This post is by Don Peppers, Founding Partner at Peppers & Rogers Group
There is, of course, no such thing as a real unicorn. Unicorns are mythological creatures, figments of the imagination, magical beings.
Unless you live in the virtual-reality world of Silicon Valley, that is, where B-series money flows in the streets and unicorns roam wild.
In the parlance of venture capital investing, a “unicorn” is any privately held, non-public company whose investors have valued it at a billion dollars or more. In the wake of Sarbanes-Oxley and other well-intended but oh-so-costly regulations imposed on public companies, it has become more and more difficult and expensive to raise money from the public market. And as LinkedIn co-founder Reid Hoffman pointed out a couple of months ago (A Herd of Unicorns), more than a hundred unicorns have been funded so far, to the point that the whole novelty of being a “unicorn” in the first place is not so – well, novel – anymore.
But the herd is now finding that even if you raise money solely from the private market, when you encounter headwinds your valuation will still go down. It just won’t be as visible as if your stock were publicly traded.
Theranos, the healthcare startup, raised millions of dollars at a valuation of $9 billion. But after a stinging Wall Street Journal investigative report revealed that the company’s blood-testing technology might not do what the company claims it does, the company has found itself under siege, and there’s little doubt that the next raise of funds, if one is needed, will be at a considerable discount to its most recent valuation.
Nor do you need to suffer a catastrophic failure or scandal to see a decline in your valuation. It’s no secret that only a very tiny percentage of all venture-funded companies actually become wildly successful. The vast majority go under, quietly. The most “successful” venture capital investors are those that have one or maybe two spectacular successes, which more than compensate for the dozens of other marginal or money-losing investments they’ve made.
So of the hundred-plus unicorns now funded, what percentage of these more advanced businesses will actually become successful enough to manage an exit strategy that fully repays their current investors? No one can predict for sure, but yesterday one very experienced Silicon Valley venture-capital partner told me he thought maybe 10% or (max) 25% of them.
And what will become of the rest? They are almost certain to become mired in difficult financial positions, even if their businesses don’t crash and burn outright. Many are likely to become successful from a purely operational standpoint, earning more money than they spend on their business, but they still won’t earn nearly enough to pay off their $1b+ valuation. They will be “succeeding downward.”
So what do you call a fallen unicorn? A microcorn?
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