Why Silicon Valley’s ‘unicorn problem’ will solve itself

Why Silicon Valley’s ‘unicorn problem’ will solve itself

The rise was like a tech startup fairytale. Within three years of founding, this unicorn company had raised more than $1 billion in venture capital — closing an astonishing $950 million in its final private round at a nearly $5 billion valuation. Revenue growth was skyrocketing from $30 million in year two to $713 million in year three and a run-rate of $2.6 billion in year four. On the strength of these meteoric numbers, the IPO was over-subscribed, pricing well above their $16-$18 range and raising another $700 million. Shares popped 30 percent on the first day of trading. It was the largest Internet IPO since Google. Just as quickly, the fairytale ended. Amazon, Facebook and Google itself aggressively entered the market. Investors grew skeptical the company could live up to the lofty expectations around users and revenue. Expenses ballooned in pursuit of growth, exacerbating concerns the company could generate long-term profit. Within a year of IPO, the stock price plunged 90 percent, wiping out nearly $15 billion of shareholder value. The unicorn in this fairytale-turned-nightmare? Groupon, in 2011. Not only did Groupon’s valuation implode, but the entire daily deal category virtually disappeared. The No. 2 vendor, LivingSocial, after raising nearly $650 million in its own right, never made it to its rumored $10-15 billion IPO. The window was closed. Amazon, who invested $175 million in the company, would later write down that investment to essentially $0. Another daily deal site, Gilt Groupe, sold itself for $250 million after once being a unicorn with a $1 billion valuation. Today, five years later, the category and the companies are all but gone. But the impact on other unicorns or the broader financial markets? Effectively nothing. There has been a lot of doomsaying lately about the “unicorn problem.” Fortune’s recent cover […]