Basis Points: A View From the Hills

Unicorn Ventures

December 2015

Unicorn Ventures

by admin on December 15, 2015

During the Renaissance, a mystical animal was a common subject of European folklore. The unicorn was said to be colored in a white so pure that other colors could not penetrate it. Their protruding ivory horn was said to have magic healing powers and could make even the most bacteria infested water source potable.

The hunt for the animal proved elusive for master huntsman and common hunters alike. Somewhere along the way, it became accepted wisdom that only someone totally pure of heart and soul could ever capture this wild woodland creature. Whether the unicorn was actually real or not is hardly the point. The animal has lived on through generations in art and literature and serve as a regular symbol for organizations and governments. The unicorn can be found on the coat of arms from England to Nova Scotia.

More recently, a different kind of Unicorn has made its way into investment lexicon. These unicorns have mythical money making powers they refuse to share with the world at large. A unicorn is a private company (not traded on the stock market), that has a valuation of over $1B. These investment unicorns were once as rare as the animal itself, until a perfect storm of increased regulation of public companies and increased demand for large private enterprises made these rare Unicorn sightings more prevalent.

Rise of the Unicorn

While some of these early unicorns (Facebook, Twitter, and Alibaba) have submitted to the capital markets through initial public offerings (IPO’S), a large portion have continued to exist in non-public form long after the time when most companies would have gone public. Uber, Pinterest, Snapchat and a host of other companies from the pyramid below have transacted large stock offerings outside the public market at valuations of over $10B. To understand how rare that is, there are currently over 100 companies in the S&P 500 that have valuations of less than $10B, including Bed Bath and Beyond, Mattel, Auto Nation, and Whole Foods Market.

Unicorn-Ventures-Chart

Beyond Series A

While it is not unusual for venture capital funds to provide the early funding (series A or seed money) for would be unicorn concepts, they usually limit their exposure to a couple of rounds of funding. VC’s use the weapon of the purse to gain seats on the board and shepherd the company toward the public markets once enough demand exists for the company stock. Increasingly, these VC’s have either been more willing to hold onto these companies past the point of sufficient demand or have had less influence on the direction of the company. To date, this strategy appears to be paying off. Pinterest raised $367M in March of 2015. The price of the shares in the offering was double the mark set less than a year earlier.

Closed to New (Small) Investors – Mostly

The door to the unicorn opportunity has remained mostly closed for all but the largest investors. Investors may visit Pinterest regularly, take an Uber in lieu of a taxi, or try in vein to follow their children’s activity on Snapchat, but what they cannot do for the most part is invest in these ideas. Investors who follow a purely passive investment strategy are frozen out of the market entirely as they have no means to own shares that are not publicly traded.

There are some actively traded mutual fund managers that have embraced the unicorn concept. One of these is Will Danoff, manager of the Fidelity Contrafund. Danoff enjoyed huge success with his early purchases of Google and Facebook and has followed that up by taking stakes in some of the privately held issues currently occupying unicorn status, including Uber and Pinterest. While Danoff and a few others have embraced the concept of chasing the next unicorn, their funds are still extremely limited in exposure with most having around 2% of assets allocated to them.

Funds that Give You A Ride On A Unicorn

A trend that began before Facebook went public has gone wild in the age of unicorns, with dozens of mutual funds reaching for pre-ipo investments they expect to be market darlings. The funds listed below, mostly available to everyday investors, are among those that have committed at least a portion of their assets to private companies.

TICKER FUND SALES LOAD ASSETS ($MIL) % IN PRE-IPO TTM PERFORMANCE NOTABLE UNICORN BETS
FCNTX FIDELITY CONTRAFUND NONE $103,400 2% 5.90% BLUE APRON, TWILIO, PINTEREST, UBER
FDGRX FIDELITY GROWTH CO. NONE 37,200 2% 8.60 UBER, SNAPCHAT, CLOUDFLARE
FBGRX FIDELITY BLUE CHIP GROWTH NONE 19,300 2% 7.50 UBER, APPNEXUS, MEITUAN, BLUE APRON
PRNHX T. ROWE PRICE NEW HORIZONS FUND NONE 15,500 2% 8.60 ATLASSIAN, EVENTBRITE, WEWORK
PVSAX PUTNAM CAPITAL SPECTRUM NONE 8,600 1% -3.20 UBER
VWUSX VANGUARD U.S. GROWTH NONE 6,200 1% 9.50 UBER, PINTEREST, CLOUDERA, WEWORK
HGOIX HARTFORD GROWTH OPPORTUNITIES NONE 4,900 6% 12.90 DOCUSIGN, DRAFTKINGS, HONEST CO., PINTEREST, UBER
PRGTX T. ROWE GLOBAL TECHNOLOGY FUND NONE 2,106 1% 13.8 FLIPKART, DROPBOX, COUPA SOFTWARE
ITSAX TRANSAMERICA GROWTH OPPURTUNITIES 5.5% 448 2% -8.90 DROPBOX, PALANTIR
DGFYX DAVIS GLOBAL FUN NONE 385 4% 0.70 DIANPING, DIDI KUAIDI

Not a complete list of each firm’s Unicorn Investments as of most recent portfolio disclosure funds is closed to new investors.
SOURCES: FUND FLINGS, MORNINGSTAR, FORREST RESEARCH

Not everyone is enamored with this new wave of large private companies. As valuations have increased, in some cases dramatically, some investors have begun to question the real value of these companies. The majority of the companies in the unicorn universe focus solely on growing revenue, subscriber base, or product adoption. When they burn through their cash, they go back to investors for another round. As the price of the stock continues to go up, it is quite possible that the funding resolve will dry up.

Concerns also abound based on the data available to determine valuation. One of the prime benefits of remaining private is the reduced compliance and regulatory burden on the company. For early ventures the ability to concentrate on the long-term without the unnecessary compliance burden is generally viewed as a good thing. With companies this large, raising money more frequently, the ability to do so without quarterly earnings calls, and market dictated regulatory requirements is an open question.

The End or the Beginning

Some industry followers point to the recent failures of smaller, well-known start-ups HomeJoy and Zirtual to name a couple along with the combination of some publicly traded companies, (Home-Away) as a signal that the easy money raising days for the unicorns are behind them. Proponents (investors) of the unicorns view this sea change as a good thing, forcing the companies to focus on their businesses and take steps to maximize profitability.

These unicorns are likely to hit some bumps in the road along the way and it may be difficult for fledgling companies to achieve unicorn status with the amount of venture capital committed to the already existing universe. Investors are right to take notice of the trend and to examine opportunities to take part, albeit in a limited way in the rise of the unicorn.

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During the Renaissance, a mystical animal was a common subject of European folklore. The unicorn was said to be colored in a white so pure that other colors could not penetrate it. Their protruding ivory horn was said to have magic healing powers and could make even the most bacteria infested water source potable. The…

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