Startups and Angel Investing: Just Say No to Unicorns

Business.com / Finances / Last Modified: February 22, 2017

There are plenty of start-ups that look like the next Uber, but you might want to put your money elsewhere.

The third employee of Google (or Apple, or Microsoft, or some other Silicon Valley company) is now living a life of luxury, thanks to stock options that skyrocketed in value. Ditto for the first investors in Facebook (or any other now iconic Silicon Valley company) who got in on the ground floor of the high-tech boom.

The visionary genius is part and parcel of the iconic Silicon Valley success story. As is those with the talent and the money who provided the resources to make the vision a reality. So, of course, everyone thinks that if they can just get in early enough on the next big thing, they’ll get to join the party.

That was one big reason behind the dot-com bust of 2000, which led to what Oliver Marks of ZDNet describes as the stock market crash that resulted in losses totaling $5 trillion and a “financial nuclear winter.”

The lesson here: be wary of unicorns as they are creatures of the imagination.

Related Article: Separating Unicorns from Reality: The Value of Business Valuation

Are Business Unicorns Real?

As J.P. Mangalindan notes in Mashable, a unicorn is a “widely used shorthand for startups who have won the techie jackpot: companies that are worth $1 billion or more, solely through fundraising and the generosity and faith of venture capitalists.”

Unlike their mythical counterparts, such companies actually exist—Uber, Airbnb and Snapchat are three. In fact, there are so many of them that we now even have a new category, the “super-unicorn” worth more than $100 billion. According to TechCrunch contributor Aileen Lee, there may be as many as three companies with super-unicorn potential.

Are Business Unicorns Dead?

If you’re an angel investor thinking about grabbing onto a horn of opportunity, it may be wise to heed the words of Silicon Valley venture capitalist Bill Gurley, who told The Wall Street Journalhe believes that “you’ll see some dead unicorns this year.” This from a guy who is an investor in Uber and Snapchat.

While that may be true, Social Internet Fund Manager Lou Kerner says, “We’re clearly not in a tech bubble close to what was happening in 2000.” But setting your sites on a unicorn may still be ill-advised.

TechCrunch’s John Backus notes that because unicorn valuations are so high, the huge amount of money a high-net-worth investor commits actually represents a very small percentage of ownership. “If a VC invests $10M – $25M from a huge VC fund into an already successful company at a multi-billion dollar valuation to acquire less than .5% of the company, what’s the point—besides the right to display a unicorn logo for its website?”

Which is why Hyde Park Angels—a Midwest investment group comprised of over 100 entrepreneurs, executives and venture capitalists—argues you have a higher prospective return on investment when purchasing interest in a portfolio comprised of multiple companies than when you try to put all your chips on a big unicorn.

Related Article: 7 Top Business Startup Opportunities Right Now

Successful Unicorn Investor Traits

According to Jerry Neumann, the only way to successfully invest in unicorns is to “have the expertise, the network and the reputation to be the one the (unicorn) founder chooses after it’s obvious that they have the shot at the gold ring.”

Even those who have such connections remain leery of unicorns. Mark Cuban believes such companies are over-valued; moreover, while everyone likes to boast about how they got in on investing in some unicorn, Cuban maintains, “They don’t tell you the other 99 percent of their portfolio failed.” 

According to Cromwell Schubert of the Silicon Valley Business Journal, unicorn valuations get inflated due to late-stage investors who, unlike the rest of us, receive guarantees of senior liquidation protection. Meaning that if things don’t quite work out as expected, they get their money back. Unlike the rest of us.

And if that isn’t enough to convince you to stay away from unicorns, we’ll close with these words from Peter Barris of the NEA venture capital firm.

In medieval times, unicorn horns were highly sought after for their magical powers, believed to eradicate poison and cure depression. Opportunistic Viking traders peddled long, white, spiral horns for huge sums—but sadly, the tusk of a toothed whale never healed or enlightened anyone. The takeaway? Don’t grab a unicorn by the horn unless you’re reasonably certain it’s not a narwhal tusk.

 

 

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