Unicorns

It’s a word that induces the same swooning expression from a venture capitalist as from a story-loving child. But unlike the mythical horned creature of the fairytale world, unicorns of the business world are very real, and proliferating. The term was coined to describe startups with valuations of more than $1 billion that had not yet gone public, and was meant to emphasize their scarcity. Now California’s Silicon Valley seems to teem with them, while sightings are becoming common in Asia and Europe. By early 2016 the list of unicorns had swelled to about 200 companies. Think Uber and Airbnb, Xiaomi and Snapchat. For the most part, however, don’t think profits, at least not yet. That’s one reason some investors are starting to wonder whether soaring valuations reflect a new era of innovation — or are just another bit of financial make-believe.

So long as a company is closely held, its value can be fuzzily defined. If it sells shares in an initial public offering, the market determines a price, and that math has not been as favorable to unicorns of late. While 32 unicorns went public or found a buyer in 2014, only 11 did in 2015. Several of those, such as Etsy, an online market for craft goods, and Square, a mobile-payment service, disappointed investors after their share sales or had to settle for lower prices to complete their IPOs. And headwinds that hit publicly traded technology stocks in late 2015 spilled over into the private market, prompting retrenchments and even layoffs at some startups. Big investors such as BlackRock and Fidelity, which have to estimate the worth of their holdings in quarterly filings, have been cutting unicorn valuations. As a result, many unicorns that sought fresh capital in the second half of 2015 did so on less favorable terms than they had gotten earlier. Some even saw their estimated market value fall below the magic billion-dollar mark. The fuzziness of unicorn math caught the eye of Mary Jo White, the head of the U.S. Securities and Exchange Commission, who warned that pressure to achieve high valuations meant that investors should approach startups with caution.