The sad demise of unicorns was widely predicted at the start of the year. Unicorns – or young, technology private companies valued at over $1bn (£693m) – drew vast sums of investment throughout last year and comparisons with the dot-com boom were drawn.
There are around 170 companies with unicorn status, according to Fortune. Some are well-known names, including hotel booking firm Airbnb ($25bn), flight website Skyscanner ($1.6bn), music streaming app Spotify ($8.5bn) and the current king of unicorns, taxi firm Uber, with its $51bn price tag. Many make no profits or have business models which are yet to be proven.
Unicorns get their valuation from the amount of money investors are willing to pay for a chunk of the business. If someone pays $100m for 10 per cent, then technically the whole concern is worth $1bn. But critics say their worth isn’t justified, and public markets couldn’t possibly absorb these companies at their current valuations.
Unicorns have polarised investors. “It’s outrageous to call the downfall of Silicon Valley but if you look across [the region], it’s red hot,” said Peter Garnry of Saxo Bank said in January. “It feels and smells like the 2000 dot-com bubble.”
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BILL GATES CALLS FOR RESTRAINT
Bill Gates recently called for restraint and argued investors need to be more discriminating in the short term. “Closing your eyes and saying ‘that’s a tech company, I’m going to throw money at it’, that strategy worked for about two years.”
The pace of funding has slowed, according to a PwC report. Anecdotally, the time taken for companies to raise new funds is longer. And some mutual funds have written down the value of their stakes. Fidelity, for example, cut the price tag on its investment in cloud storage firm Dropbox by 20 per cent and picture messaging app Snapchat by 25 per cent.
And there have been spectacular failures too. Powa Technologies collapsed in February after blowing $200m of investor cash. Its offices on the 35th floor of the Heron Tower seemed fitting for a business valued at $2.7bn, one whose founder Dan Wagner believed was going to be “the greatest technology company of all time”.
Lauded by David Cameron as an example of British ingenuity, Powa was working on mobile payments technology, although it changed tack several times. To critics, its rise and subsequent collapse seemed to epitomise what a lot of early-stage tech is about: bombastic chief executives, cash burn and not much profit.
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But there’s another side to it too. Price discovery is an integral feature of capital markets, and the value of public companies often fluctuates widely over time as investors grapple to find their true worth.
“There is this extraordinary belief that technology must be a bubble and that the price of the companies must not change. As if quoted companies don’t change their prices every day,” argues James Anderson of Scottish Mortgage Investment Trust.
Moreover, the “unicorn” banner masks a wide range of companies from food delivery and taxi-hailing to oncology specialists. Some of these are more likely to change the world than others.
“To me, the $50bn that is going into unquoted companies a year is a fraction of what it should be,” Anderson says, adding that backing innovation and growth is hugely important for investors and society.
Even Gates has questioned the wisdom of betting against unicorns in the long run, given the potential for a few to become world-changing. He has invested alongside Anderson in biotech company Grail, which is developing a blood test to detect cancer. “It is the company with the greatest possibility of changing the world in 10 years’ time,” Anderson says.
The recent write-downs to some unicorns arguably reflects a market shake-out, where the wheat starts to be sorted from the chaff. That's natural. “We are not great fans of the idea that everything in tech is like the 1990s [bubble] as it is becoming evident who the winners are,” says Anderson.
PWC's MoneyTree report also suggests investors are focusing more on established companies. “The increase in expansion and later stage financing combined with a drop in first time financing suggests a shift towards relatively mature start-ups,” said Tom Cioccolella of PWC.
Unicorns will continue to split investors: inspiring some, but terrifying others.