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ffumarola

Any thoughts on which unicorns are more situated to "weather the storm" and which aren't?

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Flipping through the list, my top 3 are Palantir, Spotify, and Zenefits.

I think Uber or Airbnb will stay and become huge, but they might both be overvalued.

Nice job Founders Fund being in SpaceX, Palantir, Spotify, AirBnB & Lyft.

Another poster suggested Zenefits would be hit hardest as many small/growing businesses fail and most will slow growth. On the flip side, maybe they've reached a sufficient size/revenue that they can "weather the storm".

Why do you see Spotify there? I see their business model as opaque, and it seems like it's their massive funding that has kept it viable this long.

I don't think you are viewing this through the right lense. Valuations are a point in time vs. thinking about a company as a long-term investment - you should more think about which of these businesses has the best long-term potential to become the winner in a massive market, with a strong "moat" that makes it hard to compete, as well as extraordinary margins.

Based on that criteria, Uber & AirBnB should be on top of this list, followed by Palantir and Stripe. Zenefits has not really shown the type of defensible traction that Uber / AirBnB have (right now they are simply a rapidly growing insurance agent with a difficult-to-scale direct sales model). I would not add Spotify to this list - bad margins, and hard to defend against Google / Apple.

I'm not going to speak to their ability to become winners in massive markets, but I don't see how Uber or AirBnB have a strong moat that makes it hard to compete. Both seem extraordinarily easy to switch away from to a competitor. Many drivers already drive for both Uber and Lyft at the same time, and it's very easy for consumers to use both apps. I haven't used AirBnB, but it seems like it would be easy to list your apartment/house on multiple marketplaces.

Both of these businesses have what are called supply-side network effects (https://en.wikipedia.org/wiki/Network_effect), which are not as strong as demand-side effects, but can still lead to dominant market positions. In more concrete terms this means that for you as a consumer, there is no DIRECT additional value of someone else joining the service (you don't care if your friend joins Uber), but the value of the service does go up with every additional supplier that joins the network (for Uber, this would mean shorter wait times when you want a car, etc.) The defensibility of these types of services is created through their supplier network, and their ability to create more value for those suppliers (and consequently consumers as well) that the competition. Uber / AirBnB can then use the revenue from their leading market position to innovate faster than their competition, create more services for consumers, pay for distribution / new customer acquisition, spend money on marketing and awareness, etc. all of which leads to them creating a massive moat around their market that makes it nearly impossible for anyone to compete with them.

Spotify is not like Netflix. Spotify is solely dependent on content creators who know exactly how profitable Spotify is at any time, and therefore how far they can be squeezed for royalties.

Netflix has two major advantages: (1) consumers are far more likely to accept a limited video catalog than they are a limited music catalog, and (2) Netflix has spent a lot of money developing their own content. Could Spotify do the same? Possibly, but probably more difficult to do so.

I think Spotify will in the future generate consistent low profits, much like a utility, and their valuation will likely reflect that.

So agree with you completely.

Any B2B startup where most of the clients are also startups are going to be hit the most.

With the stream of articles like this in the past few days I have been thinking the same thing. I have a feeling that it's already obvious to anyone doing real research — but I'm not paying close enough attention.

Blog post opportunity!

Ah, it would be great to drum a list! I.e. analyze each company, their rhetoric, metrics, and current trending performance, irrespective of perceived valuations.

I almost suspect someone is in the process of doing so right now.

The list of unicorns: https://www.cbinsights.com/research-unicorn-companies

Would definitely love to see some analysts grade that list in terms of whether the current valuation is sustainable.

I wish I understood what it is about Evernote that makes it worth $2 billion, Dropbox $10 billion, or Nextdoor $1 billion. There aren't many companies on that list that have valuations I can understand.

In the most literal sense, "being a unicorn" means nothing more than in the last funding round, they sold X% of the company for $Y, and (100/X)*Y >= 1,000,000,000

For example, if DizruptrCo Inc, sold a 15% equity stake for 200 million, they are a unicorn "valued" at $1.333 billion.

How they come up values for X and Y are part of the VC fundraising black magic. What's being reported here and a lot of other places recently, however, is that VC investors are actually willing to put an abnormally high value on Y in late rounds, because liquidation preferences mean they are very unlikely to lose money. Founders also love this, because it means they get to join the Unicorn Club, hopefully on their way to the Three Comma Club.

This is whats meant by unicorn valuations being "inflated". As always, the people who get screwed the hardest if things go south is the employees. People are starting to figure out, however, that a down round, or really anything short of a spectacular exit, for an inflated unicorn means their options and equity are probably going to end up worthless. This could lead to all the best talent running for the door as fast as they can, death spiral, etc.

Basically anyone at or near profitability can weather most storms

In the immortal words of Mr Schrute, "false."

Profitability depends on a network of flowing capital. When the input (e.g. of venture funding) dry up, profits will vanish in a shockwave.

That is dramatically true for companies whose business model is to provide services and products for either other companies in the network...

...but also for those catering to their employees.

IMHO a lot of 'problems' which seemed to cry out for an 'app' solution are going to turn out to be first world problems no longer pressing when the economy turns.

Then there's the fact that there are a lot of ugly weather patterns nationally and globally brewing...

Hold on, Toto!

Er, what? If they're profitable, the further capital and financing becomes a nice-to-have, not a need-to-have. It's no longer a business killer when it goes away.

The point is that the storm will take their income streams (customers) away from them, making them no longer profitable.

Exactly, and this is especially true for companies that are disrupting existing players by being more efficient (e.g., I would expect more travelers to turn to AirBnB during a recession as a cheaper alternative to a hotel, even if overall travel goes down).

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