Apple just bought a $400m Xmas present called Shazam. Three years ago, Shazam was valued at $1B by investors. That means its value has fallen 60% in three years, while it has grown in size, and NASDAQ has risen almost 50%.

How is that possible?

And from a strategic buyer like Apple who can logically pay a premium to what any financial investor would offer.

Fabricated Unicorns

The answer is that Shazam’s valuation was a fiction. A recent study suggested many $1B ‘unicorns’ are worth far less, with several being worth only half their ‘unicorn’ price tag. Other evidence comes from IPO’s of Square and Blue Apron, which raised money at $6B and $2B respectively, only to go public later at far lower prices. In both cases the companies gave certain investors more shares after IPO to compensate them for investing at too-high a price to begin with.

This of course begs the question what price the investors actually invested at, if they get more money back so soon after investing?

Companies raising later-stage rounds often want the fund-raises to be ‘statement rounds;’ raising money from well-known investors, raising very large sums, or crucially raising at astonishingly high valuations. Founders believe this gives them validation, prominence and market ‘buzz’ crucial to continue growing, hire the best, and anchor for maximum IPO value. What ends up happening in these rounds is investors don’t actually buy shares in the company so much as they buy a financial instrument sold by the company. A $1B unicorn value ends up not being the company value, but rather the value of a financial instrument sold by the company.

As a simple example, if I sell you a share in my company for $10, but promise if I go public or sell the business later for a lower price/share, I will make up the difference to you (‘downside protection’), I am effectively selling you a share at less than $10. This is because I am giving you BOTH a share AND a promise to cover your losses in return for cash of $10m. When I value my company, I count the $10 as the price of selling you a share, crucially ignoring the promise of safety. This is completely misleading, but the majority of unicorns have done a version of exactly this.

Fabricated Unicorn Lists

Not only are many unicorn valuations fabricated, the meaning of unicorn is increasingly stretched to breaking point. An annual investment banking study suggests there are 47 unicorns in Europe. Except, there aren’t.

A unicorn is and always has been an independent private company worth $1B+ (think AirBnB, Uber, Pinterest), a huge achievement understandably so rare it deserves exceptional praise. Yet here are the top 10 European ‘unicorns’ in this banking study:

  1. Spotify – truly a unicorn of the first order
  2. Skype – they are owned by Microsoft, they fail at the first hurdle
  3. Zalando – they are publicly traded, not privately held, in the US they would be called a public tech company, categorically not a unicorn
  4. Markit Group – they were merged with IHS after being public for some time, again a successful public company not a unicorn
  5. King Digital – they went public and got sold, a great story, no unicorn
  6. Rightmove – they are also public, where are they getting this list?
  7. Supercell – they were acquired by Softbank, why are they even on here
  8. Yandex – a public Russian company, by definition no unicorn
  9. Pokerstars – a bona fide unicorn
  10. RocketInternet – they are public, check the German exchange ticker before ‘unicorn-ing’ them

So of the top 10 European ‘unicorns’ only two (Spotify, PokerStars) are private independent $1B+ value companies.

It probably wouldn’t matter if 1 or 2 out of 10 were sketchy, but the list includes subsidiaries of larger companies and public companies which have no business being on such a list. This cheapens enormously the achievements of still-private entrepreneur CEO’s and masks real challenges in building large European companies under a veneer of ‘achievement.’

Since $1B is such an important achievement for so few private companies, we believe it should be celebrated for its immense difficulty, not cheapened by lumping in a myriad of non-unicorns to make up the numbers.

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