Startups: The unicorn is not your friend
A certain type of magical company is on the rise, said Howie Xu in TechCrunch.com. So-called unicorns “have gone from a rare breed to the new normal.” What is a unicorn? It’s a privately held startup that’s valued at $1 billion or more. Five years ago, there were 39 of them, all software companies. Now there are 376 unicorns around the world, in a wide range of businesses. Last week’s $3 billion round of investment in WeWork valued it at a whopping $45 billion. It’s the second most valuable American startup, behind Uber. The e-cigarette company Juul is a member of the club, too. This year alone, 81 new unicorns “found their horns” and hit the $1 billion–in-value threshold. Behind the surge are “mega rounds” of private investment that raise $100 million or more.
But there’s a limit to how long a company can stay private before investors start “complaining about long-delayed IPO plans,” said Rob Copeland and Eliot Brown in The Wall Street Journal. Palantir, a 14-year-old data-mining company, co-founded by noted investor Peter Thiel, may have reached it. The secretive company, valued at $20 billion, “appears to be a prosperous Silicon Valley spy-software machine,” but it has never actually turned a profit. By contrast, Facebook was profitable after five years. Despite the cash burn, Palantir is known for lavish spending, including 13-course lobster-tail and sashimi lunch tastings for employees. Palantir is only one “among a host of unicorns that are losing money years after inception.” Uber and WeWork “have burned through” more than $8 billion and $2 billion, respectively. Really, said Matt Levine in Bloomberg.com, “no one knows what Palantir is worth.” The last group of investors to put money into it thought it was $20 billion. But mutual funds run by Morgan Stanley—the very same investment bank that hopes to manage a public stock sale for Palantir—say it’s worth just $4.4 billion. The low value assigned by the funds, which are required by U.S. rules to report the fair price of their holdings, so upset Palantir that Thiel tried to buy back the shares.
Let’s call a unicorn what a unicorn is: unreal, said Yves Smith in NYMag.com. A new study is ringing an alarm on the “fake unicorns running roughshod over the venture capital industry.” Unicorns are stunningly overvalued. Why? Analysts and media use the latest massive round of funding to value the whole company. This practice continues because many players benefit from publicizing inflated numbers. “Venture capital–backed companies are money pits,” and they are always searching for new sources of funding. That source might be you. If you’ve invested in high-growth mutual funds, there’s a good chance that some of these “fake unicorns” are hiding in your portfolio. So “if you are Joe Retail and think this isn’t your problem, think twice.” ■