Unicorns: herd it all before

When the term unicorn was first used to describe rare tech start-ups valued at more than a billion dollars, there were just 40 companies that matched the description. Wind forward seven years and the tally is closer to 500. Together, this herd of fat, well-funded companies has reached a collective valuation of more than $1.5tn.

The expansion looks like a victory for tech entrepreneurialism and the US venture capital investment model. But the stampede is as much a function of low interest rates as tech innovation.

Low bond yields continue to prod pension funds and other institutional investors to move money to private markets in search of higher returns. This has allowed start-ups to remain private for longer — scoring increasingly high valuations. The median age of a company at listing has increased from 7.9 years in 1997 to 10.8 years in 2019, according to Morgan Stanley.

The pool of funds available continued to grow in 2020. VC assets under management increased from less than $250bn a decade ago to $455bn. When the pandemic began, the sector had $120bn waiting to be invested.

More money on offer means an uptick in tech valuations - not an exact science to begin with. In many cases, tech startups lack a listed competitor to use as a comparison. Without earnings or positive free cash flow, growth metrics dominate. These can be bolstered with subsidised services.

Investors considering a stake in unicorns that plan to join public markets should therefore take another data point into consideration: existing investor safety nets.

Late-stage funding rounds that come with clauses protecting those stakes in the event of a valuation decline suggest private investors are not convinced by sky high valuations they appear to back. When Square listed below its last private valuation it had to hand existing investors more than 10m extra shares. When SoftBank put $2bn into WeWork in 2019 at a much publicised $47bn valuation, it used $1bn to buy shares from existing investors at a $20bn valuation. Such dilutive actions should serve as warnings. For elderly tech startups, headline valuation figures tell only half the story.