Pando

Why I’m betting there will be more unicorns by this time next year, not fewer

By Sarah Lacy , written on December 9, 2015

From The Venture Capital Desk

CB Insights posted a Twitter poll, asking whether there will be more or less than 145 unicorns by this time next year.

That’s the current size of the herd, and yeah, it keeps growing, despite a year of concerns about high burn rates and high valuations.

I’ve detailed at length the weird mixed signals of this “everyone but me” correction, where everyone says everyone else should really reign in their spending, worries that the environment will be way worse next year, but does seemingly nothing to prepare their own house for that eventuality. Other than – yunno – continuing to close new mega-rounds at bigger valuations that raise the stakes even higher.

So it’s not a surprise the current results at the time of writing are dead-split:

I voted that there will be more. Which might surprise you given other things I’ve written.

For instance:

– That the increase in dollars while deals continue to decrease quarter-after-quarter is simply not sustainable and a redux of what we saw in the venture markets as the dot-com bust was unwinding.

– That the peak was some six months ago. (A claim backed up by this CB Insights report.)

– That there is total roadkill littering the “Uber of”, on demand, and non-demand space.

So why do I think there will be more unicorns? A few reasons:

– These things take a long time to unwind. For all the talk of Yahoo and Twitter being “done” these are still companies valued at $31 billion and $16 billion respectively. Even companies that we consider “failures,” like Groupon and Zynga, are still worth billions. And those are publicly-traded “failures.” Private companies don’t have a liquid stock, which means valuations are even stickier. They are a lagging indicator of better times. If a private valuation is going to decrease, it typically requires some sort of transaction. Even the recent Fidelity mark-downs aren’t daily or even weekly, and are a matter of in-house accounting, not something that directly or immediately impacts a startup.

 Nothing puts off a company-by-company correction like shitloads of cash. There were over 100 mega rounds of $100 million or more in just the first half of this year. And Airbnb, Uber, and the other big ones are still raising. The top companies have so much cash. Even if they are burning it, most can switch course, batten down the hatches, and still survive a year just fine. The burn rates of the moment are the “game on the field” as Bill Gurley put it in an interview last week. Because it’s the game everyone is playing, everyone has to keep playing it. When it changes, so too will the playbook. We’ve been talking ourselves into this correction for eight months or more. I can’t imagine there are many unicorns who don’t have an austerity plan. This is why I’ve argued it’s not the unicorns –who’ve already raised their mega-rounds – but the sub-unicorns that are most at risk should things turn.

 The stubborn refusal of the market to give us a catalyst. There’s been no “thing” like the Lehman bankruptcy or the dot-com crash, to force everyone to change the game immediately. Everyone hoped it would be Square. But the IPO was not as bad or as great as either bears or bulls would have hoped. Instead there’s just air seeping out of the bubble in the form of trends like lower early-stage funding, smaller numbers of deals closing overall, and likely fewer unicorns being minted each quarter. But new ones will continue to get high valuations, even in a weak market.

Take all these thoughts together and ultimately, I’m betting the momentum will continue to mint new unicorns at a faster pace than cash will run out or companies will be forced into a deal that causes their valuations to slip under $1 billion. But the fact that the poll is dead mixed shows there’s a lot of uncertainty and fear looming ahead of us in 2016. Forget the billions in rich guys’ paper capital. There are thousands and thousands of jobs in the balance should it tip the other way.