Unicorn Valuations – are they topping out?

It was just reported by the media that Uber is now valued at $62.5 Billion based on its most recent investment round of $2.1 Billion. (Link to Venture beat article).  The question always arises – is this too high?  Also, is a bubble forming for these unicorn companies with that are still private but have values of $1 billion or more.

The answer is … we don’t know.  One, it’s hard to make a judgement for an entire category of companies based on such little information due to them being private.  Two, we can’t make a judgment on a category based on one company.  In Uber’s case, there is obviously a lot customer value being built as it truly does add to the competitive taxi landscape.  We don’t have quarterly results on sales, profits, cash flow and the like to provide use much info.  We also don’t know what other industry/market segments Uber may be entering as it treats its Peer-to-Peer technology as a platform.

With that said, there are a number of companies that one could look at and say, that many are probably too richly valued.  This is confirmed as some private equity funds and mutual funds have been writing down their valuations of the their investments in a some of the ‘unicorns’.

There are always a couple of key things to note here.  Valuation isn’t necessarily a confirmation of a successful or unsuccessful business model.  A company may have an incredibly successful model generating financial value but its stock price may not be accurately representing the reality due to the demand for the stock by investors.  Amazon took over a decade to generate positive profitability that was commensurate with its relatively high stock price.  It appears that with its Web Services and the scale its operations are reaching, the profits are coming.

A second thing to note is that we won’t know the realistic price until these  companies go public and have a widely held stock traded on a big public market.  The values quoted in the news media with the unicorns are arbitrarily negotiated between large investment groups and the companies where the percentage ownership sold is minimal for the large dollar investment.  The later stage investors sure hope that some day the company does an IPO that will allow them to cash out there investment at a nice premium for a short amount of time.  Key is that the IPO market is hot and provides a successful exit.

We went through something similar like this in the late 1990s.  There are differences but one should always heed getting too worked up over valuations until they can obtain enough information on the company and there is a tradeable stock with lots of buyers and sellers.

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