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Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty
- hluska 11y agoI was pleasantly surprised by this article. I expected the usual 'the end is nigh, the bubble has popped, unicorns are screwed, we're all screwed' article. Instead, I was happy to find that it was about some of the ways that unicorns could or may have to protect employees, founders and early investors from down rounds. Purely as an educational experience, this article is certainly worth a read.
- rcarrigan87 11y agoYeah, it really is interesting to see the situation from multiple perspectives. I still wonder though, is this actually happening? Nothing in the many articles I've read suggests solid evidence that a majority of these companies are struggling. Just sound bytes from VCs pontificating.
- smt88 11y ago"Struggling" is not the same as "no longer able to justify a highly optimistic valuation". Many unicorns could actually be profitable and still never justify a $1B+ valuation.
- sgt101 11y agoBecause they are private we often can't see the books, and the bits of the books that get out are not entirely reflective of the entire picture (if you know what I mean, nudge nudge great runner sir!) However, my guess is that most of these companies are not actually profitable, and that most of them have business plans that require significant investments to make them profitable in the future. I think that most of them have a strategy that aims to "win" in the short term by dominating their categories and then to build out a business that capitalizes on their success, reaping profit in the future. If so they are in trouble in that they are going to need lots more cash before they deliver profits. New providers of cash hold all the cards because if the current shareholders don't get that cash into the business then their stake is worth nothing. If the new providers of cash are the current investors then they need to squeeze hard to justify doubling down on the risk (most of them simply won't do this, but some of the funds with very deep pockets have histories of doing this with some assets)
- 27182818284 11y agoWhen I read old case studies like WebVan it is hard for me to believe in a bubble. I do think their valuations are too high, but they certainly aren't zero--more than half of the people I know have taken and Uber or Lyft more than once, for example.
- michaelbuckbee 11y agoThings are different than the webvan bubble: many of these companies have substantial revenues, selling into a market of 10 to 20 times as many internet users, much cheaper infrastructure, etc.
- GCA10 11y agoWebvan had $178.5 million of revenue in 2000, selling in only a few markets, and it had semi-coherent plans for growing its revenue quite a lot farther by penetrating existing markets more deeply and adding new ones. Trouble was, Webvan's way of doing business bled cash at a horrific rate. The bigger it got, the more money it lost. Investors got tired of throwing more cash into the company because the cash-bleed problem couldn't be fixed. I don't think Webvan is the last company ever to suffer from such problems -- or to be unable to save itself if/when investors go on strike.
- rcarrigan87 11y agoI'm not sure Uber is really who the article is talking about. Some companies really have proven their Unicorn status. Everyone I know uses Uber a lot
- at5 11y agoStill possible for Uber to be overvalued though. Fedex, a proven business, has an EV of $39BN and FCF of ~$700MM. Uber has a $63BN valuation and loses money. Uber could take over the world. Or it might not. A lot of assumptions baked into that $63BN number. Will be interesting
- adevine 11y agoWebVan isn't the right analogy - a real estate bubble is a better one. In the .com bubble, no one was really sure how things would shake out, so there were lots of companies who wouldn't have succeeded no matter how big they got (the "losing money on every sale but making it up in volume" business plan). When the .com bubble crashed, real estate was seen as a much stronger investment because no matter how low it went, it was real "stuff" that had a sort of intrinsic value - it may go down, but it wouldn't go to 0. A similar thing happened in Tokyo real estate circa early 90s. A Tokyo apartment still has a lot of value - you'd probably think it very expensive - but it's still 80% cheaper than it was at its peak. The problem with lots of companies now isn't that they won't ever be profitable, or that they don't have realistic business plans, it's just that their valuation is way more than their earning stream will ever support. They are valued at "we'll eventually take over the market" prices, even though they'll only ever reach niche market status.
- davidw 11y agoI expect 'unicorn' references to horns and such to be thoroughly worn out by the end of the year.
- kzhahou 11y agoWe can hope. Alas, the road is long...
- numbsafari 11y agoYou mean by the end of January.
- mansilladev 11y agoNeighhhh. You're just drinking from the trough of despair.
- draw_down 11y agoBoy oh boy, this is all we talk about anymore. Always specifically in the language of unicorns too. People seem to have really latched on to that.
- kzhahou 11y agoYou're getting downvoted, but there's lots of value in your statement. Language is important, and the choice of words will frame narratives and reveal hidden truths and agendas. The press and HN/etc DOES talk a ton about unicorns. It's the only grade that has its own name. There's no word for a $10-25m startup, or a $100-500m startup. No, only $1B-unicorns. They have their own name and we're obsessed with them. This either highlights or promotes the notion that investors (and entrepreneurs?) are only interested in billion-dollar companies.
- WalterSear 11y agoIt's not surprising, considering the current standards for startup employee equity: apart from the perilous, uncertain route of becoming a founder, joining a unicorn early is the only way for rank-and-file startup employees to get any opportunity of substantive wealth creation.
- adevine 11y agoI wonder if that has led to some of these very-VC favorable deals with large liquidation preferences. Rather than take an investment that has lower valuation, a founder takes an investment in which a lower percentage goes to the VC, and thus the total valuation is higher, because getting into "the unicorn club" has value all its own: press, cachet, employee retention.
- auntienomen 11y ago$10-25M: Goblin $25-50M: Elf $100-500M: Centaur Please let this catch on.
- abakker 11y agoI'd really enjoy "wizard" to be the graduated rank, like when you're officially huge and profitable. Then, iOS/Android dispute becomes a wizard battle.
- ffumarola 11y agoAny thoughts on which unicorns are more situated to "weather the storm" and which aren't?
- hitekker 11y agoAh, it would be great to drum a list! I.e. analyze each company, their rhetoric, metrics, and current trending performance, irrespective of perceived valuations. I almost suspect someone is in the process of doing so right now.
- ffumarola 11y agoThe list of unicorns: https://www.cbinsights.com/research-unicorn-companies https://www.cbinsights.com/research-unicorn-companies Would definitely love to see some analysts grade that list in terms of whether the current valuation is sustainable.
- criddell 11y agoI wish I understood what it is about Evernote that makes it worth $2 billion, Dropbox $10 billion, or Nextdoor $1 billion. There aren't many companies on that list that have valuations I can understand.
- mrmcd 11y agoIn the most literal sense, "being a unicorn" means nothing more than in the last funding round, they sold X% of the company for $Y, and (100/X)*Y >= 1,000,000,000 For example, if DizruptrCo Inc, sold a 15% equity stake for 200 million, they are a unicorn "valued" at $1.333 billion. How they come up values for X and Y are part of the VC fundraising black magic. What's being reported here and a lot of other places recently, however, is that VC investors are actually willing to put an abnormally high value on Y in late rounds, because liquidation preferences mean they are very unlikely to lose money. Founders also love this, because it means they get to join the Unicorn Club, hopefully on their way to the Three Comma Club. This is whats meant by unicorn valuations being "inflated". As always, the people who get screwed the hardest if things go south is the employees. People are starting to figure out, however, that a down round, or really anything short of a spectacular exit, for an inflated unicorn means their options and equity are probably going to end up worthless. This could lead to all the best talent running for the door as fast as they can, death spiral, etc.
- KirinDave 11y agoSometimes businesses fail, even after early success. And the NEW YORK TIMES IS ON IT!
- charonn0 11y agoThis article needs a glossary.
- daenz 11y agoAm I reading this right?: 1. Early investors overvalue a company at $X+Y 2. Investors give money and get Z preferred shares at valuation $X+Y 3. New investment round, company valued at $X 4. Wealth transferred from founders and employees -> original investors to cover the difference $Y
- nickff 11y agoYes, that is how 'liquidation preferences' work.[1] I strongly recommend reading/watching Mark Suster, who (in my opinion) does a good job at explaining investors and terms.[2][3] [1] https://en.wikipedia.org/wiki/Liquidation_preference https://en.wikipedia.org/wiki/Liquidation_preference [2] http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2516 http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2516 [3] http://www.bothsidesofthetable.com/ http://www.bothsidesofthetable.com/
- hobbyjogger 11y agoJust thought I'd point out that the example given doesn't tell us anything about liquidation preferences (though of course you can assume they would be involved, since we're talking VCs here, but they don't matter). The relevant financing term here is anti-dilution. Here's Feld: http://www.feld.com/archives/2005/03/term-sheet-anti-dilution.html http://www.feld.com/archives/2005/03/term-sheet-anti-dilutio....
- not_that_noob 11y agoMore or less - new shares are issued to investors to compensate for the decrease in valuation. Very demoralizing usually.
- jsprogrammer 11y agoThis is, essentially, the private equity model.
- mikeryan 11y agoIt would be interesting to see if more founders take money off the table in high value rounds as a hedge against down rounds. It's not mentioned but while the founders may lose value in their common shares a lot of them have been able to cash out in the good rounds giving them a nicer cushion compared to straight employees
- anon8418 11y agoFounders can take more money off the table, but that doesn't solve for the bigger problem of down rounds mentioned in the article: employees leaving.
- frik 11y agoWhat are the best books about the 2000 dot-com bubble?
- mark242 11y agoThis is all you need to read: https://web.archive.org/web/20050715000000*/http://www.fuckedcompany.com/ https://web.archive.org/web/20050715000000*/http://www.fucke...
- pud 11y agoFounder of Fuckedcompany here. Thanks! I wrote a book, too: http://www.amazon.com/Fd-Companies-Spectacular-Dot-com-Flameouts/dp/1416577939 http://www.amazon.com/Fd-Companies-Spectacular-Dot-com-Flame...
- frik 11y agoDo you have a backup of your old website? Archive.org "backup" is incomplete...
- cableshaft 11y agoMight want to start writing the book on the 2016 unicorn dehornification, since it seems the powers that be are pretty determined to make it happen (or at least getting all the media outlets to make people think it's about to happen).
- VLM 11y agoI'm not sure anythings changed since Tom Standage's "The Victorian Internet".
- justincormack 11y agoBoo Hoo is hilarious. Never quite sure if the author realises how badly he comes across. Highly recommended.
- flormmm 11y agoDon't the late stage investors get hurt in these deals also? Why would they get in at such a high valuation?
- rdmcfee 11y agoI believe that some startup founders/execs have optimized for valuation at the expense of costly liquidation preferences for late stage investors.
- jpmattia 11y agoHaving had a front row seat to the popping bubble in 2000: I can't think of a single instance where wash-outs (which is really what is being described in the article) led to a wonderful outcome for employees. Any other old-timers around that can name any?
- gedy 11y agoWell, I did get to keep a nice office chair from the office cleanout that I still use ;-)
- pfarnsworth 11y agoMost companies got hit hard, but the ones that survived have all thrived since then. It was definitely an extinction-level event for 90%+ startups it not more, and I think something similar will occur in 2016. It will be interested to see how many of the YC companies survive 2016.
- rcarrigan87 11y agoThis is almost becoming a self-fulfilling prophecy. Enough articles are written calling for down rounds, now investors are thinking down rounds, employees are sprucing up their resumes, lawyers are preparing for battle... Can anyone really say if there is any proof to this rhetoric. Are these companies really in such bad shape? *edit: spelling
- mbdev 11y agoAll of it is because investment in Q4 of last year was lower than any Q after 2012. Which is a ridicules reason given that Q3 was by far the highest ever. With that being said given the state of the public market (going down + low dividends) startups will still look sexy for a long time. I wouldn't worry about it.
- mark242 11y ago"With that being said given the state of the public market (going down + low dividends) startups will still look sexy for a long time. I wouldn't worry about it." This is such a ridiculous comment that it needs to be highlighted for just how myopic it really is. Angel-and-after VC investment has been driven, increasingly, by the effects of ZIRP. "Fuck it, we don't have anywhere else to put our money, we might as well gamble on 23 red" is basically the prime justification for a lot of money that's been put into, say, companies that deliver lunches in San Francisco. Now that we are moving away from ZIRP, sinking money into glorified AWS-React-Node applications is going to dry up, naturally. There are huge institutional investors who will no longer be willing to take the risk, period. The "state of the public market" is getting hammered by oil prices, and by China. I don't know how you read that as "startups will still look sexy". The roulette table looks sexy when the bank isn't giving your savings account any return. The moment it does, guess what happens.
- alextgordon 11y agoI agree 100% with your analysis long-term, however it seems unlikely that interest rates will rise for the foreseeable future.
- tmaly 11y agoAll the more reason to go public and have some liquidity in your shares. I remember being at Intel in 1999 when the share price was 72. six months later it was down around 18. There was one smart senior engineer there that had put options as insurance against all his shares. The rest in that group had to rethink retirement.
- exw 11y ago<< There was one smart senior engineer there that had put options as insurance against all his shares.>> Not sure what the rules were at that time, but most public companies restrict you today from owning any derivatives in their stock.
- greenyoda 11y agoHow could a company find out that you bought put options on their stock?
- ewindisch 11y agoIt's been argued that the deal structure of companies, particularly unicorns, has begun to look like debt[1]. Low interest rates and easy money has created debt. Massive bubbling amount of debt. Crashing debt bubbles is not fun, just ask anyone that lost their shirt in 1929. There is a paper[2] from this past June that goes deep into this, highlighting how and why debt bubbles are so dangerous. TL;DR? At least checkout this Bloomsberg article[3]. I think there will be a number of unicorns that are successful. I don't even think this will only be those that are profitable. Like always, there are companies that are overvalued, and some that are undervalued. I don't think it's a 10/90 split as has been suggested by some, but the next couple years will certainly be interesting. [1] http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015 [2] http://conference.nber.org/confer/2015/EASE15/Jorda_Schularick_Taylor.pdf http://conference.nber.org/confer/2015/EASE15/Jorda_Schulari... [3] http://www.bloombergview.com/articles/2015-06-26/the-reason-debt-bubbles-are-worse-than-stock-bubbles http://www.bloombergview.com/articles/2015-06-26/the-reason-...
- yggydrasily 11y agoBut if we just keep interest rates low / near-zero forever, then we can keep inflating the debt bubble forever too! Problem solved!
- deleted 11y ago[deleted]
- ChuckMcM 11y agoI agree with it being more debt like and less equity like. And when a new investor re-writes the term sheet such that their liquidation preference is satisfied ahead of everyone else, it is just like having the bond issuer return pennies on the dollar for net negative return. And if you're looking at a $100M write off, that can fund quite a few lawyers prior to leaning back for that hair cut.
- sjg007 11y agoBond holders get paid before stockholders. But this is explosive debt.. E.g it has a liquidation preference.
- MonadQueen 11y agoShouldn't that be "Expect some Unicorns to Lose their _Horn_?"
- paulpauper 11y agoHaven't we been 'expecting' this since 2012, yet the biggest, most successful unicorns keep going up in value. For all the hype and doom about Square stock, the price is back to where it was when it began trading a month ago, although it has fallen 20% in recent weeks. But this is a good opportunity for employees to understand the risks of stock options, but it's not like the world is coming to an end. Such risks have always existed.
- Buttons840 11y agoHere's a 5 year old poll from HN: https://news.ycombinator.com/item?id=2231352 https://news.ycombinator.com/item?id=2231352 The majority had a pessimistic outlook at at least thought "something is going on".
- peter303 11y agoSometime fake valuations. "I give you a boatload of money for a small piece of your company" Doesnt mean the market or the prowess of the company will scale way up beyond that small piece. Reminds me how they pumped IPOs in the late 1990s.
- dageshi 11y agoMETA: Am I mad or has the term "Unicorn" suddenly blown up and now every news outlet has to somehow shoehorn it into all their articles when dicussing anything startup related? I really don't recall the phrase before maybe a few months ago?
- kartickv 11y agoIf I were a founder who wanted to make sure employees and founders get a better deal, what are my options? Can I accept money from investors only on the condition that they get paid only after employees and founders get paid a minimum amount, like $1M each? The stronger version of idea is to not grant stock / stock options to employees (or grant only one share if needed for legal reasons). Instead offer a guarantee that only after they earn some large amount, enough to retire, say $10 million, will any investor receive anything. Employees would never make more than $10 million, but they would maximise the chance of making $10 million. This would make the startup a less risky place for an employee to work, assuming the goal is to maximise the probability of making enough to retire. Then the investors can have whatever liquidation preferences, seniority, ratchets and so on, as they want, and it wouldn't matter to either the founders or the employees. I'm willing to accept a lower valuation (the certainty of a $100 million company is more important to me than a 20% chance of a billion dollar company). Does this make sense? Would you suggest a different approach to reduce risk for founders and employees?
- greggman 11y agoI'm confused. Employees and founders get a salary. There is no risk to them. If the company fails the investors lose millions of dollars, the founders and employees leave with 1-2-3 years of salary in their pockets and then go get another job. That is why investors get paid first. Am I missing something? I guess I don't understand where this idea that founders and employees should get paid first. In guessing because the did the work but they seem to be forgetting they also got paid for the work. As a startup it might have been less than some other jobs, in compensation they took some tiny tiny risk that if the company is successful they get a taste. But they risk is orders of magnitude less than the investors. Sorry if I'm not understanding
- ken47 11y agoThe ethics of this go deeper than what you describe. If Warren Buffett invests 1m in a company, is he in a riskier position than if a McDonald's clerk were to invest 10k in the same company? The absolute dollar value is not the only way to gauge risk exposure.