Have you heard? The unicorns (non-public tech companies with billion-dollar valuations) are dying. They’re falling from the fluffy funding clouds they occupy, landing on the cold, hard earth, and dying with a wheeze and a cough of fairy dust.
“Dead unicorns are on the horizon,” said CNN Money last year. Now they are here. “There are going to be lots of dead unicorns” this year, says the FT. Silicon Valley unicorns are “becoming an endangered species,” Vanity Fair says. And in a widely shared blog post last month, influential venture capitalist Bill Gurley laid out the problem clearly: “The pressures of lofty paper valuations, massive burn rates (and the subsequent need for more cash), and unprecedented low levels of IPOs and M&A, have created a complex and unique circumstance that many Unicorn CEOs and investors are ill-prepared to navigate.”
At the outset of this year, in January, VentureBeat tallied 229 unicorns globally, with a total valuation of $1.3 trillion. (The total pool size varies depending on where you look; Fortune’s unicorn list counts only 174, while WSJ’s list has just 145.) It is hard not to see that as a sign of a bubble. And in the U.S., new entrants far exceed exits, as companies that are crowned unicorns now stay private for much longer.
If 2015 was the year of the minting of new unicorns, 2016 has been the year of unicorns losing their horns, and delaying public offerings. Only one U.S. tech company, SecureWorks (SCWX), has gone public this year. (And the offering “fizzled.”) None went public in the first quarter. In March, Fidelity (FNF), which invests in many pre-IPO tech companies through its mutual funds, slashed the valuation of is stakes in previously-hot names like Zenefits, Cloudera and Dropbox.
But most of this trouble is here in the U.S., and the landscape for unicorns still looks plenty sunny abroad, in places like Europe and China.
The waters are friendlier abroad because they’re less crowded. It is especially true right now in Europe. “The thesis there is that there are fewer venture capital and private equity investment professionals chasing deals in one quarter, [less] density,” says Chris Roy, a director at wealth management firm Windrose Advisor, which invests in both early-stage tech startups and public tech companies. “So what that leads to is less bidding on deals and more attractive valuations from a venture capital perspective. So if you have two bidders instead of six or seven, you’re likely to get assets at a more attractive price.”
Roy adds that Europe has opportunities not just for hot young startups, but older, more established non-public tech companies, too. “There are great disruptive technologies like Uber entering Europe, but there are also these big, old, legacy brands in Europe that really haven’t gone online,” he says. “So there’s opportunity in Europe for both incumbents and disruptors.”
Four of the 10 highest-valued unicorns at the moment live outside America, and the first three are all in China: smartphone maker Xiaomi ($46 billion valuation); ride-sharing service Didi Chuxing, previously called Didi Kuaidi ($25 billion), in which Apple just invested $1 billion; online booking-service China Internet Plus, previously called Meituan-Dianping ($18 billion), and Indian e-commerce giant Flipkart ($15 billion). None of these companies appears to be in any hurry to go public, though the financial press loves to speculate about when we’ll see an Uber IPO.
Should American startups consider leaving the States to get friendlier valuations? Perhaps first they should consider turning down funding from companies like Fidelity, The Hartford, and T. Rowe Price, all of which have marked down their valuations in startups in the last year, creating bad publicity and sour spirits in the private tech market. Roy calls the mutual funds “tourist” investors, and explains that, “They’ve largely retreated, which has caused volatility and caused a lot of the [unicorn] companies to wait in the wings” to go public. And the issue with mutual funds as tech investors is that they can write down their valuations whenever they want, instead of waiting for a new financing round, as professional tech-investing firms do.
To be sure, many contrarians insist that the fervor over dead unicorns is overblown. Sam Altman, president of influential tech accelerator Y Combinator, recently said on Bloomberg TV that it’s all, “a dumb conversation.” Dropbox CEO Drew Houston, who was with Altman, said, “We try not to get fixated on what’s the valuation right now.”
Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. Follow him on Twitter at @readDanwrite.