Blowing Bubbles with Unicorn Companies

Posted by Artur Stypula on April 18, 2016  /   Posted in Investments

We are in the age of Unicorns! And NO this is NOT a Game of Thrones reference.

Unicorn

Unicorns are among us, and closer then we think. All you need to do is pick up your Android or Iphone and their demise will affect all of us more then we can imagine….

Boom There they are!! Unicorns, unicorn companies are everywhere!

Now you may ask yourself, what in the world  is he talking about Unicorns/ Unicorn Companies for??

Lets begin by going over what is this “Unicorn”, if you google the definition; ” A Unicorn is a start-up company valued at over $1 billion. Canadian tech unicorns are known as narwhals. “

Now that we have the formalities out of the way, lets get more specific.

Most of these Start up companies are in fact Tech companies, currently there are 144 Unicorns right now. Before we get into what the issue (s) might be, lets go ahead and identify the top 10 in terms of value (the B is billions), and a few others that you may know as well:

  1. Uber  (62B)
  2. Xiaomi  (46B)
  3. Airbnb  (25B)
  4. Palantir  (20B)
  5. Didi Kuaidi  (16B)
  6. Snapchat  (16B)
  7. China Internet Plus (15B)
  8. Flipkart  (15B)
  9. SpaceX  (12B)
  10. Pinterest  (11B)

Now here’s a few that aren’t in the top 10 but you may know: Lyft, Spotify, Zenefits, and one that may already be gone before I finish this article- Theranos -which just 2 hours before I started writing this article became the subject of a federal investigation whether or not they misled investors about their technology and the status of operations. For the sake of this argument please remember that bit about Theranos going forward.

Lets start with the roots of the problem : GREED AND TOO MANY USELESS APPS.

Greed. In the movie Wall Street character Gordon Gecko coined the phrase “Greed is Good”, who would have known that 30 years later, it seams that “Greed has become Golden”.  AND the general public has basically fallen for it (see the 2007/2008 financial crisis), and we keep diving deeper and deeper. Consider the current “rot” as I call it in the Tech World. According to famous Investor Jim Breyer (who knows a thing or two about start ups having been one of the 1st investors in the little thing called Facebook) in an interview with Business Insider at the Davos summit this spring had this to say; “there is blood in the water, and we are entering a 90-10 situation for the unicorn class of startups with billion-dollar valuations in which 90% of the startups will be repriced or die and 10% will make it.” This is pretty scary stuff considering the 144 Unicorn companies are worth over $505 billion as of last December 2015.

Here’s what is absolutely terrifying and should make you think twice if your in a position to invest in one of these companies or apps. THERE IS NO COVER, and when it hits the fan, and it will, where’s the exit? Unlike the subprime mortgage crisis, when this bubble pops, what will happen with all of those Billions?? (which now i’m estimating at roughly $550 billion today at the rate unicorns are raising capital, it could be substantially higher of course) They are gone, and why?

Because unlike in March 2007 when the crisis began there were $1.3 Trillion of subprime mortgages, which as everyone knows,…well didn’t do so great, and it KIND of spread to the rest of world…

Here’s the main issue, when the 130 or so unicorn  companies DO default.. that’s it. the money’s gone. Poof!!! And why? Well its simple, unlike during the subprime crisis-there was still a house left. So for every unlucky soul with an underwater mortgage-you had a potential new homeowner, or in the case of the last crisis many investors. Contrast that to the unicorn companies – – you can’t sell a worthless app, or a website- and while it stings to sell or get foreclosed on a home and lose half your value, its much worse for the overall economy for the money just to evaporate.
And WHEN (not if) this does happen, this will spread to every section of the economy. Those poor saps who invested in these companies will all take huge losses, in some cases effectively changing their lifestyles for good just like in 2007. This will have a ripple effect throughout the world economy. Leases on BMW’s, Ferrari’s and Bentley’s will go under, in my opinion the entire California Real Estate market will have a crash that will make 2007 look like a cocktail party. The already alarmingly slowing Miami real estate market probably will have major issues as well. This is also important because during the recent financial crisis these states had a major share of the subprime market.

Waves of defaults will also affect the bond market, the stock market, the housing market, and with the fragility of the publics mindset and confidence in the financial system. Before the government stepped in during the recent financial crisis, things were beginning to freeze up, banks didn’t trust each other because they didn’t know who was viable. If it went further it could have escalated much worse-insurance contracts on oil tankers wouldn’t be issued, your best buy warranty on your TV would be worthless, and as Vonnegut said; “And so it goes…” . This time, with an already fragile sentiment in the economic recovery- -these Unicorn companies could prove to begin a domino effect that could lead to the greatest financial crisis of all time. And again its rooted in Greed. So how are we falling for this again? And aren’t there so MANY awesome apps out there?

GREED: How are we falling for this? Well humans are a trusting sort, we want to believe, think we can be great, dream to be wildly successful. And lets face it, all but the most cynical folks are a sucker for a good story, because stories appeal to emotion rather then reason. Swindlers know this. Con artists also know that just about everyone wants to hear how amazing and special they are. How they are destined to be successful or rich, they appeal to our feelings. And unfortunately a lot of them pray on our hopes and dreams. What’s ironic is cons thrive during wars and political dramas, people get exploited during times of uncertainty, maybe that’s why seemingly intelligent investors are throwing baskets of money at these “advanced technologies”. The sad thing is very rarely do con artists go to trial. The beauty of most of these “cons” is investors give willingly, Bernie Madoff painted such an amazing picture, that people BEGGED to give him money. Ironically greed works against the general public too, after all it was greed that made people trust Madoff-his returns were completely too good to be true. BUT greed took over and countless otherwise extremely intelligent people, were duped and at the end of the day, ripped off. So here we are again in an environment fueled by low interest rates, mediocre returns elsewhere, investors want to believe they are in on the next big thing. And as before it almost becomes another kind of domino effect, where again otherwise incredibly intelligent people get caught bidding up literally perpetually profitless unicorn companies up , up and away.

APPS: Android users have up to 1.6 Million apps to choose from , iPhone users have 1.5 Million choices. The scary statistic is that the average app loses 77% of its users within the 1st three days of being downloaded. And 30% of the time when an app is downloaded in the United States its never opened more then twice. Now that’s not to say we don’t USE apps, to the contrary we actually spend more time on apps (three and a half hours) then we do watching TV. The key to app “stickiness” appears to be being enabled for live chat, email, or social media. So many apps impact our lives in incredible and intuitive waves, and many couldn’t live without them now. Many of the unicorn companies are in this space unfortunately, with some of the biggest ones residing here. Just like the late 90’s, and 07/08, you can only hide behind issued debt, preferred stocks, and inflated expectations of future revenues that someday will magically appear because the apps have all the “eyeballs” they need to justify their lofty valuations. Unfortunately in Silicon Valley the quirkiness has been replaced with arrogance.

What’s the solution? Honestly I’m not that smart, I wish I had the answer. One thing I would suggest if your offered the “deal” of a lifetime, remember if its sounds too good to be true it probably is. Read the fine print, look at the actual sales of the company, their assets, and most importantly their liability and at the end of the day just ask and use #commonsense .

 

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