Q4 2018 New Markets Investor

Q3 2016
‘Put simply, the only real
reason many of these unicorns
exist is because they have
deferred a real IPO for a
private one.
Round Capital’s Josh Kopelman, in the Q1 LP Letter.
All these private companies trading via private IPOs,
especially those that have managed to secure unicorn
status, is all well and good, but in the end the only way
investors can really know if these valuations hold water
is when they are ‘marked to market’. At least that is
the opinion of Kevin Kinsella, the founder of Avalon
Ventures.
Low interest rates have helped flood tech start-ups with
lots of cheap, easy money, and with China’s economy
struggling to maintain growth rates, along with its volatile
financial markets of late, the Federal Reserve is unlikely
to raise rates any time soon. All this cheap money
has opened the doors for private equity funds to play a
“new parlour game”, said Kinsella. But one that serves
to merely inflate the egos of those investing, as well as
the value of the companies they have their eyes on.
“My metaphor for that is it’s like a rich man’s game
of saying ‘OK I’ll trade my two, half-a-million-dollar,
Siamese cats, who have beautiful blue eyes, for your
beautiful, gorgeous, $1m golden retriever and we’ll call
it square’”, he said. “And you can play that game all
day long but if you really want to know what a Siamese
cat is worth or a golden retriever is worth, you go on
eBay or you go down the pet store, and it’s certainly not
those values I cited by way of example.”
The real deal
One of the first things to consider when trying to ascertain
if the billion dollar price tag attached to a company
can live up to the dream when it finally goes public is
whether or not the business is a “global platform” or
just an “overvalued feature”, said the founder and Managing
Partner of the boutique investment bank Magister
Advisors, Victor Basta, in a recently released statement.
“Microsoft’s market value at IPO was $500m. Cisco’s
was $300m. Starbucks? Just over $100m. Today 100+
private companies are valued at $1bn+. To warrant this,
each must have enduring long-term value, derived from
either being a global platform company, or at the very
least a very high value product business.”
In Basta’s view, few of these so-called unicorns exhibit
such traits, many simply being apps whose offering is
extremely hard to monetise effectively or that are very
Put simply, the only real reason many of these unicorns
exist is because they have deferred a real IPO for a private
one. They have remained private companies and,
therefore, have inflated valuations. What is more, there
is no way for their investors to cash out if interest rates
go up and all that venture capital dries up along with it.
What this all means is that only those investors who are
lucky enough to have placed their substantial private
IPO bet on an actual unicorn – rather than a donkey
posing as one – will come out on top in a game where
valuations are seemingly plucked out of thin air. Now
more than ever, it is crucial that investors in these
tech start-ups be able to decipher between a genuinely
valuable business and a company simply masquerading
as one.
-90-
New Markets Investor