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Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

nytimes.com

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Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#41

Post by mbdev »

rcarrigan87 wrote: post #33

This 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

All 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.

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#42

Post by ewindisch »

It'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

[2] http://conference.nber.org/confer/2015/EASE15/Jorda_Schulari...

[3] http://www.bloombergview.com/articles/2015-06-26/the-reason-...

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#43

Post by hobbyjogger »

nickff wrote: post #18
daenz wrote: post #13

Am 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

Yes, 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 [2] http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2516 [3] http://www.bothsidesofthetable.com/

Just 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-dilutio....

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#45

Post by gedy »

jpmattia wrote: post #32

Having 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?

Well, I did get to keep a nice office chair from the office cleanout that I still use ;-)

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#46

Post by adevine »

27182818284 wrote: post #3

When 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.

WebVan 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.

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#47

Post by AlexandrB »

draw_down wrote: post #5

Boy 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.

What's really amusing is the skepticism built into the name. Unicorns are mythical creatures and historical accounts of unicorns are either hoaxes or cases of mistaken identity. The metaphor is obvious.

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#49

Post by adevine »

kzhahou wrote: post #11
draw_down wrote: post #5

Boy 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.

You'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…

I 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.

Re: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty

#50

Post by chishaku »

rcarrigan87 wrote: post #33

This 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

> Can anyone really say if there is any proof to this rhetoric. Are these companies really in such bad shape?

One thing is for sure, you can't look at companies/startups or VC in a vacuum.

You'd be wise to look at financial markets as a whole and all the interdependent factors that __might__ be leading to a situation similar to 2008/9 or worse; another housing bubble, weakness in energy markets, banks exposure to housing and energy, weakness in emerging markets (China, Brazil), tightening monetary policy, sovereign debt crises, geopolitical risk, etc.

If investor and consumer confidence really start to slide, yes, valuations will take a hit.

That's not to say that some unicorns and other companies can't still be wildly successful.

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