've many times seen a stock sector performance chart (I don't know the technical name) with most of the market red and tech lit up bright green.
- hibikir 11y agoBecause all markets are really related in some ways, and you can't judge performance without looking at alternatives. Sometimes, a sector goes down, or up, by itself, and then we can expect that the reason for the price change has something to do with that sector. The same thing happens when looking at companies: If Home Depot is down 3% but Lowes is also down 3% and the SP500 is down 5% on average, it's a likely explanation that the tumble has nothing to do with HD's outlook. Heck, by some measures, the home improvement retail sector would be doing better than average! The same thing happens when the market is on the way up: Looking at a company or a sector in isolation doesn't let us even speculate on the reasons of the price change. In a site like this, where we care specifically about the health of tech, claiming that the sky is falling for our sector without looking at other sectors would be folly.
- tacos 11y agoYou can click two boxes on maybe 300 different financial websites and see this data. Which doesn't apply to the "unicorn" situation anyway. Volatility appears (and is fed back) as people re-evaluate risk vs reward. People who held unfashionable Microsoft stock made more money than people who got in on the last two Tumblr rounds over the same time period. Early investors are no longer just technology zealots who made $300 million 10 years ago -- actual financial companies are involved now. Also early-stage startup investing is a drop in the bucket of the greater market. If people are even bothering to move their money out, that's an even more significant indicator.
- tosseraccount 11y agoXLK: Technology Select Sector SPDR ETF: down 7% last 3 months. GSG: iShares S&P GSCI Commodity-Indexed Trust: down 26% last 3 months. http://finance.yahoo.com/echarts?s=XLK+GSG+Interactive#{%22range%22:%223mo%22,%22allowChartStacking%22:true} http://finance.yahoo.com/echarts?s=XLK+GSG+Interactive#{%22r... add GSG to compare.; set to 3 months.
- brudgers 11y agoBeing about startups, "Only" might be appropriate.
- unknownzero 11y agoThis link 404s for me, at least on mobile, huh.
- chiph 11y agoIf there is a tech bubble that bursts, I don't see how much of middle America would be affected. "So, the people in SV can't get 1-hour grocery delivery any more. How does that affect me again?"
- deelowe 11y agoIt's a leading indicator. Gas prices are unsustainably low, tech startups are in trouble, China is in the midst of an economic crisis, and US stocks have been very volatile for most of this year. These are all signs we might be due for a correction.
- kra34 11y agoThe limited partners who give VCs money include managed pension funds, college endowments, and others that very much relate to middle america. It's not all the VC's money that is being burned. They get a 2% annual rake and they can usually ponzi scheme their way to profitability through existing relationships or getting out profitably at the initial IPO price of a company (very rare these days)
- kolbe 11y agoThe biggest one is that people all across America are invested in tech companies. Pension funds are big investors in PE and VC funds, as well as investors in publicly listed equities. A tech bust would put further strain on already strained public pension systems across the US, and could even result in something like a federal government bailout if those systems cannot bear the additional burden (i.e. taxpayers everywhere foot the bill).
- whatok 11y agoI would be very surprised if there were any pension funds out there with such heavy VC allocations to the point where a downturn would encourage a federal bailout. Do you know of any?
- kolbe 11y agoIt's just one more straw. I don't think there's a single class of investment in any pension fund that would alone make a bailout necessary. But I wouldn't be at all surprised to hear that a tech sector bust would cost several funds upwards of 10%. Add a few more failures of that kind to the mix, and we'd be talking bailout.
- nickthemagicman 11y agoBlood in the water. I'm proud of your melodrama.
- code4tee 11y agoThe worst kept secret in Silicon Valley is that 90+% of the so called 'unicorns' are just donkeys with a plastic cone on their head. It long since stopped being about innovation and disrupting markets and became mostly about shuffling piles of imaginary units around so a select few could get rich. Sadly the pawns in this whole game will be all the employees holding options that are soon to be worthless... and who were convinced to take those options in exchange for taking a proper cash salary. The only good thing this time around is that (unlike the last big Silicon Valley implosion) most of these companies are still private. So it will be really messy for some private investors and the greater San Francisco area is going to have a mess on its hands, but the broader US economy isn't going to get impacted as much. The stock market of 2015 also isn't propped up by bloated tech stocks in the way it was in 1999-2000.
- deelowe 11y agoDo you have any data to support these statements? This reads as FUD as-is. Not saying that's the case, I'm not in the startup scene per se, but on the face of it, this seems overly pessimistic.
- hueving 11y agoData to support what? It's well known that common stock gets wiped out in any kind of devaluation.
- deelowe 11y agoThe OP is suggesting there is a trend of sorts. My interpretation is that she/he is suggesting there is something akin to a "pump and dump" scheme going on in SV right now. That's a bold accusation. I've not seen evidence of this, but perhaps I'm missing something here. What I have seen evidence of is a slowing economy and a shift towards more conservative investments. It happened in the early 2000s, in 2008, and it seems to be happening now.
- gmarx 11y ago
- tempodox 11y agoThe “unicorn” is not a new buzzword but the frequency of it popping up the last several days lets me assume there is a unicorn inflation underway. Put on your muck repellant and get ready for bursting bubbles full of unicorn blood.
- daniel-cussen 11y agoIn other news, printer ink prices dropped.
- pluma 11y agoI'll say it again: call them zebras. There are no unicorns. There are zebras. And if you see either of them in the wild (outside Africa) you're likely staring at a decorated donkey.
- ndirish1842 11y agoI really wish business insider would post an article that refrains from wild speculation and provides actual evidence to support their outlandish claims.
- paulpauper 11y agoyou may be waiting awhile
- itssometoneelse 11y ago"This CEO said the Valley used to be a place of "quirky people" but was now filled with "arrogant" people" Valuations and market corrections aside, this comment is the thing that resonates with me the most. I got into tech and the Internet as a kid in the early 90s because of all the cool, intelligent weirdos thinking about and building the future. I've been traveling out to SF for about a decade now from NYC to do work, and it's been sad to watch that city go from a place I thought could be the only other place besides NYC I could live to a city I try to avoid. It feels like it's getting harder and harder to find those awesome weirdo hackers. The homogeny is brutal in SF. The one upside is that it's still the Internet and I don't have to be there physically to enjoy the parts of it I like.
- pyre 11y agoI've met some people that have moved away from SF who are both intelligent hackers and arrogant. It's possible that your intelligent hackers were transformed by the SF atmosphere.
- itssometoneelse 11y agoOh, yeah, I've definitely worked with those types before. I still have love for most of them though because of the intelligent, quirky side. I read the OP comment as the wall street types invading the industry, but I guess I shouldn't make that assumption.
- jakejake 11y agoI got my start in the 90's and there has always been a bit of arrogance in programming and IT. Saturday night live used to have "The IT Guy" who was a rude, arrogant support engineer. I write it off a lot of times as social awkwardness - which sometimes comes off as rudeness.
- deleted 11y ago[deleted]
- Terr_ 11y agoReminds me of: > Here’s the Damaso Effect. [...] They come from the colonizing power, which is the mainstream business culture. This is the society that favors pedigree over (dangerous, subversive) creativity and true intellect, the one whose narcissism brought back age discrimination and makes sexism so hard to kick, even in software which should, by rights, be a meritocracy. https://michaelochurch.wordpress.com/2014/01/05/vc-istan-8-the-damaso-effect/ https://michaelochurch.wordpress.com/2014/01/05/vc-istan-8-t...
- deleted 11y ago[deleted]
- criddell 11y ago> 90% of the startups will be repriced or die and 10% will make it Wasn't that inevitable though? There's a lot of money at stake, but the number of affected people is relatively low, isn't it? I understand why HN readers are interested in this, but is it a big story outside of tech circles?
- deleted 11y ago[deleted]
- jknightco 11y agoThis is one of the most blatant cases of spin and justification I've ever read. VCs put "ratchets and downturn protections" in order to satiate founder greed? Ha! More like VCs waved huge valuations in front of founders and said "don't worry about the terms, this is good for everyone." If nothing else this article does a good job of demonstrating why its important to always check your sources and their biases.
- kolbe 11y agoI'm in Chicago, far away from the action in SV. Lately, my friends and I have been getting unsolicited calls to participate in the next rounds of funding for various "unicorns." We are mostly just laughing, because it's farily obvious that we are only getting these calls now, after all these years of unbelievable[1] tech returns, because SV thinks that backwards and unprogressive midwesterners like us are going to be the goats buying the top of their grand pump-n-dump scheme. [1] as in, not believable
- patio11 11y agoIt would be uncouth of me to say "I doubt that this comment is a literally accurate transcription of something which happened in consensual reality" but if anyone is hanging around the phone wondering "That's funny, Uber never called me": unless you happen to run a VC firm, it's highly, highly unlikely that a late-stage startup raising e.g. a D round at a multi-billion dollar valuation is interested in making your acquaintance as an investor. At seed stage or maybe an A, sure, a $25~$50k check from a technologist is still a meaningful amount of money (and valuations would probably be single-digit millions), but even if there were no legal issues at play, no firm raising on a billion dollar valuation will speak to you because the time it takes to close you would be better spent on convincing someone who can write a check that matters.
- kolbe 11y agoYou're writing words as if you disagree with me, but you are making my point. The only time we would get a call is when they've run out of every other option, and are willing to endure the added cost of desperately trying to find anyone to write them a check. This isn't an unusual circumstance in marketplaces. Sometimes investors are hard to find. But a good way to differentiate a distressed investment and a pump-n-dump is that when salesmen are desperate to make a sale on distressed investments, prices are usually near record lows. For PnDs, they're at record highs. And as for the calls. We don't get them directly from the company. It's banks who are organizing pooled investments.
- wtvanhest 11y agoI'm not too familiar with this, but I have read a few stories on Bloomberg about some of the large investment banks selling chunks of shares of Uber to their clients. Just the other day they said they reduced the minimum order size as well (I think they said $25k). I have done zero digging, but it doesn't shock me that people at JP Morgan and other investment banks are making calls to their private wealth management clients to offer them shares in large private 'unicorns'
- isnullorempty 11y agoRepeat of the DotCom bubble, a few startups make it big then everyone and their aunt tries to emulate it with slight variations or solutions to a problems that don't exist. This app bubble is very pregnant and about to deliver something awful.
- snowwolf 11y agoI still don't understand why tech media (and the rest of the industry) are still not calling out these silly valuations for what they are - marketing spin. With term sheets the way they are with liquidity preferences if I as a VC invest $100 million in a startup for a 10% stake at a 1X liquidity pref, the valuation I'm placing on that startup is $100 million and that is therefore what its reported valuation should be. No need for any repricing of these startups - just report their true valuation as largest amount invested with liquidity preferences. Edit: Just an additional point to add - If I really valued it at $1 billion I wouldn't need the liquidity preference.
- mtgx 11y agoI think it all started with Facebook. TechCrunch was reporting every 2 weeks on how Facebook's valuation grew another $5 million. What kind of "news" is that, unless you want to profit from the extra hype of Facebook's valuation?! Many people got very rich from Facebook gaining such high valuation before IPO. And now many other VCs want to replicate that kind of sort of almost ponzi-scheme type of investment.
- ethanbond 11y agoMeanwhile, Facebook's profitability is still less than a percentage point of its valuation!
- davidgerard 11y agoLiterally Ponzi. It's only an anecdote, but I found this one interesting, from a physicist talking about a startup whose key innovation literally defied physics (recharging batteries via ultrasound): http://su3su2u1.tumblr.com/post/129385764803/conversation-with-an-investor http://su3su2u1.tumblr.com/post/129385764803/conversation-wi... > I reached out to an investor in impossible startup I had talked about previously. Had a long phone call today, in which he explained to me he didn’t invest because he thought they’d ever be a viable business. He invested because he thought between their pitch/charisma and the names of the investors backing them they’d be able to get several rounds of funding, and he’d be able to cash out. That is: there's so much VC money sloshing around that hoping for a Greater Fool literally counts as a business strategy.
- paulpauper 11y agoThere's a bubble in bubble predictions. Everyone wants their 'I told you so' fame, for some reason. I guess it's human nature to want to be right or to see the overly successful stumble back to earth.
- paulpauper 11y agoHe says there is "blood in the water," and we are entering a 90-10 situation for the unicorn class of startups with billion-dollar valuations in which 90% of the startups will be repriced or die and 10% will make it. Well, that's kinda how it's supposed to be. That's why expected value is more important. A few $200+ billion Facebooks and Googles can compensate for a lot of smaller $1 billion failures.
- tylerpachal 11y ago> There are about 144 unicorns right now. I didn't realize that there are this many unicorns. Or is this a typo?
- srunni 11y agoWe wanted sustainable innovation, instead we got 144 unicorns.
- david927 11y agoBuried in the comments is this diamond. Brilliant.
- arien 11y agoIs there a list somewhere? I didn't see one in the article.
- Naritai 11y agoTechCrunch has one, peppered with their usual breathlessness: http://techcrunch.com/unicorn-leaderboard/ http://techcrunch.com/unicorn-leaderboard/
- DoggettCK 11y agoAs a friend of mine said when I was interviewing with her to escape the 100-hour-week death march at the "unicorn" I was at: "You're not a unicorn until someone buys you for $1 billion." They may be valued at $1B+, but they're not worth that much.
- Taylor_OD 11y agoI'm a tech recruiter here in Chicago. I work with a Unicorn that's website looks like its from the early 90's, is primarily using old legacy code, and just hired a contractor that has been unemployed for 9 months who I thought we would never place. This company alone has convinced me that the term unicorn means very little.
- area51org 11y agoWhat's missing from this guy's evaluation: whether or not any of these unicorns are close to or at profitability, and what their actual market potential is. If the businesses are based on bullshit, then he's probably right. If the valuations truly are wildly out of control (and it does seem like it), then sure, they're due for a correction. It's also worth keeping mind that if there are 144 of these startups, 90% of them is 129. That doesn't add up to that much money in SV terms. This seems like a tempest in a teapot. People love to make headlines, it seems, with "OMG bubble OMG!"
- crystalmeph 11y agoWith minimum valuations of $1 billion each, that's well north of $129 billion in valuation that's about to go up in smoke. I know that's not an actual dollar amount invested in these companies, and in many cases is honestly just people proving they can add a few numbers together to make a billion, but a lot of real money is likely to be lost.
- twoodfin 11y agoJust for some perspective, the current market cap of the S&P 500 is north of $15 trillion dollars. It can gain or lose $129B worth of valuation on a not particularly remarkable trading day. Not that such a geographically and industrially concentrated collapse wouldn't be a big deal, and it surely would have broad secondary effects.
- desireco42 11y agoIs this because Unicorns aren't real :)?
- gphil 11y ago> There are about 144 unicorns right now. If only 10% break out, that's only 14 companies that will really make it. Doesn't this ratio seem about right for any basket of unprofitable (or even zero-revenue) high-growth companies regardless of valuation? If those 14 winner companies average greater than a 10x return then everything pans out as expected--lots of risky investments together produce a reliable if more modest return on investment. It seems like the only abnormal aspect is the size of the valuations, but that might be just what happens in a low interest rate environment--too much money chasing too few deals. Whether this affects this success rate of these investments remains to be seen I guess.
- Naritai 11y agoYour assumption of 10% breakout is based, on some level, an assumption that each company's valuation is uncorrelated with the others, and each company will rise and fall on its merits. However, the nature of bubbles is that valuations become based on underlying structural reasons - this is what happened during the housing bubble as well. Statistical generalizations such as 'even if up to x% of people default on their loans, we'll still make money' were used to justify unreasonable investments in homes, which in turn drove a real estate valuation bubble. Well, here's what we learned in 2008 - in a down market, it's possible for _way_ more than x% of people to default all at the same time.
- gphil 11y agoYeah, I wouldn't rule out the possibility of structural problems--we've never seen this phenomenon before so it's hard to say how it will turn out. I was just trying to point out that it's not impossible for the current crop of unicorns to produce big enough winners to outweigh the failure of the rest. I'm definitely skeptical that this will happen though, because the winners would have to be really big (hundreds of billions in actual market cap in the public markets) in order to make up for the really big failures.
- rhino369 11y agoYou have to make a killing on that 10% if you are going to make up all the losses on the 90%. That works for early state investing, but I can't imagine that works for late stage. But the real problem with bubbles isn't that loser companies are pumped up, but real profitable companies are way overvalued too. During the dotcom crash Microsoft lost half its value. It was a winner. It had massive profit margins the whole time. So Uber may be in the 10% success. But if you invest right now, it might be worth half as much in 5 years.
- VeilEm 11y agoThis is a popular idea on HN and just gets upvoted because people want to agree with this and it makes them happy for some reason, but this article is not a good article. It's basically just a quote. I think any kind of the-sky-is-falling article has the chance to get good traction on HN lately without offering anything meaningful. The discussions in this thread are pretty poor and the article is poor.
- zymhan 11y agoYeah I was quite underwhelmed with the substance of the "article".
- soared 11y agoALL CAPS BLOOD IN THE WATER FEAR MONGERING.
- aagha 11y agoThe fact that so many people are frustrated and have had their comments upvoted while yours sits down near the bottom quarter of the page with only two replies should be an indication that your thinking might be out of step.
- colindean 11y agoI've always envisioned most tech businesses in general as an elephant standing on a board with a bunch of mice underneath it. The mice keep the elephant moving, but if the mice aren't continuously fed, they slowly die off. When enough mice die, the rest can't support the elephant and it thus squishes them. The elephant is shot shortly thereafter because it stopped moving. The mice that left sometimes come back to feed on the elephant carcass.
- riggins 11y agoYou have to keep in mind the source. Let me put it this way. A VC's job is to buy X (where X is equity in a startup). Of course every VC would love for X to go on 50% sale ... or even better 75% sale. You saw this with hedge fund managers and the stock market as well. Lots of hedge fund managers went on and on about how irresponsible Bernanke was because he kept interest rates low which raised asset prices. To be clear, I don't think this is a nefarious or even conscious process. However, I think if someone really wants a particular scenario it tends to color their thinking. Also the actual claim made isn't as sensational as the headline. Just says that 90% might take a lower valuation. All that requires is a general market decline. Anyway, take a look at the list of unicorns. http://graphics.wsj.com/billion-dollar-club/ http://graphics.wsj.com/billion-dollar-club/
- marcosdumay 11y agoEh, a VC job is also to sell the same X some months later, for a much higher price. If the buying price of Y goes on a 75% sale, while the selling price of 10Y also goes on a 75% sale[1], the VC makes 75% less money. [1] Things usually don't go that way. Smaller prices tend to fall less than big prices, and the VC will almost certainly get into the negative.
- jacquesm 11y agoBuying lower means a lower exit is required to get the same multiple. So buying lower is always better for a VC. Worst case they make less money on the same multiple, better case they make a much higher multiple. It's all about the rate of return, not the actual amount (assuming the amounts are still worth the effort of investing, obviously there are some lower bounds here).
- ruddct 11y agoSerious question (though, honestly, one I likely won't act on): How might someone short the unicorns?
- habitue 11y agoYou can't. The "valuation" number that is reported for unicorns is made up. It's not related to the sale of shares of the company because the company isn't public yet. To short, there has to be a market for the shares with reasonably good liquidity.
- daveguy 11y agoGenerally you can't. Privately held companies have tight restrictions on what can be done with the stock until they are made public (or bought by the next round of funding).
- fourpac 11y agoI wonder how much the HBO show Silicon Valley has affected the way people are looking at startup funding. It's finally been exposed to a mass audience.
- frik 11y agoAre Unicorns right after their IPO in trouble too?
- DubiousPusher 11y agoDoes this belong on HN? It seems like clickbate speculation without any real substance. Isn't that the opposite of what this place is about?
- grp 11y agoThat clickbate generate comments. Regarding then, it seems many people have a lot of different opinions and a sour understanding of the market. So, in my opinion, the real substance is: nobody knows what is going on, this creates a kind of fear and a negative atmosphere. Not a good thing.
- AndrewKemendo 11y ago90% of the startups will be repriced or die and 10% will make it I thought this was always the assumption. Is it because they are already valued at $1B+ that this thesis should change? I don't see why that should be the case...
- BinaryIdiot 11y ago> Is it because they are already valued at $1B+ that this thesis should change? One would assume that if it's valued so high they have a fair amount of funds in the bank from VCs in which case they could downsize considerably and still survive for quite some time. So I feel like if you're valued at $1B I wouldn't expect you to die even if you're in a decline for some considerable amount of time.
- AndrewKemendo 11y agoExcept I don't know of any unicorns that straight up died. Does a down exit count as dying? Do you have to IPO or be acquired to be a successful Unicorn? What about IPO'd unicorns that tank in the market like Box? I think we need a better metric for success than valuation. Maybe something like: Did they actually lead to the increase of adoption of a better process/technology.
- paki123 11y agoWhat are some companies that are in the 90%?
- robbyking 11y agoI was a Web Developer during the first dot-com boom, and now that I work as an iOS engineer during this boom, I'm shocked at how many of the same mistakes are being repeated. On almost a daily basis I get recruiters contacting me with interview offers from companies who have no chance of surviving past the end of the year. Their messages are often accompanied with bravado about their company's VC backers' other, more successful projects, which only makes me more skeptical.
- _asdf_asdf 11y agoOkay, caps lock. You are cool
- subrat_rout 11y agoThe article mentions about 144 unicorns(billion dollar startups). Can anybody point me to the source having lists of these companies? Curious to see who are these unicorns are.
- soared 11y agoSame, I'm trying to send out some job apps.
- mylons 11y agohaha, <insert can't tell if serious Fry meme here/>
- chrisboesing 11y agoTechCrunch has list with 159 companies atm. http://techcrunch.com/unicorn-leaderboard/ http://techcrunch.com/unicorn-leaderboard/
- acd 11y agoDotcom bubble 2.0, The unicorn bubble.
- anonbanker 11y agoWe're not allowed to call it a bubble yet, right?