
90% of the billion dollar unicorn startups are in trouble - elfalfa
http://uk.businessinsider.com/blood-in-the-water-90-of-the-billion-dollar-unicorn-startups-are-in-trouble-2016-1?r=US&IR=T
======
itssometoneelse
"This CEO said the Valley used to be a place of "quirky people" but was now
filled with "arrogant" people"

Valuations and market corrections aside, this comment is the thing that
resonates with me the most. I got into tech and the Internet as a kid in the
early 90s because of all the cool, intelligent weirdos thinking about and
building the future. I've been traveling out to SF for about a decade now from
NYC to do work, and it's been sad to watch that city go from a place I thought
could be the only other place besides NYC I could live to a city I try to
avoid. It feels like it's getting harder and harder to find those awesome
weirdo hackers. The homogeny is brutal in SF.

The one upside is that it's still the Internet and I don't have to be there
physically to enjoy the parts of it I like.

~~~
pyre
I've met some people that have moved away from SF who are both intelligent
hackers _and_ arrogant. It's possible that your intelligent hackers were
transformed by the SF atmosphere.

~~~
jakejake
I got my start in the 90's and there has always been a bit of arrogance in
programming and IT. Saturday night live used to have "The IT Guy" who was a
rude, arrogant support engineer.

I write it off a lot of times as social awkwardness - which sometimes comes
off as rudeness.

------
kolbe
I'm in Chicago, far away from the action in SV. Lately, my friends and I have
been getting unsolicited calls to participate in the next rounds of funding
for various "unicorns." We are mostly just laughing, because it's farily
obvious that we are only getting these calls now, after all these years of
unbelievable[1] tech returns, because SV thinks that backwards and
unprogressive midwesterners like us are going to be the goats buying the top
of their grand pump-n-dump scheme.

[1] as in, not believable

~~~
patio11
It would be uncouth of me to say "I doubt that this comment is a literally
accurate transcription of something which happened in consensual reality" but
if anyone is hanging around the phone wondering "That's funny, Uber never
called me": unless you happen to run a VC firm, it's highly, highly unlikely
that a late-stage startup raising e.g. a D round at a multi-billion dollar
valuation is interested in making your acquaintance as an investor. At seed
stage or maybe an A, sure, a $25~$50k check from a technologist is still a
meaningful amount of money (and valuations would probably be single-digit
millions), but even if there were no legal issues at play, no firm raising on
a billion dollar valuation will speak to you because the time it takes to
close you would be better spent on convincing someone who can write a check
that matters.

~~~
wtvanhest
I'm not too familiar with this, but I have read a few stories on Bloomberg
about some of the large investment banks selling chunks of shares of Uber to
their clients. Just the other day they said they reduced the minimum order
size as well (I think they said $25k).

I have done zero digging, but it doesn't shock me that people at JP Morgan and
other investment banks are making calls to their private wealth management
clients to offer them shares in large private 'unicorns'

~~~
myth_buster
Didn't this happen during the sub-prime crisis where the firms sold their
toxic assets to their clients.

~~~
rhino369
This is probably different. The problem with the subprime crisis was banks had
to keep the mortgage assets on their books. They'd buy it -> package it ->
sell it. Some banks realized, damn this shit is going to be worthless. And
they sold their toxic assets.

Here, the banks don't buy a stake in Uber until they arrange the pool of
investors. Or maybe they are selling shares from other clients who want to get
out of the investment.

It's doubtful the banks themselves have Uber equity on their books.

~~~
aagha
"Goldman Sachs, itself an early investor in Uber through its venture arm"...

[http://qz.com/305996/all-the-ways-investment-banks-are-
cozyi...](http://qz.com/305996/all-the-ways-investment-banks-are-cozying-up-
to-uber-ahead-of-a-possible-ipo/)

~~~
limeyx
And I bet they'd truly like to divest some of it at the current prices :)

~~~
wtvanhest
They likely have liquidation preferences so they are probably extremely
comfortable holding the "equity" while it matures at a premium to what they
put in while holding an option on more upside.

------
snowwolf
I still don't understand why tech media (and the rest of the industry) are
still not calling out these silly valuations for what they are - marketing
spin.

With term sheets the way they are with liquidity preferences if I as a VC
invest $100 million in a startup for a 10% stake at a 1X liquidity pref, the
valuation I'm placing on that startup is $100 million and that is therefore
what its reported valuation should be.

No need for any repricing of these startups - just report their true valuation
as largest amount invested with liquidity preferences.

Edit: Just an additional point to add - If I really valued it at $1 billion I
wouldn't need the liquidity preference.

~~~
mtgx
I think it all started with Facebook. TechCrunch was reporting every 2 weeks
on how Facebook's valuation grew another $5 million. What kind of "news" is
that, unless you want to profit from the extra hype of Facebook's valuation?!

 _Many_ people got very rich from Facebook gaining such high valuation before
IPO. And now many other VCs want to replicate that kind of sort of almost
ponzi-scheme type of investment.

~~~
davidgerard
Literally Ponzi. It's only an anecdote, but I found this one interesting, from
a physicist talking about a startup whose key innovation literally defied
physics (recharging batteries via ultrasound):
[http://su3su2u1.tumblr.com/post/129385764803/conversation-
wi...](http://su3su2u1.tumblr.com/post/129385764803/conversation-with-an-
investor)

> I reached out to an investor in impossible startup I had talked about
> previously. Had a long phone call today, in which he explained to me _he
> didn’t invest because he thought they’d ever be a viable business._ He
> invested because he thought between their pitch/charisma and the names of
> the investors backing them they’d be able to get several rounds of funding,
> and he’d be able to cash out.

That is: there's so much VC money sloshing around that hoping for a Greater
Fool literally counts as a business strategy.

~~~
solnyshok
I found that best indicator of such schemes is when their only achievement is
a celebrity team backed by celebrity investors. while both are good for
raising awareness of the cause, if traction data is missing, I stop reading,
mentally flag it, and move on.

------
code4tee
The worst kept secret in Silicon Valley is that 90+% of the so called
'unicorns' are just donkeys with a plastic cone on their head.

It long since stopped being about innovation and disrupting markets and became
mostly about shuffling piles of imaginary units around so a select few could
get rich. Sadly the pawns in this whole game will be all the employees holding
options that are soon to be worthless... and who were convinced to take those
options in exchange for taking a proper cash salary.

The only good thing this time around is that (unlike the last big Silicon
Valley implosion) most of these companies are still private. So it will be
really messy for some private investors and the greater San Francisco area is
going to have a mess on its hands, but the broader US economy isn't going to
get impacted as much. The stock market of 2015 also isn't propped up by
bloated tech stocks in the way it was in 1999-2000.

~~~
blantonl
_The worst kept secret in Silicon Valley_....

I would argue this is the _best kept secret_ , because this flush out needs to
occur to wash away all the so called disrupters who, as you put, are really
just shuffling piles of money around instead of actually doing any innovation.

I hate to invoke schadenfreude here, but the past few years have been
incredibly insulting to those of us who have been running highly profitable
bootstrapped businesses, and so I eagerly await this flush. Picture Mr. Burns
from the Simpsons tapping his fingers together.

~~~
malchow
Like you, I am a co-owner of a bootstrapped, profitable, conservatively
managed technology company. I am happy to have built what I have. But I can't
find a whit of pleasure at the prospect of a disastrous reversal in private
technology financing. There are a lot -- a lot -- of bad deals receiving
favorable financing from out-of-touch or non-traditional institutionals.
That's true. And painful but non-combustive reversals are part of the
functioning of markets, sure.

But SV remains the one place in the world where smart investors with genuine
science and technology backgrounds are willing to play the long game with
entrepreneurs. I spend a lot of time in London and New York. The generally
hidebound nature of their investment cultures, which make perfect sense when
you're doing an Exotic Pet Vet Tax-Free Rollup, or a Midwest Refrigerated
Storage Debt-Chummed Dividend Fête, would never have made a bet on Google,
Oracle, Nvidia, PayPal, Oculus, to take a few at random.

So while there are a good dozen $1b liquidation preference-cap companies that
are fundamentally silly, wishing for a tidal reversal in private tech funding
isn't a good idea. VC qua asset class is important.

~~~
e40
Why I want the bubble to burst: I can't afford to pay Google, et al and
unicorn salaries. My bootstrapped, profitable, conservatively managed company
isn't swimming in cash. 10 years ago the pay we offered was competitive, but
now... salaries (+ benefits) have gone through the roof.

~~~
khuey
Comp is being driven by Google, Facebook, Apple, etc, generally not unicorns.

~~~
cft
But before this bubble, as a bootstrapped startup one could beat Google by
offering very early stage employees an attractive mix of cash and a lot of
stock: Google's stock options are not that attractive since it has gone
public. Now on paper you cannot beat the offerings of the unicorns, since they
also offer cash and stock options. From experience, the existence of unicorns
made the life for a bootstrapped startup in San Francisco very difficult. In
our office building in SF, we had probably about 6 bootstrapped companies in
2012, now only mine is left: the other 5 moved elsewhere (most are still
open). The smaller offices were joined and the companies were replaced by the
larger funded ones. Also the building was bought by a more greedy landlord.

~~~
mylons
Google's stock is very attractive. employees are generally paid in actual
stock, and not options. there's a huge difference between options, and stock.

options in a startup, especially since ~95% of startups fail, are generally
worthless.

~~~
cft
I am talking about very early employees. What is the typical dollar amount in
RSUs or stock a new engineer after MEng is getting in Google?

~~~
mylons
>$100k over a few years at the initial date of the grant. You can roll the
dice all you want on startup options or take RSUs with actual value

------
VeilEm
This is a popular idea on HN and just gets upvoted because people want to
agree with this and it makes them happy for some reason, but this article is
not a good article. It's basically just a quote. I think any kind of the-sky-
is-falling article has the chance to get good traction on HN lately without
offering anything meaningful. The discussions in this thread are pretty poor
and the article is poor.

~~~
aagha
The fact that so many people are frustrated and have had their comments
upvoted while yours sits down near the bottom quarter of the page with only
two replies should be an indication that your thinking might be out of step.

------
jknightco
This is one of the most blatant cases of spin and justification I've ever
read. VCs put "ratchets and downturn protections" in order to satiate founder
greed? Ha! More like VCs waved huge valuations in front of founders and said
"don't worry about the terms, this is good for everyone."

If nothing else this article does a good job of demonstrating why its
important to always check your sources and their biases.

------
robbyking
I was a Web Developer during the first dot-com boom, and now that I work as an
iOS engineer during this boom, I'm shocked at how many of the same mistakes
are being repeated.

On almost a daily basis I get recruiters contacting me with interview offers
from companies who have no chance of surviving past the end of the year. Their
messages are often accompanied with bravado about their company's VC backers'
other, more successful projects, which only makes me more skeptical.

------
colindean
I've always envisioned most tech businesses in general as an elephant standing
on a board with a bunch of mice underneath it. The mice keep the elephant
moving, but if the mice aren't continuously fed, they slowly die off. When
enough mice die, the rest can't support the elephant and it thus squishes
them. The elephant is shot shortly thereafter because it stopped moving. The
mice that left sometimes come back to feed on the elephant carcass.

------
chiph
If there is a tech bubble that bursts, I don't see how much of middle America
would be affected. "So, the people in SV can't get 1-hour grocery delivery any
more. How does that affect me again?"

~~~
Terr_
Aside: Don't invest too heavily in the same field you work in, because you
don't want to lose your job and lose your investments at the same time.

~~~
ghawkescs
I believe you should invest in the fields that you work in and understand (as
long as you are investing long-term).

Your time and expertise in these areas will give you better insight that most
other investors will not have. See Warren Buffett's "circle of competence".

~~~
Marazan
And then: Enron.

~~~
Terr_
Exactly. Not only were many employees invested in the same sector, their nest-
eggs were invested _in their employer_ , which is (from a safety perspective)
even worse.

'Course, that invites some comparisons to equity in startups...

------
gphil
> There are about 144 unicorns right now. If only 10% break out, that's only
> 14 companies that will really make it.

Doesn't this ratio seem about right for any basket of unprofitable (or even
zero-revenue) high-growth companies regardless of valuation? If those 14
winner companies average greater than a 10x return then everything pans out as
expected--lots of risky investments together produce a reliable if more modest
return on investment.

It seems like the only abnormal aspect is the size of the valuations, but that
might be just what happens in a low interest rate environment--too much money
chasing too few deals. Whether this affects this success rate of these
investments remains to be seen I guess.

~~~
Naritai
Your assumption of 10% breakout is based, on some level, an assumption that
each company's valuation is uncorrelated with the others, and each company
will rise and fall on its merits. However, the nature of bubbles is that
valuations become based on underlying structural reasons - this is what
happened during the housing bubble as well. Statistical generalizations such
as 'even if up to x% of people default on their loans, we'll still make money'
were used to justify unreasonable investments in homes, which in turn drove a
real estate valuation bubble.

Well, here's what we learned in 2008 - in a down market, it's possible for
_way_ more than x% of people to default all at the same time.

~~~
gphil
Yeah, I wouldn't rule out the possibility of structural problems--we've never
seen this phenomenon before so it's hard to say how it will turn out.

I was just trying to point out that it's not impossible for the current crop
of unicorns to produce big enough winners to outweigh the failure of the rest.

I'm definitely skeptical that this will happen though, because the winners
would have to be really big (hundreds of billions in actual market cap in the
public markets) in order to make up for the really big failures.

------
riggins
You have to keep in mind the source. Let me put it this way. A VC's job is to
buy X (where X is equity in a startup). Of course every VC would love for X to
go on 50% sale ... or even better 75% sale.

You saw this with hedge fund managers and the stock market as well. Lots of
hedge fund managers went on and on about how irresponsible Bernanke was
because he kept interest rates low which raised asset prices.

To be clear, I don't think this is a nefarious or even conscious process.
However, I think if someone really wants a particular scenario it tends to
color their thinking.

Also the actual claim made isn't as sensational as the headline. Just says
that 90% might take a lower valuation. All that requires is a general market
decline.

Anyway, take a look at the list of unicorns.

[http://graphics.wsj.com/billion-dollar-
club/](http://graphics.wsj.com/billion-dollar-club/)

~~~
marcosdumay
Eh, a VC job is also to sell the same X some months later, for a much higher
price.

If the buying price of Y goes on a 75% sale, while the selling price of 10Y
also goes on a 75% sale[1], the VC makes 75% less money.

[1] Things usually don't go that way. Smaller prices tend to fall less than
big prices, and the VC will almost certainly get into the negative.

~~~
jacquesm
Buying lower means a lower exit is required to get the same multiple. So
buying lower is always better for a VC. Worst case they make less money on the
same multiple, better case they make a much higher multiple. It's all about
the rate of return, not the actual amount (assuming the amounts are still
worth the effort of investing, obviously there are some lower bounds here).

------
area51org
What's missing from this guy's evaluation: whether or not any of these
unicorns are close to or at profitability, and what their actual market
potential is.

If the businesses are based on bullshit, then he's probably right. If the
valuations truly are wildly out of control (and it does seem like it), then
sure, they're due for a correction.

It's also worth keeping mind that if there are 144 of these startups, 90% of
them is 129. That doesn't add up to _that_ much money in SV terms. This seems
like a tempest in a teapot. People love to make headlines, it seems, with "OMG
bubble OMG!"

~~~
crystalmeph
With minimum valuations of $1 billion each, that's well north of $129 billion
in valuation that's about to go up in smoke. I know that's not an actual
dollar amount invested in these companies, and in many cases is honestly just
people proving they can add a few numbers together to make a billion, but a
lot of real money is likely to be lost.

~~~
twoodfin
Just for some perspective, the current market cap of the S&P 500 is north of
$15 trillion dollars. It can gain or lose $129B worth of valuation on a not
particularly remarkable trading day.

Not that such a geographically and industrially concentrated collapse wouldn't
be a big deal, and it surely would have broad secondary effects.

------
criddell
> 90% of the startups will be repriced or die and 10% will make it

Wasn't that inevitable though?

There's a lot of money at stake, but the number of affected people is
relatively low, isn't it? I understand why HN readers are interested in this,
but is it a big story outside of tech circles?

------
paulpauper
_He says there is "blood in the water," and we are entering a 90-10 situation
for the unicorn class of startups with billion-dollar valuations in which 90%
of the startups will be repriced or die and 10% will make it._

Well, that's kinda how it's supposed to be. That's why expected value is more
important. A few $200+ billion Facebooks and Googles can compensate for a lot
of smaller $1 billion failures.

~~~
JDDunn9
No VC has "a few" $200+ billion investments. The $1+ billion are suppose to be
the successes that make up for the $1+ million failures.

~~~
ubercow13
Huh? The $1+ billion successes make up for the $1+ million failures, not the
$1+ billion failures.

------
ndirish1842
I really wish business insider would post an article that refrains from wild
speculation and provides actual evidence to support their outlandish claims.

~~~
paulpauper
you may be waiting awhile

------
subrat_rout
The article mentions about 144 unicorns(billion dollar startups). Can anybody
point me to the source having lists of these companies? Curious to see who are
these unicorns are.

~~~
soared
Same, I'm trying to send out some job apps.

~~~
mylons
haha, <insert can't tell if serious Fry meme here/>

------
tempodox
The “unicorn” is not a new buzzword but the frequency of it popping up the
last several days lets me assume there is a unicorn inflation underway. Put on
your muck repellant and get ready for bursting bubbles full of unicorn blood.

~~~
pluma
I'll say it again: call them zebras. There are no unicorns. There are zebras.
And if you see either of them in the wild (outside Africa) you're likely
staring at a decorated donkey.

------
brudgers
Being about startups, "Only" might be appropriate.

------
AndrewKemendo
_90% of the startups will be repriced or die and 10% will make it_

I thought this was always the assumption.

Is it because they are already valued at $1B+ that this thesis should change?
I don't see why that should be the case...

~~~
BinaryIdiot
> Is it because they are already valued at $1B+ that this thesis should
> change?

One would assume that if it's valued so high they have a fair amount of funds
in the bank from VCs in which case they could downsize considerably and still
survive for quite some time. So I feel like if you're valued at $1B I wouldn't
expect you to die even if you're in a decline for some considerable amount of
time.

~~~
AndrewKemendo
Except I don't know of any unicorns that straight up died.

Does a down exit count as dying? Do you have to IPO or be acquired to be a
successful Unicorn? What about IPO'd unicorns that tank in the market like
Box?

I think we need a better metric for success than valuation.

Maybe something like: Did they actually lead to the increase of adoption of a
better process/technology.

------
DubiousPusher
Does this belong on HN? It seems like clickbate speculation without any real
substance. Isn't that the opposite of what this place is about?

~~~
grp
That clickbate generate comments. Regarding then, it seems many people have a
lot of different opinions and a sour understanding of the _market_.

So, in my opinion, the real substance is: nobody knows what is going on, this
creates a kind of _fear_ and a negative atmosphere. Not a good thing.

------
ruddct
Serious question (though, honestly, one I likely won't act on): How might
someone short the unicorns?

~~~
habitue
You can't. The "valuation" number that is reported for unicorns is made up.
It's not related to the sale of shares of the company because the company
isn't public yet. To short, there has to be a market for the shares with
reasonably good liquidity.

------
paulpauper
There's a bubble in bubble predictions. Everyone wants their 'I told you so'
fame, for some reason. I guess it's human nature to want to be right or to see
the overly successful stumble back to earth.

------
fourpac
I wonder how much the HBO show Silicon Valley has affected the way people are
looking at startup funding. It's finally been exposed to a mass audience.

------
anonbanker
We're not allowed to call it a bubble yet, right?

------
tylerpachal
> There are about 144 unicorns right now.

I didn't realize that there are this many unicorns. Or is this a typo?

~~~
srunni
We wanted sustainable innovation, instead we got 144 unicorns.

~~~
david927
Buried in the comments is this diamond. Brilliant.

------
nickthemagicman
Blood in the water. I'm proud of your melodrama.

------
unknownzero
This link 404s for me, at least on mobile, huh.

------
desireco42
Is this because Unicorns aren't real :)?

------
acd
Dotcom bubble 2.0, The unicorn bubble.

------
isnullorempty
Repeat of the DotCom bubble, a few startups make it big then everyone and
their aunt tries to emulate it with slight variations or solutions to a
problems that don't exist. This app bubble is very pregnant and about to
deliver something awful.

------
_asdf_asdf
Okay, caps lock. You are cool

------
wrong_variable
This is a classic example of simpson's paradox.

Market's across the board are doing pretty bad this month - It would be
interesting to how bad tech is doing _relatively_ to oil futures and other
commodities.

~~~
pc86
Why is it important how tech is doing _relative_ to other unrelated markets?

Edit: I don't know why I'm being downvoted for asking a question. I've many
times seen a stock sector performance chart (I don't know the technical name)
with most of the market red and tech lit up bright green.

~~~
hibikir
Because all markets are really related in some ways, and you can't judge
performance without looking at alternatives. Sometimes, a sector goes down, or
up, by itself, and then we can expect that the reason for the price change has
something to do with that sector. The same thing happens when looking at
companies: If Home Depot is down 3% but Lowes is also down 3% and the SP500 is
down 5% on average, it's a likely explanation that the tumble has nothing to
do with HD's outlook. Heck, by some measures, the home improvement retail
sector would be doing better than average! The same thing happens when the
market is on the way up: Looking at a company or a sector in isolation doesn't
let us even speculate on the reasons of the price change.

In a site like this, where we care specifically about the health of tech,
claiming that the sky is falling for our sector without looking at other
sectors would be folly.

------
frik
Are Unicorns right after their IPO in trouble too?

