Fantastic Beasts and where to find them: Unicorns, Zombies and Frankenstein

2nd January 2018  

by Daniele Testa, Chief Analyst at U-Start



It was a warm, fall Saturday morning when, in 2013, Aileen Lee coined the term that, to her own surprise, would have changed the VC industry in the years to come. She was drafting an article for TechCrunch, whose definitive title would have sounded like this: “Welcome to the Unicorn Club: Learning from Billion-Dollar startups”. In this piece, she went on explaining that the term referred to American, software-based startups, founded after 2003 with a private evaluation higher than 1 Billion dollars. The term “Unicorn” was used to describe the rarity of such companies, in terms of statistical occurrence: supposedly, there was one unicorn for every 1538 software companies being founded, a whopping 0,7% of the sample analysed. To put it into perspective, it is 100 times easier to be accepted at Stanford, than to spot a unicorn. Not easy, not easy at all.

Or….is it? “Statistically” speaking, nowadays it’s actually easier. Pitchbook data show that the US unicorn population grew from 40 to more than 120 (and counting). Since 2008, this set has grown 16-fold, only in the US. But how many among these can be considered “real” unicorns? How many will offer a liquid, realized exit for investors? If we accept the change of variable and re-focus our analysis, some preliminary considerations are to be made.

First, timing towards IPO has changed dramatically. 10 years ago, investing in a unicorn came with the perception of a short exposure and a very liquid exit in the near future. The last decade has modified this paradigm: it is more convenient to stay private longer. Why? Because cost of capital is relatively low, and because, in the hyper-competitive market we are experiencing, sensible information is better preserved without disclosure obligations. In addition, some of the latest private evaluations would not be sustainable in the public market: take as an example the post-IPO performance of Cloudera, Blue Apron and Snapchat, all of which were under the latest private evaluation pre-IPO. I am not talking about Chapter 11 and Asset liquidation, but it is fair to say that investors that joined the last private round might not have been very pleased with the results.

Putting it all together, is it then easier to find a Unicorn? Hell, no. In my humble opinion, it is actually more difficult. Some companies embody the “fake-it-until-you-make-it” paradigm, acting as if they were already a great success, even if they’re just on their way. A premium price an investor would not be pleased to pay. Some others, tempted by advantageous conditions in the debt market, prefer to push profitability-seeking further down the line and keep growing at a relatively low cost. These practices have become so common that “evolutions” of the term unicorn have spurred: “Zombiecorn”, a company whose latest private (and too high) evaluation makes IPO unrealistic. “Frankencorns” are those unicorns that will most likely never reach profitability and keep being re-animated by VC’s money infusions.

Hence, unicorn doesn’t mean success. Or, at least, it doesn’t any more. Not only it is compulsory to identify companies that have a clear growth path in front of them, but also, among those who pass this first test, it is pivotal to look for “liquidity” signs. The Unicorn hunt is more open than ever, but the rules of engagement are more complicated: the realized multiple, like the devil, hides in the details. 

It was a warm, fall Saturday morning when, in 2013, Aileen Lee coined the term that, to her own surprise, would have changed the VC industry in the years to come. She was drafting an article for TechCrunch, whose definitive title would have sounded like this: “Welcome to the Unicorn Club: Learning from Billion-Dollar startups”. In this piece, she went on explaining that the term referred to American, software-based startups, founded after 2003 with a private evaluation higher than 1 Billion dollars. The term “Unicorn” was used to describe the rarity of such companies, in terms of statistical occurrence: supposedly, there was one unicorn for every 1538 software companies being founded, a whopping 0,7% of the sample analysed. To put it into perspective, it is 100 times easier to be accepted at Stanford, than to spot a unicorn. Not easy, not easy at all.

Or….is it? “Statistically” speaking, nowadays it’s actually easier. Pitchbook data show that the US unicorn population grew from 40 to more than 120 (and counting). Since 2008, this set has grown 16-fold, only in the US. But how many among these can be considered “real” unicorns? How many will offer a liquid, realized exit for investors? If we accept the change of variable and re-focus our analysis, some preliminary considerations are to be made.

First, timing towards IPO has changed dramatically. 10 years ago, investing in a unicorn came with the perception of a short exposure and a very liquid exit in the near future. The last decade has modified this paradigm: it is more convenient to stay private longer. Why? Because cost of capital is relatively low, and because, in the hyper-competitive market we are experiencing, sensible information is better preserved without disclosure obligations. In addition, some of the latest private evaluations would not be sustainable in the public market: take as an example the post-IPO performance of Cloudera, Blue Apron and Snapchat, all of which were under the latest private evaluation pre-IPO. I am not talking about Chapter 11 and Asset liquidation, but it is fair to say that investors that joined the last private round might not have been very pleased with the results.

Putting it all together, is it then easier to find a Unicorn? Hell, no. In my humble opinion, it is actually more difficult. Some companies embody the “fake-it-until-you-make-it” paradigm, acting as if they were already a great success, even if they’re just on their way. A premium price an investor would not be pleased to pay. Some others, tempted by advantageous conditions in the debt market, prefer to push profitability-seeking further down the line and keep growing at a relatively low cost. These practices have become so common that “evolutions” of the term unicorn have spurred: “Zombiecorn”, a company whose latest private (and too high) evaluation makes IPO unrealistic. “Frankencorns” are those unicorns that will most likely never reach profitability and keep being re-animated by VC’s money infusions.

Hence, unicorn doesn’t mean success. Or, at least, it doesn’t any more. Not only it is compulsory to identify companies that have a clear growth path in front of them, but also, among those who pass this first test, it is pivotal to look for “liquidity” signs. The Unicorn hunt is more open than ever, but the rules of engagement are more complicated: the realized multiple, like the devil, hides in the details. 

It was a warm, fall Saturday morning when, in 2013, Aileen Lee coined the term that, to her own surprise, would have changed the VC industry in the years to come. She was drafting an article for TechCrunch, whose definitive title would have sounded like this: “Welcome to the Unicorn Club: Learning from Billion-Dollar startups”. In this piece, she went on explaining that the term referred to American, software-based startups, founded after 2003 with a private evaluation higher than 1 Billion dollars. The term “Unicorn” was used to describe the rarity of such companies, in terms of statistical occurrence: supposedly, there was one unicorn for every 1538 software companies being founded, a whopping 0,7% of the sample analysed. To put it into perspective, it is 100 times easier to be accepted at Stanford, than to spot a unicorn. Not easy, not easy at all.

Or….is it? “Statistically” speaking, nowadays it’s actually easier. Pitchbook data show that the US unicorn population grew from 40 to more than 120 (and counting). Since 2008, this set has grown 16-fold, only in the US. But how many among these can be considered “real” unicorns? How many will offer a liquid, realized exit for investors? If we accept the change of variable and re-focus our analysis, some preliminary considerations are to be made.

First, timing towards IPO has changed dramatically. 10 years ago, investing in a unicorn came with the perception of a short exposure and a very liquid exit in the near future. The last decade has modified this paradigm: it is more convenient to stay private longer. Why? Because cost of capital is relatively low, and because, in the hyper-competitive market we are experiencing, sensible information is better preserved without disclosure obligations. In addition, some of the latest private evaluations would not be sustainable in the public market: take as an example the post-IPO performance of Cloudera, Blue Apron and Snapchat, all of which were under the latest private evaluation pre-IPO. I am not talking about Chapter 11 and Asset liquidation, but it is fair to say that investors that joined the last private round might not have been very pleased with the results.

Putting it all together, is it then easier to find a Unicorn? Hell, no. In my humble opinion, it is actually more difficult. Some companies embody the “fake-it-until-you-make-it” paradigm, acting as if they were already a great success, even if they’re just on their way. A premium price an investor would not be pleased to pay. Some others, tempted by advantageous conditions in the debt market, prefer to push profitability-seeking further down the line and keep growing at a relatively low cost. These practices have become so common that “evolutions” of the term unicorn have spurred: “Zombiecorn”, a company whose latest private (and too high) evaluation makes IPO unrealistic. “Frankencorns” are those unicorns that will most likely never reach profitability and keep being re-animated by VC’s money infusions.

Hence, unicorn doesn’t mean success. Or, at least, it doesn’t any more. Not only it is compulsory to identify companies that have a clear growth path in front of them, but also, among those who pass this first test, it is pivotal to look for “liquidity” signs. The Unicorn hunt is more open than ever, but the rules of engagement are more complicated: the realized multiple, like the devil, hides in the details. 

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