Chasing unicorns feb 2020

Chasing Unicorns
XenBytes, February 2020: Chasing Unicorns
By Kenneth Yeo, CIO
A unicorn is a privately held startup company
with a current valuation of US$1 billion or
more
In the connected world we live in, we are often shown investment opportunities
by our friends or receive unsolicited opportunities in our Inbox. Here, we discuss
two important considerations (amongst others) when chasing unicorns - investment
stage and share type.
Early Stage
I see a lot of early stage companies looking for seed/A round investments.
These could range from founders with a business plan to companies having some
early revenue.
Before one invests in an early
stage company hoping that it will
eventually transform into a unicorn,
one should be cognizant of the
chances of capturing one. In a
September 2018 report published
by research firm CBInsights1 which
tracked a cohort of over 1,100
companies from the moment that
they raised their first seed
investment (in 2008, 2009 and
2010), only about 1% reached
unicorn status. As this is an
average figure, the actual
probability varies widely with much
better odds for a top tier VC fund
compared to an individual investing
in start-ups on an ad hoc basis.
#1 - Investment stage
1“Venture Capital Funnel Shows Odds Of Becoming A
Unicorn Are About 1%”, CBInsights, Sep 2018
40
31
25
13
5
< $1B
$500M – 1B
$200 –
500M
$100 –
200M
$50 – 100M
Number of startups
with IPO/ M&A exits
Dead/
Self-sustaining
67%
IPO/
M&A exit
30%
Other
Status of 1,119 startups that received
seed funding in 2008-10
Co-
founders
Revenue
Seed Capital
Early
Stage
Later Stage IPO
Public &
Secondaries
Valley of death
Break even
A B C D
Mezzanine
Friends &
Family
Venture Capital, Private
Equity,
M&A, Strategic Alliances
Angel
investors
IPO
?
© Xen Technologies Pte. Ltd. (201832847D) All rights reserved.

Late Stage
Investing in unicorns after they have become unicorns have been popular in
recent years. While the risk of the company not reaching the finishing line of a
successful IPO is lower than an early stage investment, it may not result in a
profitable investment.
Below is a simulation of the funding rounds a start-up goes through before
reaching a successful IPO.
Pre-Money, $M
Dilution
Post-money,
$M
20
20%
24
50
20%
60
100
20%
120
300
20%
360
1,000
20%
1,200
2,000
20%
2,400
3,000
20%
3,600
1.00 2.10 3.50
8.70
24.10
40.20
50.20
0
10
20
30
40
50
60
A B C D E Pre-IPO IPO
Price/share,$
Stage of
financing
Series A
InvestorCost/share = $1 50x IPO
price
Pre-IPO Investor
Cost/share =
$40.20
1.25x IPO
price
The investor in the A round of this
simulation makes 50x his
investment (his cost/share is $1
while the IPO price per share is
$50).
The pre-IPO investor makes 1.25x.
For the pre-IPO investor, most of
the upside or downside will take
place post-IPO. The risk of making
a loss is high if the stock price
declines after IPO.
Pre-Money valuation is the company
valuation prior to the investment round
Dilution is the decrease in ownership
for existing shareholders that occurs
when a company issues new shares
Post-Money valuation is the value
after the investment has been made
Definitions

Case study: Uber
According to Crunchbase, Uber raised a total of US$16.6b in 22 funding
rounds prior to its IPO in May 2019 at a pre-money valuation of US$74b (US$45
per share), which is just above the pre-IPO round led by Toyota raised about 6
months before its IPO. After IPO, the share price fell to a low of just below
US$30/share, which is below the valuation of the early 2018 funding round led by
Softbank at US$33/share. The share price has since recovered some ground and is
trading at US$36/share (as of end Jan 2020). Thus, pre-investors who bought
shares at pre-IPO valuation and have held on to these shares are still making
losses.
This is not unique to Uber. Of the top 50 VC backed IPOs in 2019, 14 were
trading below their respective IPO valuations on Jan 31, 2020. The top 4
companies have valuations of above US$10b each at IPO, namely, Uber (US$82b),
Lyft (US$24b), Slack Technologies (US$23b) and Pinterest (US$13b). With the
exception of Pinterest, all the other 3 companies were trading below their IPO price
as of end Jan 2020 with discounts of between 16% to 56%. The largest unicorns are
usually the ones that are most well-known and commonly available to investors pre-
IPO and are also the most likely to underperform after the IPO.
0
10
20
30
40
50
60
70
80
90
0
1
2
3
4
5
6
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Equity
Debt
Funds raised
(US$B)
Implied
valuation
(US$B)
IPO Valuation:
$82.4B
Current market cap:
$62.5B
2013
TPG & Google lead
$258m investment
2015
Goldman raises $1.6b in convertible
debt from private wealth clients
2016
Saudi wealth fund makes $3.5b
backing
2017
SoftBank-led consortium invests
$1.3b
2018
Toyota invests
$500m

#2 - Share type
The other important consideration is the share type which can be broadly
classified into primary and secondary shares.
Primary shares
Shares you buy directly from the
company when the company raises a
new round
Secondary shares
Shares bought from existing
shareholders or management
Who are the investors investing in
the round?
Having a top tier VC fund leading
the round will give more assurance than
a round led by a strategic investor who
might have other considerations beyond
financial gains.
What to consider
Who is the seller and why is he
selling?
As an “outsider” we must avoid being
“dumped” shares by “insiders” who have
better visibility of the company’s
performance.
What to consider
Share class and valuation
Shares sold by founders or early
investors are usually of a lower
preference than later round shares sold
by the company. In the event of a
liquidation, the holders of lower class of
shares will only be paid back after the
holders of higher classes of shares have
been paid back.
Direct vs. indirect shares
Earlier investors typically hold their
shares in an SPV. When selling their
shares to you they are transferring
shares in the SPV instead of shares of
the underlying company. This means
you have no direct access to the
company and are dependent on the
seller to provide you with ongoing
updates on the company.
When purchasing indirect
shares, you should also
look at the terms of sale
to see if the seller
charges you any fees and
carry for managing the
SPV.

Chasing unicorns is a potentially rewarding but highly risky hobby that is best
left to the professionals (top tier VC funds) who have the experience of spotting the
next unicorn and also the expertise to give assistance and guidance to groom the
start-ups into unicorns.
At Xen, we seek out the best VC managers and present opportunities for
investors to invest in them via our a fintech solution, which allows fractionalized
access and tradability in alternative investments, through a user-friendly, compliant
onboarding platform. We also bring curated quality unicorn opportunities backed by
top tier VC funds to our investors.The author
About Xen
Kenneth has over 20 years of experience in the private equity industry.
He started his investment career with the Government of Singapore
Investment Corp (GIC) where he spent 12 years, half of which was
based in GIC's overseas offices in Bangkok, London and the Silicon
Valley. Kenneth joined Allianz Capital Partners in 2007 as an
Investment Director, responsible for its private equity fund investments
in Asia. Most recently, he was a Senior Director at Azalea, a wholly
owned subsidiary of Temasek Holdings.
Transforming Alternative Asset Management.
We live in an age where access to the right investments can be a door to wealth and ﬁnancial security.
In Asia, where there has been an unprecedented growth in wealth, the current force of economic
influence and power is among the young and affluent, the millennials and XENnials.
Most accredited investors in Asia are locked out of alternative opportunities due to high barriers to entry
– high minimum investment levels, zero liquidity and lack of transparency. Only a small fraction of
investors has access to the above market returns and performance of alternative investments, including
private equity, venture capital, real estate, infrastructure, private debt and hedge funds. Xen creates a
fintech solution which allows fractionalized access and tradability in alternative investments, through a
user-friendly, compliant onboarding platform.
Xen is opening up an industry, traditionally dominated by and designed for UHNWIs and institutional
investors, to accredited investors seeking access and liquidity in alternatives.
Founded in 2018 by a strong management team of former investment bankers, traders and fintech
veterans, Xen envisions a future of alternative asset management powered by technology for the
utmost transparency, liquidity and cost efficiency.
This Publication and any information contained herein is made available by Xen Technologies Pte. Ltd. (hereafter “Xen”) for general
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Chasing unicorns feb 2020

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