Economy Why investors should beware of unicorns by Start Magazine editorial staff

The herd of unicorns - private startups valued at $ 1 billion or more - are multiplying at a staggering rate. But many recently publicly traded unicorns continue to lose money. The Economist in-depth analysis Aileen Lee, a venture capitalist who founded an investment firm called Cowboy Ventures, coined the term "unicorn" in 2013 to refer to what was then a rare, almost magical species: private startups valued at $ 1 billion or more. Aside from magical attributes, they are a common phenomenon today and are becoming more and more so. Consumers, who are about to benefit from a range of new and often affordable products and services, can expect to enjoy the ride. Investors betting on the unicorn derby should be more careful - writes The Economist. The unicorn herd of the world is multiplying at a rate that is more like that of rabbits. The number of these companies went from a dozen eight years ago to more than 750, for a combined value of $ 2.4 trillion. In the first six months of 2021, tech startups raised nearly $ 300 billion globally, almost as much as in all of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to CB Insights. a data provider. Compared to the same period last year, the number of funding rounds above $ 100 million has tripled, to 390. Much of this has helped to fatten the older members of the group - all but four of the 34 who now boast. Valuations of $ 10 billion or more have received new investment since early 2020. The latest tech darlings are no longer primarily Uber marketplaces for bringing services to consumers. Instead, they offer, or are developing, sophisticated products, often in more niche markets. About 25% of funding in the second quarter went to financial technology companies, with many flows also into artificial intelligence, digital health and cybersecurity. The recipients of investor generosity are also becoming more global. Although American and Chinese startups continue to dominate the fundraising rankings, the share from outside the two largest markets has grown from around 25% in 2016 to 40% in the last quarter. In July, Flipkart, an Indian e-commerce company, raised $ 3.6 billion in a round that valued it $ 38 billion. Grab, vying to be Southeast Asia's answer to China's super-apps, hopes to go public in New York this year with a valuation of $ 40 billion. The torrent of money can be explained by two factors. The first is a divestment spree by early venture capital (VC) lenders of startups. Exits, through public listings and acquisitions, have more than doubled globally year on year, to nearly 3,000. The proceeds are flowing back into new VC funds, which have raised $ 74 billion so far this year in America alone, approaching a record $ 81 billion in 2020 in half the time. Venture capitalists can't spend the money fast enough. In the three months to June Tiger Global, a particularly aggressive New York investment firm, made 1.3 deals on average every business day. The second reason for the surge in valuations is greater competition among investors. Newcomers to the tech-investing business, such as pension funds, sovereign wealth funds and family offices, are flooding the private markets that were dominated by the VC firms of Sand Hill Road in Palo Alto. In the last quarter, "non-traditional" investors in America took part in nearly 1,800 deals that together raised $ 57 billion. Many may have been encouraged by the success of the previous forays of dabblers outside the VC world. Their annual investment returns in a first round of funding have averaged 30% over the past decade, according to PitchBook, another data company. This is more than double 10-15% for veteran VCs. This winning streak could still end in tears. This is what happened two years ago, when highly valued companies with shaky business models either shut down after their initial public offerings (like ride-hailing rivals Uber and Lyft) or never got that far. (WeWork, an office rental company whose listing was shelved after investors cooled). Many recently listed unicorns continue to lose money. According to calculations by The Economist, those who went public in 2021 made a cumulative loss of $ 25 billion in their last financial year. Assessing whether the remainder are worth their high ratings may be more difficult than ever. Like their predecessors, they don't disclose financial results. At the same time, extrapolating from early unicorns, which tended to pursue growth at all costs in winning markets, offers little help because today's lot often aims to capture good margins by selling truly unique technology. This could be a more sustainable strategy if the technology works. But it is more difficult for non-experts to evaluate, especially on the basis of what is often little more than a prototype. Nikola and Lordstown, two electric vehicle companies that went public in 2020 through reverse mergers with Special Purpose Acquisition Companies (SPACs), are under investigation by US authorities for allegedly exaggerating the feasibility of their technology. Another risk comes from politics. Authorities around the world are increasingly wary of letting tech companies outgrow or enter regulated markets such as finance or healthcare. As part of a broader crackdown on big tech companies, the Chinese government recently sabotaged Didi's operations by banning its app from Chinese app stores days after the company's initial $ 68 billion public offering to New York, apparently for the misuse of user data. These moves have cooled investors' appetite for Chinese startups, whose funding has actually fallen over the past two quarters. In America, the Securities and Exchange Commission is starting to monitor the use of cryptocurrencies. Many cryptocurrency exchanges have set investors in motion in the bitcoin rush last year. Now Coinbase's market capitalization, one of the largest, has shrunk by half, or $ 56 billion, from its peak following its April listing. Investors, therefore, would do well to be careful. For everyone else, the last unicorn race seems like a boon. As risk investments mostly involve stocks and little debt. As long as venture capital funds loss-making startups while offering subsidized services or developing smart new products, consumers have no reason to look the gift horse in the mouth.

(Extract from the foreign press review by Epr Comunicazione)