Take a New (Skeptical) Look at Unicorns

by February 5, 2020
To understand unicorns, remember that monetary value is always a relative prospect. (Image Credit: Pixabay user d97jro)

Unicorns—startups with at least a $1 billion valuation—used to be as rare in business as they were in fairy tales. No more.

According to market research firm CB Insights, there are between 390 and 430 unicorn firms in the world. Many, but not all, are in information technology.

They’ve been all the rage for years. Journalists would ooh and ahh over the stratospheric numbers, the visionary founders, the office perks. They’d frequently say less about whether the business models made sense.

And then came the IPOs of companies like Uber and Lyft and the failed one of WeWork. People wanted to know, after years and umpteen billions in funding, when executives would finally steer companies to profitability. In the case of WeWork, the answers were so obvious and terrible that the companies imploded.

It was like seeing a minor version of the dot com debacle from the late 1990s into the early 2000s. Business journalists today should take some lessons. Here are a few.

What unicorn status means

To understand unicorns, remember that monetary value is always a relative prospect. If you’re stranded in a desert with a car that ran out of fuel, what is worth more: ten pounds of gold bullion or a 10-gallon can of gas and a 5-gallon container of drinking water? The latter, because they will keep you alive and let you drive back to safety.

The billion-dollar mark for a unicorn refers to valuation. Not how much money the company makes or even what an independent and sober evaluation might suggest, but what the last investor was willing to pay for a share of the company. That amount times the percentage of ownership gives the valuation. If someone paid $10 million for a 5 percent share, the valuation is $200 million.

The investment decision may have been wise or foolish. All that valuation measures is the popularity of the company among people with money.

Why there’s a push for unicorn status

To understand unicorns, you need to get the motivation behind the founders, the hangers-on, and the investors. Depending on the group, they want notoriety, ego gratification, money, and competitive advantage. Achieving that unicorn status can deliver.

The attention brings the money and ego. The ego catches more attention, redoubling the money. The more money and attention, the more competitive advantage, not just for the founders, but the venture capital companies looking to attract the next new big thing. It can become a virtuous or vicious circle.

Demand the numbers and understand them

There are many entrepreneurs and backers of startups who are willing to say virtually anything to get positive press, which potentially stokes the . The more good word they get, the better a chance they have of pushing interest in their companies and getting better funding.

No matter what the industry, you have to ground the research and get beyond claims by people who may be willing to spin a wild tale to see if you’ll bite. Look for the basic numbers—not valuation, but how much business are they doing? What’s the income? How realistically long from profitability? What’s the cash burn rate? How much are they pumping into marketing in an attempt to grow fast enough to justify the high valuation?

You may not hear much in the way of real answers until someone leaks some financials, but you have to push for it. And if you don’t get it, when doing your reports, be sure to bring up what they wouldn’t tell you and the now-predictable issues that come up. Take the hot air out of the balloon and give people a more realistic and less idolized view.