Injured Unicorns Spotted in Silicon Valley

As opposed to the horse with a single, spiraling horn projecting from its forehead, today’s unicorn describes privately held start-ups that are worth more than $1 billion: think Uber, AirBnB, Snapchat or Pinterest (actually, these are all considered ‘deca-corns’ because they are worth more than $10 billion).

Current estimates suggest that there are now 143 unicorns in existence today and are supposedly worth half a trillion dollars, but it’s actually hard to tell because the market isn’t pricing these companies.  In fact, some of the pricing indications suggest that these valuations are coming down.

In the old days, venture capital firms would fund start-ups and when they got big enough, the companies would go public through an Initial Public Offering (IPO) and the venture firms could sell their stock in the public market.  (For those people who think that you get in ‘at the ground floor’ with an IPO, you’re actually paying off the venture firms that, in fact, got in on the ground floor).

Today, firms are willing to stay private longer because they don’t have to worry about short-term profits that Wall Street demands each quarter.  Private companies can lose money and attempt to build scale more quickly and keep competitors at bay.

One interesting example with St. Louis connections is Square, the very-cool payment processing system not much bigger than a postage stamp that plugs into a mobile phone.  Right now Square is privately held but was valued at $6 billion in their last capital raise at $15.46 per share.

The company is growing quickly – net revenue jumped almost 50 percent to nearly $900 million in the first nine months of the year.  Unfortunately, the company lost -$131.5 million during the same time period, which is a little worse than the loss of -$117 million during the same period last year.

Square is going public today at $9 per share, which translates into a valuation of $2.9 billion.  And that’s just the opening price – it will take a little time to see what happens to the stock after trading starts not to mention a year or two down the line.

Will it be like Facebook (FB), which has gone up by almost 250 percent since it went public (albeit after a tough first year), or like some of the other unicorns that have gone public recently?

Since Twitter (TWTR) went public two years ago, its share price has been all over the board, but is basically at a breakeven while the S&P 500 gained more than 20 percent.   More recently, Etsy (ETSY) went public in April and is down -45 percent (more than -70 percent if you weren’t allocated shares on the first day and had to buy in the open market).

It’s been reported that mutual funds that hold privately held unicorns are marking down their shares as well.  The Financial Times reported that Fidelity marked down their Snapchat holdings by 25 percent in the last three months and Blackrock wrote down their Dropbox shares by a similar percentage last month.

The Wall Street Journal reported that companies aren’t valuing the unicorns consistently either – Blackrock says that Uber is worth $40.02 per share while Hartford Group says that it’s worth $35.67 and Fidelity reports $33.32 per share.  Since there is no market price, it’s impossible to say who’s right and who’s wrong, although you can see that there is a potential conflict of interest problem.

Since we don’t deal in unicorns, this isn’t an issue for us.  We like the public market pricing even though it can be volatile.  The market price may or may not do a better job of reflecting intrinsic value, but at least we can all agree that the process is fair.

This is a bit of an aside, but thinking about these unicorns has made me appreciate short-sellers even more than I have in the past (here’s an article where I celebrate short sellers).  There is definitely a place for people who are willing to bet against high valuations and keep the starry-eyed optimists in check, although the IPO market seems to be doing a fair job as well.

My point is that I like markets because they are where buyers and sellers come to the market and agree on a price.  That happens in a limited way in the private markets (even without the short-sellers), but there aren’t enough competitive bidders on either side to really do as good of a job as the public markets in my opinion.

That price inefficiency undoubtedly creates opportunity for someone, but unfortunately not for Silicon Valley outsiders like us.