Unicorns are no longer the stuff of legend — not the fanciful equines marked with elegant wings and prominent horns. Instead, at the mention of the term “unicorn”, the Silicon Valley tech startups valued between $1 and $10 billion, is evoked.

1. L A R R Y S C H E I N F E L D
P R E S E N T I N G
Are
UNICORNS GOING
OUT TO
PASTURE?

2. Unicorns are no longer the stuff of legend — not the fanciful equines
marked with elegant wings and prominent horns. Instead, at the mention
of the term “unicorn”, the Silicon Valley tech startups valued between $1
and $10 billion, is evoked.
Supposed to be as rare as their namesake, unicorns have instead “[bred]
like rabbits,” suggesting the health and vitality of the tech sector. Recently,
however, with the disappointing failures and lower stock prices, unicorns
are losing value, which could result in a sizeable death wave for these
seemingly magical companies.

3. A Brief History of
Unicorns
The advent of smartphones gave unicorns life. By putting the power of
the internet in the palms of consumers’ hands, smartphones created
unprecedented opportunities for unicorns to invent and deliver services
that people did not even know they wanted. As of this year, there are
150 unicorns in the United States.
Since 2007, the tech sector has created thousands of jobs and opened
brand new economic opportunities in a relatively new space —
examples like Uber and AirBnB being two.

4. Moreover, it’s transformed the faces of entire cities like
Austin and San Francisco. To this day, despite concern
over unicorns’ health, downtown San Francisco is
inundated with construction cranes building new
housing aimed at the city’s tech workers.
With so much growth, tech startups self-valued their
companies at billion dollar levels and spent
extravagantly to outgrow their rivals. For a time, venture
capitalists were eager to finance this spending, but with
2015-2016 stock prices falling below IPO levels the steady
flow of money from mutual and hedge funds has
receded into a trickle.

5. IS THERE
REALLY A
TECH
BUBBLE?
Most experts think that there is.
Jay Ritter, a finance professor at the
University of Florida whose expertise is in
valuations and IPOs, defines a bubble “as
something where assets have prices that
cannot be justified with any reasonable
assumption.”

6. Some of today’s hottest unicorns are valued in multiple multiples of 10 of
their annual sales, indicating that they are indeed unreasonably
overvalued. In a recent valuation of Uber, its investors calculated the
company’s worth at a multiple of 100 times its sales. Though AirBnB’s $25.5
billion valuation is only 28 times its sales, the number nevertheless exceeds
earlier record-breaking peak valuations that were only 6 times the number
of sales.
As if to prove that unicorns are overvalued, Fidelity recently wrote down 19
Silicon Valley startups, signaling that tech is very likely in a bubble.

7. So Will the Bubble Burst
and Kill the Unicorns?
It’s hard to say. Some think the bubble will burst in 2016, but there is also
optimism that current conditions will, at worst, knock out only 50% of
unicorns, thereby restoring proper valuations and merely deflating the bubble.
It is worth noting that, thus far, only one major unicorn, Fab.com, has failed
and only one other, Evernote, may be on its way. Moreover, these setbacks are
not the result of lower valuations but of poor management and lack of solid
strategic vision. Fab did not understand the advertising game and failed to
attract repeat customers. Evernote’s product is not streamlined and does not
deliver exceptional service, especially when compared to its competitors.

8. THANK YOU
W W W . L A R R Y S C H E I N F E L D V C . C O M