lego-unicorn
Business Management

Sub-prime 'unicorns' need to focus - and not on valuations

For over a year now the hype around Silicon Valley and its global satellites has been about unicorns – pre-IPO companies with a valuation of $1bn or more. So rife has this become that it sometimes seems that a new unicorn pops up every day and there are even unicorn subspecies like decacorns ($10bn-plus valuations). Where did all this come from? And where will it end? I spoke to George Mathew, the president and COO of business analytics company Alteryx, and a man who has seen all this sort of thing happen before in roles that have included being the boss of SAP’s BI unit and an early-stage employee of Salesforce.com.

Mathew takes a sceptical view of the unicorn phenomenon and takes aim at those entrepreneurs who “look at valuation at all costs”. He is especially scathing about what he calls the “subprime unicorns”.

“I worry less about the companies that are tens of billions in value; those companies that have reached such a rarefied air will figure out some way to profitability. The bigger question is the subprime unicorns: the 40 or 50 that are valued at [almost] exactly $1bn – how is that possible that they’re exactly at that valuation?”

So who is to blame? The rapacious VCs?

“I don’t think it’s the investors at all but the founders and entrepreneurs that have created a narrative in their own minds that this valuation is the be all and end all of success and unless I get unicorn status I don’t get to hire this next person. It’s a very bad situation that they’re putting themselves in by going after that status.”

But surely those investments are cooked up in part by the big-stakes investors? Mathew relents a little, saying they also play a part but he also contends that there are others closer to (my) home.

The complicit are “a mix of the entrepreneurs/founders, leadership teams, the investors and also the media [driving] quite ephemeral valuations … the subprime unicorns have taken funding without a real understanding of what their path to profitability is”.

A better approach for them would be to look to the long term, Mathew says.

“Our belief is that customers are first and as we see our customers succeed we build a sustainable and profitable business. That basic mechanism has somehow been forgotten.”

That said, Mathew is no enemy of those companies that can go on long runs without turning a profit, like Amazon Web Services or Salesforce.com.

“Amazon and Salesforce have been pretty focused on growing their core businesses and I don’t think their investors are not aware of that. They can reduce expenses and have a path to profitability very, very quickly. Both were great about focusing on their customers. Salesforce defined customer-centric business and Amazon Web Services is rewriting the rules of cloud computing and both of have very strong value propositions.”

Mathew believes that many of the “sub-primes” will continue to be “systematically devalued” unless they recognise that business is a long haul. Also, the current markets will not allow them to cash in with a “get in, get out” philosophy.

However, Mathew does see today’s scene as very different to that of the first dotcom bust – and not just because today’s much-hyped companies have business plans that don’t strain logic.

“The thing that’s dramatically different is a lot of the companies back then were trying to go into the public markets and, if you look at the boom and then the bust, retail investors were substantially impacted by companies that had these runs upwards and downwards. The difference in this round is that much of the overvaluation and [reduction in valuations] will occur outside of a retail public investor forum so this will be more managed.”

For Mathew, recent revised valuations of pre-IPO companies suggest the markets are already “starting to correct and rightsize”.

“Don’t get me wrong,” he concludes. “There will be some outsize winners. If we look at what the ‘sharing economy’ looked like even four years ago it’s a fundamental different way we all live and that fundamental disruption will leave some sort of value. But I don’t think that will be uniform.”

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Martin Veitch

Martin Veitch is Contributing Editor for IDG Connect

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