The End of Unicorns

Date: February 05, 2016 Last Edit: February 11, 2016

The much-hyped “unicorn,” a highly valued private company, might not exist for much longer.

The fate of “unicorns” — private companies that investors value at $1 billion or more—might soon reach a status similar to the fabled creature: non-existence. 

In the last five years, private investors have poured $362 billion into these companies with hopes to catch a magical moneymaker such as Uber or Airbnb.

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But despite all the hype, most will be left with ordinary “donkeys.” There are currently 173 of these tech startups, and the majority won’t go public anywhere near their last valuation—if at all, according to Fortune magazine. 

The reason for the ill-fated end of these once highflying IPOs is the troubling climate of both IPOs and the stock market. This year, U.S. stock indexes had the worst two-week period to start a year in history as the S&P 500 fell 8 percent in the first 10 trading days.

Additionally, investment returns on tech IPOs plummeted to the negatives in 2015. 

“Though the average time from founding to IPO reached a high for tech deals in 2015, the profitability of the typical technology company going public has plunged into negative territory over the past couple of years. The median EBITDA for tech companies going public in 2015 was –$9 million,” William D. Cohan reported in Fortune.

A lack of profits will cause both the evaluation and cash flow into these Silicon Valley businesses to decrease, and companies will begin to clash for funds below the previous billion-dollar level, known as “down rounds.” 

With the threat of bankruptcy looming ahead, the fight to receive this money will be a “blood bath,” according to Steven Davidoff Solomon, professor at the U.C. Berkeley School of Law.

“The unicorn wars are coming,” he warned.

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