The popularity of unicorn companies has grown over the last several years. In the US alone there are 107 privately owned firms valued at US$1bn or more – more than the rest of the world combined (103). Most of these companies are technology-driven enterprises with a relentless drive to grow, making them an active contributor to M&A activity. Recently, however, valuation issues have plagued the category and greatly reduced the number of exits. With the future of unicorn valuations in limbo, questions remain about how investor sentiment will continue to shift going forward.
Toppan Vintage, a trusted financial printing and communications company, in partnership with Mergermarket, is pleased to present the newest edition of M&A Pulse newsletter. This newsletter features responses from US-based senior corporate executives who shared their insights on the current and future state of unicorn companies.
Toppan Vintage question: What will happen to the valuations of unicorns in the next 12 months? Leading deal experts weigh in...
The once-vaunted category of unicorn companies is losing some of its sheen. In 2014, more than 30 private companies worth US$1bn or more exited, and the average exit valuation rose to above US$9bn, according to data from CB Insights. In the following two years, 25 or fewer unicorns exited each year and the average exit price fell to below US$3bn.
Looking forward to the coming 12 months, more than two-thirds (68%) of our respondents believe the valuations of unicorn companies will continue to decline somewhat. Twelve percent think they will remain the same, while one-fifth (20%) think valuations will rebound and actually increase somewhat.
Some recent signs indeed point to further declines in the fortunes of unicorns. In the final quarter of 2015, a wave of multi-million-dollar write-downs by asset management firms hit companies including Dropbox and MongoDB.1 Now, in mid-2017, the US$68.5bn valuation of Uber appears to be at risk as well: Three investor groups want to put money into the ride-hailing company, but at an undisclosed discount price.
One of our respondents, a Texas-based managing director at a mid-market investment bank, said this reversal was inevitable given the inflated valuations held by many unicorns. “The mindset towards the unicorns is changing now as we see financing decreasing for them,” the investment banker said.
“Many investors are unwilling to pump more capital into unicorns, since many of them are losing value. This was bound to happen, as a lot of unicorns had a valuation much higher than their potential warranted and it was never going to be easy to sustain.”
Another sign of unicorns’ declining fortunes has been the fall in the stock prices of recently listed companies Snap and Blue Apron. The value of social media giant Snap dropped by 53% as of mid-August from its firstday price earlier this year, and that of meal kit service Blue Apron had gone down by 42%.
However, not everyone is so pessimistic on the valuation front. A managing director at a Bay Areabased private equity firm noted that the overall stock market has performed exceptionally well, creating fertile ground for further IPOs.
“The value of unicorn companies will slowly increase,” the PE managing director said. “As equity markets steadily improve and growth rates start rising, we expect a change to take place and unicorn companies to gain value. The valuation of unicorn companies will also increase because investment options are limited and unicorn companies promise strong value and earnings for investors.”