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Why Not All Private Unicorns Will Become Public Unicorns

Posted on Tuesday, Jan 13th 2015

We’re in yet another tech bubble led by Silicon Valley’s marvelous froth machine. However, this time, the bubble is constrained to two parts of the market, and thankfully, both are private.

One, late stage, over-valued, over-hyped venture-funded still private startups. The ones among these that are valued at over $1 Billion are anointed Unicorns. This stems from an article by Aileen Lee with Cowboy Ventures, Welcome To The Unicorn Club: Learning From Billion-Dollar Startups.

Two, over investment at the seed stage in private fledgling startups. For more on this, please read: Why 70k In Angel Investments Is A Problem.

Thankfully, the public market is NOT in a bubble, hence when this one bursts, not much harm will be caused, except a lot of rich people will lose a lot of money.

The Economist explains this well in a recent piece aptly titled

Yet judged by the financial yardsticks of the dotcom era there is as yet no bubble. The NASDAQ index of mainly technology stocks is valued at 23 times expected earnings versus over 100 times in 2000. That year Barron’s, an investment magazine, published an analysis showing that 51 listed technology firms would run out of cash within a year. On December 6th Barron’s repeated the exercise and found only five listed tech firms with wobbly finances.

On the topic of Unicorns, the article has this to say:

The second area of technology froth is in private markets. Their exuberance was demonstrated on December 4th when Uber closed a $1.2 billion private funding round that valued the five-year old firm at $40 billion. Baidu, China’s biggest search engine, is set to buy a stake, too. There are 48 American VC-backed firms worth $1 billion or more, compared with ten at the height of the dotcom bubble, according to VentureSource, a research outfit. In October a software firm called Slack was valued at $1.1 billion, a year after being founded. 2014 looks set to be the biggest year for VC investments since 2000.

Well, unless several of these 48 VC-backed firms get acquired by larger companies at valuations greater than a billion, they will not end up with Unicorn level exits.

To sustain a billion dollar valuation in the public market, thankfully, isn’t a joke this time around, as it had been during the dotcom era.

I see fund managers being thoroughly irresponsible these days by investing at valuations that make no sense whatsoever.

Frankly, in 2015, a correction will be more than welcome.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Last year, we began tracking Unicorn companies – essentially organizations with billion dollar plus valuations – inspired by a TechCrunch article by Aileen Lee of Cowboy Ventures. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here.

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