Of Unicorns and Bubbles

In addition to profiling the story of the Oculus acquisition by Facebook, Vanity Fair recently featured articles about Unicorns (billion-dollar valuation start-ups), and the technology bubble. Current valuations are (again!) brought about by 7 years of easy money, where you have too much money chasing after assets. This can be good and bad: the abundance of capital has encouraged more people to come out to build companies; however, those that truly add value to our economy, or are profitable, are few and far between.

For an idea of how bubbly the sector is, take Jet.com. The brash four month old e-commerce startup out to take on Amazon.com raised $225m at a $600m valuation, and is going for another round at a $3b valuation! (See WSJ article)

If this is not a bubble, what is? The names are not without reason: Unicorns are mythical and bubbles have to pop sometime. What investors could do would be to understand the companies' business models and financials, if they are truly sustainable and defensible. Are the companies going after something faddish, that can be done without, or something essential, a technology that has the potential to change the world? The man on the street should also ensure that his income is not fully dependent on errand running start-ups, taxi disrupters, or freelance internet work. 

Around half of dot-com era companies such as Amazon and ebay survived the last crash to emerge as the tech behemoths they are today. Perhaps the best test for the companies would be the bursting of this bubble with more rounds of financing, as it would purge the wannabes or "unicorpses", and leave the strongest standing. Another way would be for them to be to go to market, where they will have to reveal their performance numbers and investors can then ascribe a true value to them. The rest of us will just have to be wary as we watch this bubble grow.