A unicorn company refers to a startup company valued at over $1 billion. Much like an actual unicorn, unicorn companies are rare, beautiful, and highly sought after. Airbnb, Uber, Pinterest, Snapchat and Space X are all examples of present day unicorns. However, the fate of the majestic unicorn isn’t looking so magical in 2016, with many market analysts predicting the unicorn could be facing an impending extinction.
While unicorns initially got their name due to their rarity, they’ve now begun breeding themselves beyond carrying capacity. In fact, the Wall Street Journal compiled a list of unicorns in the technology field, listing 78 different companies valued over $1 billion. The pervasive myth is that, if a company is valued that high, it must be financial stable, making it an ideal investment opportunity.
However, this is unfortunately not always true. According to venture capitalist, Michael Moritz, there are a large number of unicorn companies that could go under, with many already showing signs of distress. As the market becomes oversaturated with unicorn companies, the purchase power of consumers simply can’t keep up, resulting in slowed growth rates among unicorn companies.
Just because some unicorn companies may be facing difficulties, doesn’t mean unicorns are an inherently bad investment. There are some key indicators that investors should assess to determine the overall business health of a unicorn company. Some of the primary things to consider include:
- The hiring rates of new employees.It’s a well-known business fact that in order to continually grow profits, you need to be hiring more talent. If the hiring rates of a business are slowing down, stagnating, or declining, it could indicate financial difficulties.
- The social media presence.Social media can actually tell you a lot about the health of a company. If the business continues to have a strong social media presence with trending advertisements and posts, this indicates they’re still popular in the public eye. Declining social media presence means the public is less focused on the company, while also indicating the company had to scale back on their marketing budget.
- The need for funding.If the business has sought to raise new funds within the last 3 years, this is a huge red flag. An established unicorn should be generating a high enough ROI that they no longer need to depend on outside funding sources to fuel their growth, so raising funds is an indicator of financial trouble.By identifying some key warning signs in advance, you can avoid the struggling unicorns and invest your money more wisely in companies that are continuing to experience growth.
Market analysts don’t view the future of unicorns too favorably, and 2016 may be the year unicorns return to the land of mythical creatures for good. Even MarketWatch predicted that unicorns will fade into oblivion in the coming year, so investors need to be cautious when it comes to high-valued startups. Data collected by PwC shows that venture capital funding was reduced to $11.3 billion in the final quarter of 2015, which was a decrease of 32 percent from the third quarter. It’s predicted that the third quarter funding in 2015 will have been the peak for the technology industry, and funding will likely not reach such heights again.
The future of unicorn companies isn’t looking so bright. As unicorns have begun outbreeding their market capacity, the purchase power of consumers can no longer keep pace, resulting in stagnating profits for many unicorns. The year 2015 experienced a massive tech boom, and the third quarter experienced historic highs from venture capitalist investors. Yet, that funding peaked and is now declining once more, meaning unicorns everywhere are in trouble. If you do plan to invest in a unicorn, be sure to thoroughly assess the business to identify any red flags that indicate financial struggle.
Regards,
Ethan Warrick
