I'd be curious to know what percentage of founders are taking money off the table during these rounds. For as many of these articles that I read I don't see much about that. De-risking their personal stake by 3-10M could be a motivating force in these high valuation rounds but I don't see evidence either way. Because on its face these unicorn rounds seem to increase risk rather than reduce it in a few dimensions.
i wouldn't ever take investment money without personally benefitting from it. after working my ass off for 6+ years, the thought of giving a portion of my company away without money in pocket seems patently absurd. like, a total non-starter. nope. i would laugh in the face of anyone who offered. anyone who tells you otherwise is probably trying to fool you -- that happens a lot when you own a business.
if i were a vc, i'd also want my entrepreneurs to take some money so they can focus on more important things. the executive team of a funded company with real employees and real expectations of not pissing away a small fortune and many careers should not be worried about personal money at all. they should have enough disposable income to get all their personal luxury crap like laundry service and car rides, fancy gym memberships and whatnot taken care of. supporting a family? then it's even more important because it relieves the stress of multiple people which would have been the executives' to bear.
plus, a pissed off founder that got ejected from their own company after years of work and no compensation..... not a recipe for good things. in fact it's a recipe for very, very bad things.
> a pissed off founder that got ejected from their own company after years of work and no compensation..... not a recipe for good things. in fact it's a recipe for very, very bad things.
Such as…? If they weren't compensated, and don't have money, how much damage can they do?
How would they have complete control if they were ejected?
If you're talking about control of another company, I'd imagine there'd be some time period of non-compete, and trouble finding new investment (assuming investment was needed).
It's exceedingly rare for founders to be allowed to take money off the table during these large rounds. According to leaked emails from Sony, investors balked when Evan Spiegel of Snapchat tried to unload $40M in personal shares - just after he had turned down a $3B offer from Facebook. The founder of Twitch wanted to take some money off the table at a ~$200M valuation nine months before it was sold to Amazon for $970M, and he was also rejected [1]. If they aren't giving cash to founders of companies like Snapchat and Twitch, there likely aren't a whole lot of other people that are getting it either.
I think sama mentioned that it's now more common for founder to take some money off the table starting at their B round. It makes sense, you don't that the entrepreneur focused on their money problems. A little financial can go a long way with your family.
...just months after TC seemingly can't run itself out of breath highlighting and hyping up all these same companies enough. Constant fanfare or doom, all hyperbole, nothing in between or representative of reality which is somewhere in the far less exciting middle.
The unicorn phenomenon is the result of hot money looking for any kind of return in a zombified financial system.
Tech has had a good run the last ten years but things like QE have contributed to turning the sector into something of an asset bubble.
But will it be allowed to burst? I'm not so sure. The central banks now have a vested interest in keeping these bubbles (whether in real estate or stocks) going for as long as possible.
A few more rounds of QE and Twitter and LinkedIn might be back up in the clouds again.
Tech is small potatoes in the global financial system, and the losers in a unicorn bubble burst are a small set of private investors. I doubt there will be any bailout for tech, nor will there be any major hangover like the dot-com bust. Rather, a few entrepreneurs and investors who made bad bets will exit the market, and their places will be taken by new entrepreneurs and investors who were more prudent. Capitalism at its finest.
If we're predicting upcoming bailouts from this crash, I would bet on U.S. oil companies and everything big in China. China could potentially cause a massive earthquake in international trade.
The student-loan bubble is also a massive debt overhang that could cause huge repercussions, but I don't see a trigger that would cause it to burst.
Tech is a big part of the US stock market (significantly bigger than it was before the financial crisis began).
The question is: would the unicorn bubble bursting then contribute to a loss in faith in tech in general by investors, a NASDAQ collapse and a haircut for the likes of Apple and FB?
We could well be on our way to QE to infinity and beyond.
House prices in parts of the UK are 17 times salary now (against a historic average of 4 or 5), which all comes down to central bank policies over the last 20 years.
The new (ab)normal might be here to stay, although I'd take a punt on alternative currencies in the meantime.
(It's also less than Alphabet, given stock price movements since August. Take Uber and Xiaomi out of the unicorn list and the aggregate value of all unicorns combined is a little less than Microsoft.)
The total value of unicorns, including Uber and Xiaomi, is roughly 10% of the NASDAQ 100. [per same link]
The total value of the NASDAQ 100 is about 1/4 that of the S&P 500:
Multiply them out and all unicorns together are worth about 2-3% of the S&P 500, or less than 1/4 of the decline since the beginning of the year. That's the typical fluctuation in value on a fairly active trading day.
These unicorns are not really tech companies tho'. What tech do they sell? They are ad companies or regulatory arbitrage plays, with an app and a website, that's all.
> and the losers in a unicorn bubble burst are a small set of private investors.
i think this is correct but incomplete. in the modern global financial system there can be very long-range correlations between investors in both the short term and the long term. if those private investors' performance is highly coupled with the health of large financial institutions it could destabilize everything.
when all the debt and credit in the world is structured and restructured into more and more complex financial products local risk can easily become systemic.
>Tech is small potatoes in the global financial system
I don't think this is how it works. The problem is there is too much speculative capital floating around; it creates bubbles anywhere some rich dudes smell opportunity. It does not have to be a jackpot; any hope of a fat percentage will bring the money around.
> if he couldn’t get a billion-dollar valuation straightaway for his company, he wouldn’t raise capital at all, saying the valuation was a “psychological threshold” for “certain types of customers”
If this wasn't Slack that it was referring to - I think I'd agree.
However, if I remember correctly, it was basically Stewart taking advantage of the investor frenzy and putting a ton of cash in the bank.
It's not like they're burning it on ads or promos like Groupon or Uber. My feeling was they were taking advantage of the investing environment to really shore up their cash reserves - no matter the valuation.
Stewart Butterfield seemed remarkably astute in the reasons he gave to the NYT as to why he was raising the money when he didn't need it:
"It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.
And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms."
It surprised me in the 1999 boom and crash how few players seemed to recognise there was a bubble and game the system. Most of them believed the hype and went bust. Only a few seemed to recognise their valuations were crazy and that could be taken advantage of such as AOL merging with Time Warner. I think Butterfield is one of the few to recognise the hype and take advantage this time around. Many others are using the available cash to hire excessive numbers of expensive employees which may bring them down when things dry up.
I work at a unicorn company... that is technically not a unicorn, and not listed on most of the unicorn lists. For most of these lists the companies considered unicorns are ones that have a valuation of over $1B and it took less then 10 years for the company to get there.
The company I work at took... 11 years to get to this valuation, so it's not on the list. It took this long because there were very few investment rounds, as the company has been profitable from year 3 onwards.
I am pretty amused at how it's only the valuation that counts to be a unicorn - for example there are some companies who took $300M in investment, are burning really heavy cash, and have the $1B valuation since the last, $200M round. The media covers these companies much more extensively then they have ever covered us, or similar companies who are doing well and just don't take further investment. Just looknig at the financial structure, cash flow and market saturation, there are good unicorns, bad unicors and then the ones in between.
Before joining any company, unicorn or not, just do your due diligence. All companies will tell you how insanely much the options will be worth assuming the 50% annual growth the next 5 years, and winning big in the market. But a share or option is only a promise, and it's only as good as the company, the team, the founders - and the economy.
So, I'm dubious about anyones ability to actually see a tipping point in advance, but if this is the case how do software engineers (as opposed to founders etc) protect themselves?
Buddy, it already happened. It'll take a year to catch up to most of you, but the "point" already "tipped" months ago. If your job fundamentally relies on inflated financials, prepare your butt and your resume. Maybe apply to work somewhere that is very well established and clearly has positive noncyclical cash flow.
IMHO, August 2015. It's usually better not to bother trying to convince others, though; just bet your book and either you're right or wrong, but at least you won't have wasted your time.
Work for a company that isn't actively running out of money.
IMO the tipping point has been obviously visible for some time now - many VCs even openly admitted as such. The trick with doomsaying is that even if you can accurately predict doom, it's hard to predict when everything is going to explode.
So yeah, the peanut gallery like myself have been preaching this for a while, but honestly nobody could've predicted with any precision when it was going to happen.
As an employee though you can de-risk yourself by simply not playing in the first place - this is a problem that's largely isolated to high-valuation startups that don't seem to have a handle on profitability.
Profitable companies are doing fine, and will survive all of this without much pain.
If you're working for a company that has taken a substantial amount of funding, is as of yet not cashflow-positive, and doesn't have a long runway, I'd be a bit worried.
Unicorn tipping. Like cow tipping, but way more challenging.
Jumping into the article...
> the media has been almost singularly obsessed with companies valued at north of a billion dollars
Wow, Techcrunch. That's the pot calling the kettle black. Don't you think?
Markets create zig-zaggy lines. Media will be there to report on every zig-zag. We'll waste our time reading these articles thinking they are important.
"Unicorns reach a tipping point" is one of those phrases that are going to give future historians work to do.. Did 21st century people believe in unicorns? Was unicorn tipping like cow tipping?
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[ 3.9 ms ] story [ 164 ms ] threadVC's set the prices after all.
if i were a vc, i'd also want my entrepreneurs to take some money so they can focus on more important things. the executive team of a funded company with real employees and real expectations of not pissing away a small fortune and many careers should not be worried about personal money at all. they should have enough disposable income to get all their personal luxury crap like laundry service and car rides, fancy gym memberships and whatnot taken care of. supporting a family? then it's even more important because it relieves the stress of multiple people which would have been the executives' to bear.
plus, a pissed off founder that got ejected from their own company after years of work and no compensation..... not a recipe for good things. in fact it's a recipe for very, very bad things.
Such as…? If they weren't compensated, and don't have money, how much damage can they do?
If you're talking about control of another company, I'd imagine there'd be some time period of non-compete, and trouble finding new investment (assuming investment was needed).
[1] http://justinkan.com/the-99-percent
At least with unicorns it makes sense.
It was always ironic...the whole point of a "unicorn" is that it doesn't exist.
If we're predicting upcoming bailouts from this crash, I would bet on U.S. oil companies and everything big in China. China could potentially cause a massive earthquake in international trade.
The student-loan bubble is also a massive debt overhang that could cause huge repercussions, but I don't see a trigger that would cause it to burst.
https://www.cbinsights.com/blog/unicorn-companies-worth-less... [August 2015]
(It's also less than Alphabet, given stock price movements since August. Take Uber and Xiaomi out of the unicorn list and the aggregate value of all unicorns combined is a little less than Microsoft.)
The total value of unicorns, including Uber and Xiaomi, is roughly 10% of the NASDAQ 100. [per same link]
The total value of the NASDAQ 100 is about 1/4 that of the S&P 500:
http://marketcapitalizations.com/historical-data/total-marke...
Multiply them out and all unicorns together are worth about 2-3% of the S&P 500, or less than 1/4 of the decline since the beginning of the year. That's the typical fluctuation in value on a fairly active trading day.
i think this is correct but incomplete. in the modern global financial system there can be very long-range correlations between investors in both the short term and the long term. if those private investors' performance is highly coupled with the health of large financial institutions it could destabilize everything.
when all the debt and credit in the world is structured and restructured into more and more complex financial products local risk can easily become systemic.
Especially, since people can't default on them.
So the hangover will stay with us for as long as people who took student loans are alive. (Or perhaps even manage to pay them off.)
I don't think this is how it works. The problem is there is too much speculative capital floating around; it creates bubbles anywhere some rich dudes smell opportunity. It does not have to be a jackpot; any hope of a fat percentage will bring the money around.
In psychology, this is referred to as Projection.
However, if I remember correctly, it was basically Stewart taking advantage of the investor frenzy and putting a ton of cash in the bank.
It's not like they're burning it on ads or promos like Groupon or Uber. My feeling was they were taking advantage of the investing environment to really shore up their cash reserves - no matter the valuation.
"It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.
And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms."
It surprised me in the 1999 boom and crash how few players seemed to recognise there was a bubble and game the system. Most of them believed the hype and went bust. Only a few seemed to recognise their valuations were crazy and that could be taken advantage of such as AOL merging with Time Warner. I think Butterfield is one of the few to recognise the hype and take advantage this time around. Many others are using the available cash to hire excessive numbers of expensive employees which may bring them down when things dry up.
[0] http://bits.blogs.nytimes.com/2015/04/16/is-slack-really-wor...
The company I work at took... 11 years to get to this valuation, so it's not on the list. It took this long because there were very few investment rounds, as the company has been profitable from year 3 onwards.
I am pretty amused at how it's only the valuation that counts to be a unicorn - for example there are some companies who took $300M in investment, are burning really heavy cash, and have the $1B valuation since the last, $200M round. The media covers these companies much more extensively then they have ever covered us, or similar companies who are doing well and just don't take further investment. Just looknig at the financial structure, cash flow and market saturation, there are good unicorns, bad unicors and then the ones in between.
Before joining any company, unicorn or not, just do your due diligence. All companies will tell you how insanely much the options will be worth assuming the 50% annual growth the next 5 years, and winning big in the market. But a share or option is only a promise, and it's only as good as the company, the team, the founders - and the economy.
0: https://en.wikipedia.org/wiki/Skyscanner
IMO the tipping point has been obviously visible for some time now - many VCs even openly admitted as such. The trick with doomsaying is that even if you can accurately predict doom, it's hard to predict when everything is going to explode.
So yeah, the peanut gallery like myself have been preaching this for a while, but honestly nobody could've predicted with any precision when it was going to happen.
As an employee though you can de-risk yourself by simply not playing in the first place - this is a problem that's largely isolated to high-valuation startups that don't seem to have a handle on profitability.
Profitable companies are doing fine, and will survive all of this without much pain.
If you're working for a company that has taken a substantial amount of funding, is as of yet not cashflow-positive, and doesn't have a long runway, I'd be a bit worried.
Jumping into the article...
> the media has been almost singularly obsessed with companies valued at north of a billion dollars
Wow, Techcrunch. That's the pot calling the kettle black. Don't you think?
Markets create zig-zaggy lines. Media will be there to report on every zig-zag. We'll waste our time reading these articles thinking they are important.