Are there too many unicorns?

The cosmic equestrian championship

Unicorns; Decacorns; rocketships going to the moon. Categorising startups often verges from the celestial to the metaphysical. 

The etymology would indicate that each vessel should embark on an intergalactic ascent, before the surviving astronauts are assigned a purple horse to jockey for the cosmic equestrian championship (sponsored by Softbank and Tiger Global).

The winner earns a fat cash prize and a free ticket back to planet earth. 

Given the difficulty of the journey, surely those who achieve unicorn status should only be elite competitors?

Well this year’s cohort is so large it can barely fit on the track.

Unicorn mania

Unicorn mania is noted to be consequence of two things:

  1. Ultra loose monetary policy - excessive QE and low interest rates creating a glut on institutional balance sheets. Low yields for fixed-income instruments leading more investors (hedge funds, family offices, CVC and PE) to search for returns in private markets, particularly at the growth stage.
  2. Software eating the world. The pandemic has accelerated technology’s conquest of almost every sector, so naturally there is a commensurate increase in the number of highly-valued companies.

That leads us to this tweet which sparked quite a debate on venture Twitter. 

In essence, he argues that there are too many unicorns and not enough exit possibilities for each one.

Let’s dissect the veracity of each statement:

1. These companies are too big to be acquired with new antitrust rules

We are in a red hot M&A market, especially for fintech. Incumbents are buying insurgents: this year, Etsy bought Depop ($1.5bn), Visa snapped up Tink ($2.1bn), Intuit nabbed Mailchimp ($12bn), and Square bought Afterpay ($29bn). 

The unrelenting tide of acquisitions is showing no signs of slowing down. Market leaders are wary of being supplanted - and they need new technologies such as BNPL and open-banking in their armoury. 

Fintexits in Europe

The antitrust argument reflects regime change, starting in the US, and spreading globally. Jurisdictions have grown tired of the anti-competitive machinations of big tech, yet the competition law that polices them was drafted for the era of oil barrens and old money. 

The Bjork doctrine has dominated legal thought since the '70s; as long as consumer prices are low, one firm can engulf as much of the market as it likes. 

Despite Lina Khan’s appointment as head of the FTC, there remains few legal impediments to acquisitions, although her tenure is in its infancy. Google’s acquisition of Fitbit ($2.1bn) was passed in January, but today’s environment is far more hostile.

Facebook’s acquisition of Giphy ($400mil) is under review in the UK and the verdict will serve as a bellwether for future FAANG acquisition policy globally. It appears vertical mergers such as this one are the low-hanging fruit for regulators on both sides of the Atlantic.

One can’t ignore private equity either. While their ability to execute leveraged buyouts would be stymied by an interest rate rise, they’d still be there to mop up if valuations tumbled. 

2. Public markets can only absorb 100-150 companies per year

The argument goes that there is only a finite investor appetite for IPOs. If interest rates rise thanks to inflationary pressure, this will only decrease further. The legal and bureaucratic hurdles to listing only permit a certain amount of new entrants. 

What can’t be ignored, however, are the 441 SPACs whose time is running out for a merger, scouring for a target like a desperate freshman looking for a partner as the club lights turn on at 5 A.M.

Then there’s the direct listing route, taken by Coinbase and Robinhood which is far less onerous. So there's plenty of creativity going on to help bypass the rigour of the traditional process. 

Indeed, there are plenty of unicorns who will happily bide their time until the perfect moment to go public. Private markets awash with venture capital can provide shelter from the short-term demands of investors in public markets, as shown by Stripe and ByteDance. 

Ultimately, the 150 figure is somewhat American-centric; there were 582 IPOs globally in Q2 2021 alone. London and Amsterdam are becoming more attractive tech listing locations, although HK and Shanghai are on the opposite trajectory. 

The verdict

Are there too many unicorns? Probably.

But the market will be able to weed out the duds from the gems. 

As long as the inevitable interest rate rise isn’t too drastic, businesses with strong unit economics and digital infrastructure will always find a way to exit, however that may be.

Tal Feingold