Pattern Recognition, by Ian Sigalow


The Year of the Undercorn

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The Year of the Undercorn


“When a venture-backed company breaks through the $1BN valuation mark, we call it a Unicorn. When the same company falls back below the $1BN threshold, it becomes an Undercorn.”

-Dan Primack

In 1974 Wilshire Associates launched an index with the aim of tracking every public company headquartered in the US. They called it the Wilshire 5000, where 5,000 was roughly the number of public companies at the time. At the end of the first Internet bubble in 2001, the Wilshire 5000 had swelled to about 8,300 companies. Today, the Wilshire 5000 is a pale shadow of what it once was – only 3,700 companies remain.

A lot has been written about the decline of the public markets. Nonetheless, companies still go public every year. In 2014 almost 100 venture-backed companies successfully IPO’ed. The odds are roughly 1-in-1,000 that an investment will go all the way from Seed to IPO and it takes, on average, 11 years to make the trip. But if you think going public is hard, stop and consider the hurdle to staying public.

In order to stay public, companies need predictable revenue, operating leverage, high barriers to entry, growing markets, and on and on. Otherwise you end up among the walking dead – valued for the cash on your balance sheet, traded by appointment, burdened by all the costs of being public but without any of the benefits. Great engineers don’t join walking dead companies, so technology businesses have a particularly hard time reversing this situation. But they are not alone. The average lifespan of an S&P 500 company, representing the best blue chip stocks in the world, has been cut in half since 1974 and is now down to just 18 years.

Now consider the contrast between the public markets and the late-stage venture market.  The number of privately-held companies valued at over $1BN is at an all-time high.  There are currently 40 venture-backed start-ups valued at over $1BN in the private markets, and 27 of these companies are headquartered in San Francisco. Investors assume that each and every one of these Unicorns will have a successful IPO at many multiples of its current valuation.

In case you believe the public market will absorb these companies at a premium, here is a point of reference. There are only 71 publicly-traded technology companies headquartered in Northern California with a market cap of at least $2BN… and this list is declining at the same rate as the market in general. Meanwhile SF-based VCs have been minting similarly-valued companies, in the private markets, at a rate of one per month for the past two years.

Earlier this year one of my partners made the comment that we are witnessing “private market intoxication and public market sobriety.” I have been struggling to explain why this is happening, and I think the answer lies in a structural difference between VC investors and public market investors.

Consider this example – a hedge fund decides to invest in a publicly-traded grocery company. The hedge fund hires data scientists and builds a panel to track consumer spend. A single panel can tell you how Whole Foods is doing relative to Fresh Market based on the amount their customers spend, how many times per week their customers shop, whether they are successfully converting users from less expensive groceries, average revenues derived on a store-by-store basis, and on and on. The information is not perfect, but it is accurate enough to take a long position in one company and a short position in another. Eventually the better business appreciates and the worse business declines. In the meantime the hedge fund is perfectly liquid, can cancel the trade at any time, and has a long time to make up his or her mind.  This process, when repeated thousands of times, results in very efficient pricing.

Now consider the venture market. A grocery start-up like Instacart meets with a half dozen Silicon Valley VCs. If a VC wants to win the deal, he or she has to move quickly, lest the company decides to go with someone else. A VC can’t use short selling to balance the position. A VC doesn’t employ data scientists to build proprietary consumer panels. And if the VC wins, he or she is locked up, potentially forever, unless the company goes public or gets bought for billions of dollars by the two or three companies that can afford to make such an acquisition.  Also assume that the VC has lost a couple of deals in the past (there are five losers for every winner in this example) and in hindsight has seen companies go on to become huge outcomes.  This process, when repeated thousands of times, results in very inefficient pricing.

One interesting fact is that the same research that determines whether Whole Foods will prevail over Fresh Market can also determine the fate of Instacart. And if grocery is not your bag, how about predicting if Uber will prevail over Lyft? Or answering the question of whether ZocDoc will be as valuable as OpenTable, even though consumers visit doctors 1/100th as often as restaurants. And perhaps someone knows whether Palantir should be valued as a software company or if it really scales more like a consulting firm. I have a feeling that the smartest investors have solved these riddles already while they patiently wait for the Unicorns to go public.

Meanwhile we keep stumbling upon panel companies in our internal research and have decided to fund the two we liked the best. The first is AppAnnie, which is the definitive panel for mobile application data. The second is Earnest, which is the definitive panel for consumer purchase data. Both companies provide large, clean, 100% opt-in datasets. We use them on virtually every consumer investment we do. Perhaps one of the positive outcomes from this blog post is that more VCs will pay attention to these services going forward.

So back to the Undercorns…

The “$1BN+ valuation private round” is a relatively new phenomenon.  I am sure that a few funds will make a killing if they are smart enough (or lucky enough) to bet on the next Google, Facebook, or Twitter pre-IPO. I also think that this market will last through 2015 and potentially into 2016, because right now everyone is cautious.  In my experience valuations only reset when everyone thinks they are invincible.

That said, in the past year we saw RocketFuel, Chegg, Millennial Media, Jive,, and Horton Works earn the Undercorn distinction. There are a lot of other companies that are trading below their private market valuations (New Relic, Zynga, Groupon), but these companies are still valued at over $1BN so are not technically Undercorns by the Primack definition.

My theory is that we are going to see more Unicorns in 2015, followed by Undercorns in 2016. It takes a long time for companies to burn through large funding rounds, but bad businesses generally do not succeed in the long run.  2015 promises to be an exciting year under any circumstances, and I am looking forward to watching this all play out.


Ian Sigalow

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

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