Unicorn valuations are distorted; they must prove themselves worthy of the name in 2016

If 2015 was the year of the unicorn, then in 2016 the unicorns must prove themselves worthy of the name. The valuations of technology startups have exceeded $1 billion, and they have set off a wave of crazes. Now the market has become more rational, and people have begun to realize that the valuations of billions of dollars are illusory. The Financial Times wrote today that 2015 was the year of the development of technology "unicorns", but in 2016 they will not be so glorious and smooth. These startups must show good performance and they must prove that they are worthy of such high valuations.

Square's IPO is a key event

It is estimated that there are more than 140 highly valued technology companies in the United States. The valuations of these companies have grown rapidly for two main reasons. First, technology companies bring good ideas and are ready to use software and the Internet to change the entire industry, which people are looking forward to. Second, more investors are willing to take risks in the private market.

The IPO of mobile payment company Square in November was a key event. Square's IPO price was lower than the price offered by investors in previous financing. In desperation, Square could only compensate investors by issuing additional shares, while the pricing of some other "unicorns" faced more doubts.

Michael Moritz, chairman of Sequoia Capital, has used the term “secondary unicorns” to describe companies with shaky foundations. Bill Gurley, partner at Benchmark, has gone even further, claiming that “all valuations are fake.” The correction in valuations has already begun and will continue.

Valuations are distorted

The scale of the adjustment in Silicon Valley will not reach the level when the Internet bubble burst in 2000. Although the quality of unicorns varies, leaders such as Uber and Airbnb have had a huge impact on existing industries. People's excitement about future technologies is not unfounded. The combination of artificial intelligence, software and communications has far-reaching significance. Unfortunately, private market valuations have been distorted and inflated, and startups have postponed IPOs, which have raised questions about financial innovation. Despite the market excitement, VC has not achieved good returns in recent decades, and only a few funds have achieved returns that satisfy investors.

The IPO market has faltered, forcing established funds and other public-market investors to participate in private financings of high-growth Silicon Valley companies. The jury is still out on whether being an insider can make more money, and some unicorn valuations have fallen.

The market environment is very favorable to startups. They can raise billions of dollars and then actively expand their businesses without being constrained by the same rules and regulations as publicly listed companies, which must announce performance and disclose financial conditions every quarter. They have obtained many rights that listed companies have, but have not assumed the corresponding obligations.

The market should have set some rules for these companies, but investors were either not protected or some protections were only allocated to a few people in the private market. As the company grew, investors in each round of financing received different protections and treatment.

The US interest rate hike has begun, and the era of super-cheap financing is over. Silicon Valley "unicorns" are no longer mysterious. They must raise funds by issuing stocks and paying dividends, and sometimes the company's valuation is lower than before. The promises made during private financing are being tested, and the results of the test will be disappointing. These companies have not brought returns to investors, but they are deceiving people with the beautiful coat of "mythical beasts".