The new obsession of the VC world is Unicorns, those pre-IPO tech startups valued at $1 billion or more. CBInsights has composed a good list of startups that have achieved unicorn status which seems to be growing on a daily basis. There is no doubt there are many great companies in this list, but I believe several of these valuations have gone way ahead of themselves. I have discussed in the past why valuations don’t reflect real value but when I see some of the companies in the unicorn list I can’t help but raise an eyebrow.
I don’t know what is more difficult – trying to spot a winner, or trying to predict which ‘hot’ startup is not that hot. I am going to list a few startups at the top of the unicorn club that I think are overvalued and take the chance that several years from now I will be publicly humiliated when it turns out I was dead wrong. I’d love to get feedback on why I am wrong, or what else am I missing.
Snapchat at $15B – I can see a case for how Snapchat is worth $15B. But my overall point is that there will most likely be multiple winning messaging platforms in mobile and not necessarily the kind of “winner takes it all” dynamic we have seen in the past with Facebook. Also, the amount of time that people can spend on social networks and messaging platforms is limited. So every minute that users are spending on Snapchat is a minute they don’t spend on Facebook / Whatsapp / Instagram. Therefore, in theory, if Snapchat is worth $15B then Facebook should be worth $15B less today.
Dropbox at $10B – I am a big fan of Dropbox and use it extensively. However, I believe the fierce price war that the cloud storage world is undergoing is just the beginning. Only a few days ago Google announced that the free photo app has unlimited cloud backup of photos and videos. The main issue with Dropbox is that it needs to charge for something that other large players such as Google, Apple and Microsoft will offer for free in the long run to get users hooked into their platforms.
Spotify at $8.4B – This is another product I love. However, I find it hard to see a hugely profitable music distribution company emerging in a space where “content is king”. Unless Spotify becomes a main source of revenue for record labels and artists, it will keep getting squeezed with high royalty rates (currently 70% of revenue). Now if I were a large music producer, I would work hard to support Spotify’s rivals so I am not dependent on a single distribution platform.
Square at $6B- I can’t understand how a low margin business can command such a valuation. Without seeing the numbers, I assume it is very difficult for Square to recover the high cost of acquiring SMB customers given the low margins. The real winners from Square are the credit card companies which are holding them hostage and collecting the majority of the revenue. Not less frightening is the intense competition from companies like Apple, Google and Paypal that have an inherent advantage of owning the underlying platform or payment solution.
WeWork at $5B- WeWork, the co-working space startup, has transformed the way people think about shared work space. Moreover, they have a great business model breaking large spaces into small offices and leasing them at relatively high rates by not adhering to the common square feet listing. However, at the end of the day it is a game of Real Estate pricing arbitrage which will require a lot of effort to sustain, especially if interest rates go up or tech funding dries up (most likely both will happen simultaneously). Therefore, I find it hard to understand how the company can get away with a high flying tech multiple.