Year of the Unicorn

By: Richard A. Anderson

A unicorn is a mythical creature that is often depicted as a horse with a large, pointed, spiraling horn projecting from its forehead. A unicorn can also be defined as something that is highly desirable but difficult to find.

In the investment world, a unicorn is a privately-financed start-up company with a current valuation of more than $1 billion. Aileen Lee, the founder of the venture capital firm Cowboy Ventures, first coined the term in 2013. At the time, there were only 39 unicorns among thousands of start-up companies. Today, there are more than 340 unicorns around the world and those companies have an estimated value of nearly $1 trillion. The term seems rather out-of-date considering unicorns in the investment landscape are not especially hard to find.

In recent years, unicorns have been even easier for investors to find thanks to the increasing number of companies that have gone public through an initial public offering, or IPO. There were 20 unicorn IPOs in 2018, which represents a three-fold increase since 2016. Many in the industry are estimating we could see more than 100 unicorns make their debut in the public markets in 2019. So far this year, we have already witnessed Uber and Pinterest tap the public markets at valuations of $82.4 billion and $12.7 billion, respectively. To put this in perspective, the average company in the S&P 500 index has a valuation of about $47 billion.

The rush of unicorn IPOs has many wondering whether this could be signaling a market top. The argument is that as the end of the business cycle approaches these companies are trying to tap public markets at their highest point to maximize returns to early investors. With current market valuations so favorable and investor optimism running high, this presents an ideal opportunity for venture capitalists to cash out before conditions worsen.

The concern that the flurry of unicorn IPOs could be a sign of a market top is most likely an offshoot of the dot-com tech bubble. The last time we saw this type of IPO activity was the lead up to the dot-com tech bubble, in which a large number of tech companies went public at the end of a long economic expansion.

However, the unicorns of today are very different than those of the late 1990s. The current crop of unicorns are larger and more established firms. Many of today’s unicorns have generated significant revenues to garner their lofty valuations, even if they have failed to report profits. In the lead up to the tech bubble, many of the companies that went public had neither revenues nor profits.

Unicorns have generated a buzz in the markets. And should some of the largest U.S.-based unicorns such as WeWork, Airbnb, SpaceX, and JUUL Labs follow the likes of Uber, Lyft, and Pinterest into the public markets, this will continue to stoke the narrative that this mad rush to go public could be an indicator that a market top is on the horizon as private investors look to cash out. It seems like every week there is some new signal indicating danger ahead because it happened once or twice before something bad happened. We think it’s best to ignore these “signals,” which are more like noise, because there is no foolproof signal of when a bull market will end.