Just 25 months ago, Aileen Lee coined the term unicorn in her post Welcome to the Unicorn Club and last week the Economist declared these Unicorns “Gored.” Over the span of those two years, the Unicorn press cycle has swung from euphoric apotheosis to bleak nadir.
The rise and fall of unicorns in the press isn't a unique phenomenon.
A company’s narrative moves like a clock: it starts at midnight, ticking off the hours. The tone and sentiment about how a business is doing move from positive (sunrise, midday) to negative (dusk, darkness). And often the story returns to midnight, rebirth and a new day…
wrote Aaron Zamost, a former manager of global communications at Google, YouTube and currently head of communications at Square wrote about the press cycle. The truth of the matter for unicorns lies somewhere in between the night and the day.
We don't often talk about what success means for this class of companies. So what is it?
For the founders and employees, it's not just the attainment of a $1B valuation. Success is a combination of financial gain, work experience in a hyper-growth company, and the pride of building a transformational company. Many of these companies will attain all of those things. We can argue about the degree of financial gain for each one, but because unicorns are broadly distributed across consumer and enterprise sectors, and within subsectors like transportation, security, sales software, it's irrational to argue that all of them will fail. There are many spectacular and disruptive businesses in the herd.
If we evaluate these companies as a portfolio, as investors do, then unicorn success is measured by financial return. Early stage VCs who have invested in a portfolio of different unicorn companies will likely generate terrific returns. At a blended valuation of $100M post-money, a Series A investor in a $1B company at IPO or sale records a 10x gain. Later stage investors like mutual funds and hedge funds, simply have to break-even on their investments to perform similar to the S&P500, a common benchmark, which is up just 1.65% for the year.
There will be flameouts. There always are with startups at any stage. Our fascination with unicorns today has to do with the scale of the phenomenon: the number of companies at these valuations, the amount of capital fueling their growth and the historic cash burn required to attain those growth rates - and the perceived risk with such high stakes.
And it's true that the boom-time fundraising market of the last few years has created some problems. The Economist enumerates three, which all are legitimate: the desire to reach $1B in valuation for marketing/ego, the multiple disparity between the public and private fundraising markets, and an environment that is less discerning which businesses have strong business models and which have business models susceptible to changes in the fundraising climate.
But we're arriving at the point when the gloomy sentiment around these companies is unwarranted. Perhaps the mark-to-market accounting by mutual funds of recent investments is to blame. But that news may be deceptive, because the valuation methodology and true financial performance isn't known to the public.
As the press tide turns, let's not forget these companies all aim to transform some industry segment and grow at historic rates. Many will succeed. Some will not. But in the end, many of these companies will have transformed the world according to their mission. The negative press cycle is just another hurdle to overcome.
To quote Teddy Roosevelt: It's not the critic who counts; the credit belongs to the man who is actually in the arena.