Mar 28, 2015

What's Feeding The Growth Of The Billion-Dollar 'Unicorn' Startups? - Forbes

When venture funder Aileen Lee coined the term “unicorn” in late 2013 to describe the $1 billion startup, it was a fitting description—there were only 39 in existence. Now we may need a new term to describe the phenomenon. In little over a year, the number of unicorns has jumped to 80. Valuations have soared at an unprecedented pace: Snapchat—a company that refused Facebook’s $3 billion buyout in 2013—is now seeking a $19 billion valuation, for example. Driving this rapid acceleration is everything from big corporate buys to technological advances to the growing cost and bother of going public. At the end of the day, will today’s Gen-X business leaders avoid the pitfalls that derailed their Boomer counterparts and led to the dot-com collapse?
Unicorns have grown at an astounding clip. Defined as U.S.-based tech companies started since 2003 and valued at $1 billion or more, these startups are surging in worth and in number: The total value of these companies increased $28 billion in Q4 2014 alone. At this pace, unicorns have become almost commonplace. In fact, the new measure of exclusivity is the “decacorn” (a startup worth $10 billion or more): In late 2013 there was only one (Facebook), but now there are at least eight—including Uber ($41 billion), Palantir ($15 billion), and Airbnb ($13 billion).
Behind this growth, on the supply end, is massive investor spending: Venture capitalists (VCs) and investment firms alike are doubling down on private startups. With paper-thin interest rates and meager yields on the S&P 500, investors see risky startups as their only opportunity for appetizing returns. As a result, VCs spent $19.6 billion on tech startups in 2014, up 67% from 2013.This investment balloon has prompted mutual fund giants like BlackRock and Fidelity, known for buying shares in startups once they go public, to join the private game—opening up enormous financial channels.
Meanwhile, on the demand end, big tech companies simply have more money than ever before—which gives investors hope that there’s a big buyout waiting for startups. Considering Facebook’s $19 billion acquisition of WhatsApp andGoogle’s $3 billion acquisition of Nest, high returns are out there to be had. Even non-tech companies like Home Depot, Wal-Mart, and Red Robin are buying up startups, either to scale up someone else’s innovation or (cynics would say) to shelve the competition.
The reason these companies now possess such huge cash reserves goes back to macroeconomics: In a slow-growth, low-interest rate environment, companies like Facebook and Apple don’t have much appetite for traditional capex investing. And when they do spend their money, they prefer buybacks and buyouts.
Some say that these high valuations are being pushed upward by a uniquely profitable flood of technological innovations—such as mobile advertising, cloud computing, and P2P platforms. Today’s startups have it easier than those of the dot-com bubble: From social media galleries like Pinterest to whiz-bang inventions like WhatsApp, tech startups can utilize their massive economies of scale to reach millions while only paying a handful of salaries and avoiding costly overhead.
Still another reason for unicorn growth is an increasing desire to stay private. In the 1990s, companies like Microsoft and IBM rushed to go public and grew up primarily in the public market. Now, because of tough regulations for newly-public companies, many private startups only hold IPOs as a last resort. The Sarbanes-Oxley Act mandates stringent compliance and reporting procedures for public companies, making it simpler and more cost-effective to stay private. Even more recently, the 2012 JOBS Act expanded the maximum investor base of private companies from 500 to a full 2,000.
So are unicorns destined to become the new normal—or will they soon vanish? Optimists believe that most of today’s startups are primed for success. These companies have tech advantages and customer bases that didn’t exist two decades ago. Though the dollar signs worry others, this group says you can’t put a price on growth potential. Plus, investors don’t want to miss the next Facebook, which—despite a disastrous IPO—took only two years to rebound far above its original stock price. These stories encourage investors betting on unicorns’ longevity.

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