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Overvalued Unicorns Looking for Exits

Posted on Tuesday, Nov 15th 2016

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The social media sector, Facebook in particular, has set the trend for high valuations even without revenues or even monetization models. But not all these unicorns can expect to sustain such high valuations. 

Twitter’s Buyout Prospects

Twitter is a case in point. In its latest quarter, Twitter reported revenue of $615.93 million and a loss of $103 million. While it did exceed market expectations, it was the ninth straight quarter of slowing growth.

In the face of stiff competition from the likes of Facebook, Instagram, and Snapchat and its own struggle to fight abuse on its platform, its user growth rate has stagnated. Average monthly active users (MAUs) grew 3% over the year to 317 million. Average US MAUs grew 1.5% and average international MAUs grew 3.7% over the year. At the end of the quarter, Twitter had 67 million US-based users and 250 million international users. Compare this to its metrics at the time of its IPO: more than 218.3 million monthly active users and more than 100 million daily active users worldwide.

Driven by its need to focus on high growth, improve margins, and revenue generating opportunities, Twitter plans to reduce 9% of its global staff, or 350 people and shut down its video-sharing app Vine.

In September, Twitter had engaged Goldman Sachs to help plan a sale. Salesforce, Microsoft, Disney, and Alphabet were seen as prospective buyers. However, its anemic user growth rates, losses, and toxicity have been hampering its buyout prospects. After these prospective buyers backed out, the market was abuzz with rumors of Japan tech giant SoftBank’s interest. From a peak of $18 billion at the height of its buyout buzz, its market cap has tumbled down to about $12 billion. Still a mega Unicorn, but a struggling one.

Snap’s IPO Prospects

Snap, formerly known as Snapchat, is reportedly gearing up for an IPO. Unlike Twitter, it has seen phenomenal user growth from 50 million in 2014 to more than 110 million daily active users in 2015.

It operates on a freemium model. It earns revenues through in-app purchases and premium services such as replies, along with advertising.

Snap does not disclose detailed financials. Analysts estimate that it earned $59 million in revenues in 2015 compared with earlier estimates of $100 million. Revenues are projected to grow to $250 million-$350 million this year, and up to $1 billion by 2017.

It has been venture funded so far with $2.65 billion in funding. Its last round of funding was held in May this year when it raised $1.8 billion at a valuation of $20 billion. An earlier round held in March last year had valued it at $16 billion. It is reportedly seeking to raise $4 billion from the IPO in March 2017 at a valuation of at least $25 billion.

Snapchat has recently been making interesting moves to justify its valuation. It has announced plans to diversify out of pure chat offerings, and rebrand itself as Snap. It has also diversified into wearables.

Pinterest

Another unicorn with low revenue and ridiculously high valuation is Pinterest. It has raised $1.3 billion in funding from individual investors and funds including Valiant Capital Partners, FirstMark Capital, Fidelity Investments, Bessemer Venture Partners, SV Angel, Andreessen Horowitz, Slow Ventures, Rakuten, Jack Abraham, Max Levchin, Kevin Hartz, Michael Birch, New York Angels, William Lohse, Jeremy Stoppelman, Wellington Management, and Goldman Sachs. Its last round of funding was held in May 2015 when it raised $186 million at a valuation of $11 billion.. It is expected to triple its revenue to $300 million this year. Its monthly users increased from 100 million in September 2015 to 150 million in September 2016.

It wasn’t until very recently that Pinterest took active interest in monetization. It has struggled with figuring out a way to earn ad revenues, while keeping users interested. Last year, it began leveraging its women concentrated audience toward e-commerce initiatives like buyable pins. However, they never really took off as a way for users to actually make purchases.

Pinterest also plans to slowly roll out so-called “buyable pins,” posts from which users can buy products just by clicking a button.

With these e-commerce initiatives, Pinterest hopes to reach $2.8 billion in revenues by 2018 and grow its active user base to 329 million by 2018. It has ruled out an IPO any time soon. This is a company that Amazon could buy and monetize nicely.

Quora

Even question answer site Quora has recently started its monetization efforts by introducing targeted advertising. It will show ads in a selected few pages that is most likely the target audience of the advertiser. Initially, it plans to allow only Lever, Uber, Wealthfront, and Sunrun to advertise on its platform.

Quoara has recently reported that it has 100 million monthly visitors, 50% from the US and 15% from India.

Quora has raised $141 million from investors including Adam D’Angelo, Benchmark, Matrix Partners, North Bridge Venture Partners & Growth Equity, SV Angel, Techammer, Tiger Global Management, Y Combinator, Benjamin Ling, and Keith Rabois. It last raised $80 million in April 2014 at a valuation of $900 million. At that point of time, it had no revenue.

Snap, Pinterest, and Quora are on a path where they need to tread carefully. If they fail to monetize effectively or their user growth saturates, they might end up like Twitter. Not all startups can expect to have exits like Whatsapp, which was acquired for $19 billion by Facebook with no monetization.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

Photo Credit: Tomais Ashdene/Flickr.com

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