Hunting for Unicorns: Is Gambling on Tech Startups a Sound Investment Strategy?
April 22, 2019
By Michael List
I love this time a year. It’s a time of new beginnings with Spring, Easter and the start of a new Initial Public Offering (IPO) season. Broadly, financial markets had a wonderful first quarter and that momentum has continued into April.
Some people view this IPO season flush with opportunity. Others see more change and risk. But one thing's for sure: after years of teasing us, many “unicorns” are finally going public.
What is a Unicorn Company?
A “unicorn,” as originally defined by venture capitalist Aileen Lee, first described any U.S.-based software company that has started since 2003 and is valued at over $1 billion. However, the term has grown to generally define any privately held company valued at $1 billion worldwide.
Lee, the founder of Cowboy Ventures, a seed-stage venture capital firm, first coined the term in her 2013 article: “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.”
Unicorns — and tech startups seen as potential unicorns — are an attractive investing notion, because they give the “average Joe” a chance to participate in remarkable growth when they finally decide to go public.
Which “Tech Unicorns” are going public in 2019?
Unicorns scheduled to go public this year include Pinterest, Uber, Lyft and Zoom. These companies excite investors because they disrupt old industries and have experienced rapid growth in users or revenue (or both).
That being said, more experienced investors have expressed warnings of caution citing information similar to that below provided by the Wall Street Journal. Looking at major technology companies, we can see the time span from when each company was founded, to when it went public, to when it was first profitable relative to the IPO:
As you can see Apple, Facebook, Google, and Cisco were all profitable before they went public. Qualcomm, Twitter, Groupon and Amazon all took several years to generate a profit for investors. Contrast this with companies expected to have IPOs in 2019 — most have been in operation for more than a decade, with no profits, and some have no plans to ever generate a profit.
Another word of caution comes from MarketWatch — know what you are buying. The chart below shows performance of Zoom Technology. The company has been publicly traded since 1989, but hasn’t reported any revenue since 2011 (i.e. no sales):
Last month the stock was trading at 4 cents a share, and it finished last week at $2.70. It appears,
investors gamblers believed they were buying Zoom Video [ZM] which held it’s IPO last week but instead bought Zoom Technology [ZOOM], a completely different company with a long history of no sales and delinquent reporting of required financial statements.
Fundamentals don’t matter to everyone (as seen with Zoom Tech), but they do matter to us. Our philosophy and portfolios remain the same. Talk to an advisor today about a creating a portfolio that's broadly diversified with an emphasis on strong fundamentals and reasonable valuations.