Horses Dressing Up as Unicorns for Halloween
Trick or Treat! Really the horses have been dressing up as Unicorns for a while, but Halloween just seems like a fun day to call out the emperor’s clothes for the costumes they are in many cases. Since @AileenLee @CowboyVC coined the term, everyone wants to be a Unicorn. And why not? Company press hits go up, customer acquisition gets a boost, hiring is a little bit easier, every investor knows your name, a bunch of outside money follows inside money leading a Unicorn round, possibly on even better terms … the media hoopla brings a lot of attractive benefits.
The media sprinkles so much Unicorn Dust on the anointed, that in order to help companies get the benefit, investors have been willing to get creative about finding a way to make the $1B headline work. Anti-dilution clauses will effectively re-price the current round if the next round is below some mark, or liquidation preferences will ensure that if the company sells the investors get a minimum return before any common stock gets paid out. But a $1B valuation with heavy downside protection via structured round is not equivalent to a $1B market capitalization of a public company that it is being compared to. It is more like an option on upside with a floor, a complex financial instrument which is not reported on because the terms are not disclosed publicly and it is too complicated to make a good headline. The really scary part is seeing other investors match the price without the preference, blindly following the made for media valuation and buying up common vs preferred investor shares at substantially the same price. The media is fortunate they do not have to cover those calls nor do they have to apologize after people lose their shirts for believing the hype.
I worry that so much sport has been made of Unicorn spotting, Unicorn tracking, the Unicorn Club, that it has helped fuel an overpriced, speculative, late-stage secondary, and there will be a hangover after that party. I know, I have been to that party before, having worked in tech through the dot com 1.0 pop. @JPortnoy wrote a great blog post foreshadowing the run for the door that could end that party if we can’t find a softer landing through some sanity. More importantly to me, I worry that this is all noise we should all be Subtracting as we work together to build great companies. I believe startups are at their best when they are focused on the meritocracy of good dev, good design, and good distribution. And as much as I like the whimsy of Aileen’s label, I don’t believe we should build a culture with a party around that label or any other. Media is not here to build great tech companies, so I understand their motivation to bring the noise. Perhaps it is our responsibility as tech company creators to Subtract that noise away.
Photo credit: Smart Pak https://www.smartpakequine.com/