Look closely at this Brueghel ‘Instagram’ from the 1500s; at the bottom right corner of this holiday snap is a figure that has just crashed into the sea. The painting: The Fall of Icarus.
We now see a ‘class’ of Icarus companies –overvalued ‘features’ that are a subset of the famous $1b+ ‘Unicorn’ club, that are destined to crash into the sea having flown too close to the sun.
Our argument is this:
Microsoft’s market value at IPO was $500m. Cisco’s was $300m. Starbucks? Just over $100m. Today 100+ private companies are valued at $1b+. To warrant this, each must have enduring long-term value, derived from either being a global ‘platform’ company, or at the very least a very high value product business.
However, a few ‘unicorns’ aren’t platforms or even serious high value products. They are at huge risk of devolving into becoming ‘features,’ embedded within other platforms or products, or incorporated into competitors’ next releases. This group of ‘Icarus’ class start-ups fly very close to the burning sun: simultaneously attracting ‘platform’ company valuations while shouldering the huge business risk of becoming low-value add-on features during the next few years.
Inevitably our Icarus list will be controversial but we highlight Pinterest, Shazam, Evernote and Snapchat as unicorns with a serious long-term risk of being embedded out of independent existence.
Of these, the unicorn with the greatest feature-risk is probably Shazam. A discovery-based app reliant on huge amounts of customer data is best deployed, or owned and developed, by an existing platform player. That player can leverage its own installed base to provide the very best discovery experience across music, TV or other media. Surely this would dictate the best Shazam-like experience would come from Apple or Google or another broad-based vendor, and never from an independent whose data and development resources can never be as broad.
In the case of Pinterest, nearly $600m of venture capital and a $5 billion private valuation requires the business achieves a $10billion+ valuation pretty quickly. Ad revenue from ‘promoted pins,’ or commerce revenue from buy buttons, seem the most likely revenue sources. But Facebook and Google are already garnering the lion’s share of new mobile ad spend, leaving less room for ‘newbies.’ Commerce revenues need to be very large to be worth anything; even $500m of product sales hardly validates a $1 billion company value. Set these challenges alongside the innovation treadmill; Twitter has shown how much damage a company valuation can receive if innovation slows down for even 6 months, so execution risks are huge.
This doesn’t mean these companies aren’t valuable; engaging 20-25% of online users as Pinterest does has strategic value to a larger player. But normally a company whose offering is at serious risk of being a feature needs to prove a lot more before commanding $1 billion+.
Put another way, a business whose offering is at risk of becoming a feature is only worth $1 billion when it proves it’s worth $1 billion.
Posted by Victor Basta @MaExits