Where Will All the Unicorns Go? (In 3 Charts)
Most would agree that we have witnessed the peak of private technology exuberance, and the funding market is slowly starting to turn. On the back of the Fidelity markdowns, I posted a chart last week that led me to ask the question, “where will all the unicorns go if the private cross-over investors returned to a pre-2014 strategy?”. I was curious, is the unicorn naturally a pack animal and if so what is the current public market’s carrying capacity for the billion dollar IPO?
It was obvious the question was tough and an answer even tougher, so I pulled together some data that might help us understand the future for the existing “unicorn club”. I narrowed it down to a couple of data-driven scenarios -- we are either going to have an unprecedented tidal wave of IPOs at record setting dollar volume over the next 12-36 months, or we are going to have many companies that struggle to go public at the valuations in which they previously raised at. In all likelihood, we may experience both. Follow the figures below for the objective data rounded out by my final thoughts.
Chart #1
- The Unicorn Club has initiated a stampede that is both beautiful and alarming. Since Aileen Lee created the term “Unicorn Club” in Nov. 2013 there have been 82 net new private unicorns or .76 increase of private unicorns per week. I don’t have the exact number, but this means there is ~1 new $1B private company created per week over the last 108 weeks! There is only so much unicorn-worthy oxygen in the world, and this growth is definitely pushing its limits.
- There are currently 121 private unicorns that have a total market cap of $460B at current valuations.
Chart #2
- If the Unicorn Club was to all go public at their current valuations and raise 12.5% of their market cap, there would be $57.5B of IPO pipeline.
- In 2000, defined as a “the tech-bubble” a record $34.4B was raised in tech IPO volume. Another bubbly year wouldn’t make it through 60% of the existing unicorn pipeline (note this doesn’t account for non-unicorn IPOs and any valuation expansion for existing companies.)
- The average annual tech IPO volume from 2009 to 2014 (since last recession), excluding Facebook and Alibaba is $7.7B year. Even if we include Facebook and Alibaba in the 6 year average, yearly IPO volume would take 4 years to clear the existing unicorn pipeline.
Chart #3
- Less than a third of tech IPOs over the past 10 years and sub 50% in 2015 (record high) have been north of a billion dollar market cap at IPO.
- Over the last 10 years there have been an average of 10 IPOs a year north of a billion dollars. Even at 23 IPOs > a billion in 2014 (record high) it would take over 5 years to clear the existing Unicorn pipeline.
Although impossible to provide a 100% accurate generalization to such a diverse group of companies there is one objective restraint in our market-- the supply of investable dollars for technology IPOs over the next 12-36 months. As this over-populated unicorn generation competes for ever-tightening resources, the IPO market is a necessary safety valve that must release the pressure on an overcrowded farm.
Many unicorns will continue their momentum and have amazingly successful IPOs generating tremendous and sustainable value for ALL shareholders (e.g. Alibaba). In a world where unicorn investing feels more like traditional series A venture capital, we also know that many unicorns will fail and become “unicorpses” (e.g. Fab).
But, there will be many cases where things are not as black and white. My hope (and belief) is that the demand for the number of unicorn public offerings remains high (as it should given the # of high quality companies), but I suspect that the demand to pay the prices of previous private rounds (or any meaningful step-up) will not always be there. I believe we will continue to set new records for the number of public tech offerings, but fear the IPO will not be the ultimate moment of validation and celebration for a company as it once was. The IPO, as it has been for many already (e.g. Square, Hortonworks, Box), is becoming a bitter-sweet occurrence. For many unicorns, a tech IPO might very well act as a reset button where the company has to “get back onto the proverbial horse” and re-focus the business on new demands from public investors.
This is what is most exciting. I can’t wait to see the entrepreneurs that adapt, re-focus, re-invigorate and re-inspire a bruised unicorn to fight back and resurrect itself, emerging stronger than ever. Unicorns have faced this monumental challenge for decades. Facebook, Amazon, Apple, Netflix etc. all required leadership that was able to adapt and re-define their business many times over. As this generation of unicorn entrepreneurs embark on their next stage of company building, I am confident they have the courage and skills to accomplish what they set out to do, change the world in a meaningful and sustainable way, regardless of where they "go" next.
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Max Motschwiller is a General Partner at Meritech Capital https://www.meritechcapital.com/
Sources:
Chart 1: The Wall Street Journal & Fortune
Charts 2 & 3: CapitalIQ
Author, The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings
9 年Max, I reference your insightful article in a post called "Shouldn’t Public Venture Capital Investors Get Price Protection Too?" Here is a link https://www.dhirubhai.net/pulse/shouldnt-public-venture-capital-investors-get-price-too-karl-sjogren Karl
Private Equity Advisor - Front Office Corp Fin, M&A, Biz Dev, Strategic Alignment Orientation
9 年Great article Max. People got unicorn-fever. I think it's useful to sit back and think. Let's say exit (because that's were many are aiming for or otherwise valuations may stay in paper or they'll have to become a typical business which is something different). So right now according to TechCrunch https://techcrunch.com/unicorn-leaderboard/ there are 157 unicorns with $530b estimated value https://goo.gl/kJyyYO with only 15% in equity participation (ie 1/6.5 return?) of which 100 in the US $320b but then US investors are abroad too). Only the US part is about 3% of GDP or of NYSE capitalization. On the other hand there's $1tr in US PE drypowder; maybe we're at an age that private companies will do there and not need go public (with regulation/admin in the mix). Or strategics will buy them (as long as the market is strong). After all startups are usually a challenge in their position; don't know if they are not incremental to the existing pie. Anyway let's think in any case.
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9 年ah yes, the joy of pause, pivot and perform!
CEO at Candid
9 年Max Motschwiller, do you have a similar report on the M&A environment over a similar timeframe? I can't imagine all these companies will/should IPO but would be interesting to see what other "exit" opportunities they may have.
RVP @ Slack for Iberia & Italy
9 年Very interesting and insightful article. You put in a lot of data which helps make the point more unbiasedly than any other piece on this topic I have read so far. One thing is thinking a bubble is on the way. Backing it up with meaningful data is what makes this article an interesting read! Thanks for sharing Max!