Dead Unicorns, No One Is Fooled By Your Valuation – #startups #unicorns


I Had A Squeee Party…..

Okay I admit it, I had a little “squeeeeeeeee!” party this morning. There were no guests or booze, only a cup of tea. Why? Common sense is starting to prevail in investor land when it comes to technology startups.

The unicorns are getting a reality check and the odd leg hacked off to bring them down a normal size. Fidelity Investments slashed 25% of it’s stake in Snapchat. Dropbox had a mega write down from Blackrock Investment too (24%). Square payments IPO was set 35% lower than valued…. see a small pattern emerging.

Blessed Are The Investors

Investors aren’t daft, they’re in it for the long haul and it’s only about one thing for them, making a return. Investors are not there to realise your dreams, if that’s your thinking then it’s time to take a hard look in the mirror.

Chris Douvos at Venture Investment Associates put it perfectly, “These are companies that had extremely high valuations based on momentum and hype, and which are at last returning to earth.

Hype 101

Technology company valuations are the biggest hype metric going. In true Dragon’s Den style it’s the simple multiplication of equity raised divided by the % of the company gone and the multiplied by 100 to get a valuation headline.

If you are “struggling to find a way to monetise” then it’s reality check time and a series look at the drawing board. Silicon Valley startups can get away it for so long but you certainly can’t. Just to add to that, your pie in the sky cash forecasts, their worth nothing too.

When the likes of Snapchat is failing to figure out a way to make money (it’s advertising but even that’s hard to do) then there’s a little hope for us all. It’s also very worrying that if they can’t get their act together I’d say there’s another thousand in the Valley suffering from the same dream state.

So What Is Your Valuation?

There’s a few different types of valuation in addition to the hype cycle method.

  • Asset-based Valuation – based solely on the balance sheet
  • Comparable transaction value – when compared to it’s peer group (could be dangerous comparing your valuation to Twitter though, so get real)
  • Discounted Cash Flow – given its stream of future cash flows and its cost of capital
  • Dividend discount model – given the dividend stream it intends to return to investors

I dare you to get your accountant to give one of those a whirl….. dare ya!

The Bottom Line

Investors are here for one thing, to make more money then they had to start off with. One method of doing that is finding a venture that will make them money. That means finding a company with a 95% chance of exiting with 3x or 5x their input or a route to profit. Either way, it’s your head on the block to deliver that. It’s not a game….

It’s time to put a clear route to revenue and profit first. Here’s to the new reality.

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