Unicorns, rare enough in the real world, now seem to be a dying breed. Tech unicorns, that is – venture-backed companies valued at more than $1 billion. Venture capitalists (VCs) of all stripes (tiger stripes that is, to go for an appropriately predatory VC metaphor) have backed way, way off from funding the mythical mega-startups.
According to the latest MoneyTree venture survey from consultants PwC and analyst CB Insights, out on Wednesday, the high season for unicorns in the US was the third quarter of 2015. Just three companies grew that fabled twisty forehead adornment in Q1: Zoom, C3 IoT, and Rocket Lab.
Compare that to 2015, when the elusive beasts were almost becoming commonplace. In Q2 of that year, VCs funded 14, while that rose to 16 in the next quarter. After that it was a slippery slope towards more, shall we say, cautious financial disbursement.
Sobering
By Q1 2016 – just two sobering quarters later – only a solo unicorn made an appearance. By that measure, I suppose, the last quarter signals explosive unicorn growth. But the trend over the past year has been for low level unicorn creation: five in Q2 2016, four in Q3, three in Q4, and now three in Q1 2017.
Why the monohorn reduction? One factor is that even Silicon Valley VCs seemed to have begun to worry that the tech scene was looking a bit too alarmingly bubble-icious. Another has to be the continuing failure of some once-vaunted unicorns – Twitter, for example – to find a solid business model.
The breathless IPO of Snap (parent company of Snapchat) earlier this year is already looking like a cautionary unicorn tale along those lines.
Others, including some ‘degacorns’, so-called for being valued at more than $10 billion, increasingly seem to reside in what Steve Jobs famously termed the reality distortion zone.
Companies such as, say, ride-share giant Uber, valued at around $68 billion, beloved of VCs yet plagued with public relations catastrophes, high profile executive departures, legal challenges, and even outright bans (just this week, Italy banned Uber after a court ruled its app posed unfair competition to taxis).
Yet Uber lost about $3 million last year, despite revenue growth during that period, according to leaked financial documents last year. Even with its diversification into areas beyond a taxi-replacement service – selling ride data to governments to help them build better city infrastructure is one recent idea, according to The Information – many remain dubious that the company could justify its valuation for long if it went for an initial public offering (and thus had to give the world a closer look at its financials).
Cautionary tale
The breathless IPO of Snap (parent company of Snapchat) earlier this year is already looking like a cautionary unicorn tale along those lines. Shares debuted at around $24 on its IPO at the start of March, and rose to a peak of $27.09 the following day, but are hovering around $20 now. It’s never a great sign to lose 20 per cent of your launch price in six weeks.
But it is early days, you may say, and Facebook had a similarly challenging start – a revenue slide revealed in documents filed just before its 2012 IPO. Facebook, however, had several potential revenue sources, including a mobile business model it hadn't even begun (but badly needed) to properly exploit. Snap, by contrast, lost $500 million last year alone, and warned in its launch documents that it "may never achieve or maintain profitability". And, Snap is still without any clear model for generating income.
Meanwhile, consider this: Silicon Valley hasn’t had a major IPO in years now (Snap is in Southern California). And down rounds, when a cash-hungry company’s shares are offered at increasingly lower valuations, have been a significant feature of the tech venture scene for going on two years now. Even shiny Valley companies such as Foursquare have had down rounds.
‘More discerning’
If you read the financial commentary, words such as “more discerning” are used to describe venture investments these days. That is backed up by the MoneyTree survey, which noted that while overall funding rose 15 per cent in Q1 2017 over Q4 2016, to a total of $13.9 billion for 1,104 deals, “both deal and dollar levels remain well below the peak levels of 2015”, according to the report.
And deals sank to an eight-quarter low in two of technology’s heartland regions, San Francisco and New England, even though actual funding amounts increased. But that was due to the distorting factor of so-called mega-rounds, big injections into companies, often the unicorns that are on the VC luvvies list.
On the plus side, European deal activity rose for the fifth straight quarter. For the first time, European deals surpassed the 600 per quarter mark, with 605 deals valued at $3.3 billion. And deals have topped $3 billion for six of the past eight quarters, slow but steady growth.
Not as exciting as a unicorn nursery, perhaps, but probably more prudent in the long run.
Download The MoneyTree report here.
