
The Age of Unicorns - amosson
http://fortune.com/2015/01/22/the-age-of-unicorns/
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lisa_henderson
About this:

"When Cowboy Ventures founder Aileen Lee coined the term unicorn as a label
for such corporate creatures in a November 2013 TechCrunch blog post, just 39
of the past decade’s VC-backed U.S. software startups had topped the $1
billion valuation mark. Now, casting a wider net, Fortune counts more than 80
startups that have been valued at $1 billion or more by venture capitalists."

Again, this is because interests rate, in general, are very low, much lower
now than they were during the original Dot Com boom, which is why valuations
are higher. The math on this is simple.

Suppose you have a company that makes $1 million in profits. The question then
is, at what point does it make sense to invest in something else? When
prevailing interest rates are 10%, then $1 million is 10% of $10,000,000, so
the company is worth $10,000,000 (excluding a million other factors for the
sake of a simple model). If the company demands more than $10,000,000 to buy
it, then it makes sense to invest in something else instead. If a company
wants less than $10,000,000 for ownership, then it is a hot deal.

But when prevailing interest rates drop to 1%, as now, and since $1 million is
1% of $100,000,000, then for same level of profit, the value of the company
has gone from $10,000,000 to to $100,000,000.

Again, there are a million other factors you could consider (do you trust the
management, can they scale, how fast are they growing) but I'm going with a
simple model here to demonstrate the basic driving force of modern valuations:
when interest rates go down, valuations go up.

Of course, that doesn't explain why a web startup with no profits would be
valued more than, say, a mature company like GE, which has known profits. Some
of the wilder valuations are obviously being driven by speculation about wild
growth rates.

~~~
phreeza
I completely agree that low interest rates are to blame for these high
valuations, but your numbers example seems off. By that logic, shouldn't
company valuations shoot to infinity if interest rates reach 0% (which they
effectively have).

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thedufer
The interest rate in question here is probably the long-term rate, which is
unlikely to go to 0. That would indicate a wide-spread belief that interest
rates will remain at 0 for the foreseeable future, in addition to current
interest rates being at 0. It's difficult to imagine a situation in which this
would be true.

~~~
toomuchtodo
> It's difficult to imagine a situation in which this would be true.

Japan.

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thedufer
All the data I can find points to their long-term prime rate sitting at ~1.1%.
Yeah, that's low, but it's also pretty clearly non-zero.

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phreeza
Taken by themselves, it is hard to say which one is overvalued. But looking at
the entire class, I think they are definitely overvalued. The trick will be to
figure out which one of these companies is the Amazon among the Webvans....

~~~
raldi
Are you sure the class, as a whole, is overvalued? If, in 1999, you had
invested $1000 each in Google and 49 flops, you'd still have come out ahead.

~~~
phreeza
What I mean by 'class' is the slew of companies now valued at 1B+. Not sure
what googles valuation was in 1999? I am guessing it was still well below 1B.

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sgt101
I feel a terrible unease about these companies. It's not the bloated
valuations, but rather the motivation for running companies in this way. The
plc has many critics, as a model of risk sharing and financial transparency
it's got huge holes right through it as Enron (and other car crashes) showed.
But who has a clue about what's happening in these companies, and who, and
what (banks, pension companies, taxpayers, plc's) are being taken for a ride?

Caution...

~~~
debacle
I get you. Just yesterday I was thinking about how _valuable_ everything these
companies give us for free is, and how Google specifically has completely
distorted what people's perceptions are on the value of software, especially
email. Google can have 50 loss leaders that completely obliterate the ability
to profit in certain segments for other companies, and they're so massive they
don't even feel it.

~~~
cullenking
This is actually a very common problem we see with our service. Tons of 1 star
reviews in Play/iTunes because we dare to withhold (valuable) features in
order to make enough profit to run the business. Once a week we get very very
negative (read: swearing) emails to customer support about needing a paid
account to do certain things. Kinda a shame, considering the sheer value we
offer 98% of our free users because 2% actually pay.

Preaching to the choir I am sure :)

~~~
debacle
Actually right now I'm geocoding about 100k addresses for completely free via
Google's APIs. Something that would have cost a few hundred dollars a few
years back, at the very least.

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snarfy
Consider Facebook's valuation and then consider how they actually make money.
Do they even make money outside of advertising, and is that advertising over
valued? How many advertisers have already pulled out of Facebook ads due to
ineffectiveness?

A lot of these companies are valued solely on the number of users, and little
to due with anything else. Maybe someday they will spin it and turn all those
users into profit, that seems to be the dream. It's not always a viable
reality.

~~~
fecak
The amount of data Facebook is able to collect on their users is the
difference for them, and the value of data for hundreds of millions of users
is hard to quantify.

~~~
eggie
facebook's core offering is slowly walking towards the exit:
[http://www.google.com/trends/explore#q=%2Fm%2F02y1vz](http://www.google.com/trends/explore#q=%2Fm%2F02y1vz).

Much of that valuable data stands to stale.

(edit: how do i link.. oh man)

~~~
thumper
That seemed pretty convincing, but then I added some comparison terms like
"instagram" and "snapchat"... they are hardly a blip. I think that argues that
the world is going mobile, but then maybe google trends isn't a fair way to
measure who is walking where.

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cm2012
There's quite a few more billion+ venture backed start-ups not on the unicorn
list.

