Cracks are starting to form in the edifice of unicorn company valuations. Lately, unicorns have been taken to task by various op-eds, including ones from The Wall Street Journal and Fortune. Now, the IPO market is starting to get chilly, as several IPOs have been delayed or revoked altogether. Unicorn valuations at higher rates than investors are willing to pay could spell trouble for investors.
First Data, one of the biggest IPOs yet this year, ended up with a price below its intended range. Many IPOs are simply trying to go public before they’re actually ready to do so. Bullish investor Henry Kravis urges companies not to go public unless they know they’re ready and have a very good reason, but companies still want to go bold, often to their detriment.
For example, DropBox Inc. has bolstered its valuation by $6 billion since last year, now priced at $10 billion, but investment bankers worry the company can’t go public with so high a value. Out of 49 venture-backed tech companies that have had IPOs since the beginning of 2014, 11 are trading at lower values now than they were then.
“We’re seeing financing rounds where founders are coming back and lowering the price over and over again,” says venture capitalist Bill Gurley. Because the unicorns are so heavily overvalued, when the rest of the market catches up, investors could be in real trouble, as they stand to lose significant capital.
But the bloated prices of unicorn companies aren’t all necessarily bad news, says Leslie Pfrang, principal at leading IPO advisory company Class V Group. She says that unicorns and investors have nothing to worry about because there’s plenty of capital out there, even if all the unicorns hit the market at once.
One good piece of news about a company’s decision to go public is that it has to be more transparent and forthcoming about how it makes money and how it operates its business, which, if the company has a solid business model in place, could be a good thing—but potentially deadly if it doesn’t.
Investors should be wary, as always, but only time will tell what’s in stock for unicorn companies and their IPOs.