Venture

Huge Rounds Continue As Unicorn Doubt Grows

Morning Markets: After a period of awe at their fundraising prowess, unicorns are now taking redoubled criticism. Let’s examine.

The Crunchbase News team is wrapping up its work on the Q3 venture capital reporting cycle, digging into global VC data, the North American scene and more. It’s a good read if you haven’t had the chance.

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The data we’ve published details a venture market that is in good health. The now-past third quarter didn’t set a grip of new records, but it kept the money flowing in the late-stage market; private investors are still writing big checks to high-growth, high-potential (and, probably, high-burn) companies.

Indeed, supergiant rounds ($100 million and greater) are still trending higher everywhere but China, as we examined here:

You’d reckon, then, that there’s plenty of available capital for unicorns (private companies valued at $1 billion), giving the hundreds of firms that meet the criteria plenty of space to grow. And that their recent fundraising success would generate them, on balance, more positive press than negative.

Not really.

The WeWork IPO, leadership, economics, and corporate governance fiasco pared to the sinking Uber and Lyft have convinced lots of folks that the median health of a unicorn is poor. It’s not hard to find warnings notes in publications of all sizes and shapes.

A sample from this morning: “In a Post-WeWork IPO World, New Age Auto Startups Now at Risk,” in which Bloomberg writes that:

The collapse of WeWork’s attempted IPO is not only a warning sign for technology startups with inflated valuations — funded by investors pouring money into unprofitable companies in search of the next Amazon or Netflix — but, strangely, augers ill for many new companies in the auto industry.

The article is interesting, you should read it. Its point that warning signs are flashing for a host of unicorns feels like the key market narrative regarding unicorns today. Picking out a few recent examples of the theme, here’s The Atlantic writing about “WeWork and the Great Unicorn Delusion” in September. Here’s a Washington Post columnist from the same month: “What’s making tech unicorns lose their magic?” And, for fun, here’s BI reporting that the “WeWork IPO fiasco marks top for unprofitable unicorns” from earlier in October.

The sentiment, driven by some admittedly negative recent news, is now so discussed that even presidential candidates are weighing in:

This sort of commentary isn’t new. (Here’s a piece from four years ago discussing how “Silicon Valley’s Unicorn Companies are in Trouble,” etc.) But it does seem to be a newly-strengthened narrative thanks to some outlier events. Regular readers will recall that we touched on this topic last month. What’s changed is that the commentary that we noted then has seemingly picked up pace.

At the time I tried to argue for a middle-ground between Silicon Valley’s optimism about itself, and the newly-fashionable view that something akin to Unicorn Swine Flu was about to destroy a generation of venture returns:

If the markets fell apart tomorrow, some unicorns would die, some would be forced to downsize and endure, and some would be perfectly fine. The year 2000 this is not, even if there is excess in the market and there are valuations out there that make no sense.

Today let’s add on to the above paragraph, as it’s not as complete as we might like. The sort of unicorns that will survive, it’s likely fair to say, are those that:

  • Have above-average gross margins (for a unicorn)
  • Have below-average cash burn (for a unicorn)
  • Have access to zero, or low-cost customer acquisition channels
  • Generate some sort of recurring revenue

Unicorns with those attributes will prove harder to kill, and thus will be more valuable than their peers who do not share the same characteristics. If bad times come, and there’s a private-market flight to quality, I’d hazard that the above attributes are going to be the most attractive to investors, even in a downturn.

In reverse, gross-margin challenged, high cash-burn, CAC-exorbitant, and one-time revenue unicorns will suffer if private market sentiment really shifts. But that just makes sense, right?

Illustration: Dom Guzman

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