Recently, many smart people (investors, analysts and bloggers) have begun ringing the alarm bell: startups are overvalued, and since everything that goes up is bound to come down, these startups with massively inflated valuations will crash – hard.
Here’s a sample of the headlines we’ve been seeing in just the last few months (for the uninitiated, “unicorns” describes companies whose valuation exceeds $1 billion. They’re supposed to be rare, just like unicorns.):
“Are Tech Companies Overvalued? Top Investors Think So” – TechCrunch
Legendary VC Fred Wilson of Union Square Ventures and John Lilly of Greylock both argue at startups are massively overvalued, with Wilson lamenting, “I think in general the public market valuations got too high, and then that went down into the private market, and the private market valuations got too high, and now the public market valuations are correcting, and now there’s a bunch of companies that raised money at really high valuations in the private market and they’re going to have to deal with that.”
“Top VC: A lot of tech startup failure coming in 2015“- Fortune
Bill Gurley, another legendary investor in the VC community who has led investments in companies such as Uber, NextDoor and OpenTable, thinks that the private startup investment is overheated, and after a relatively smooth past few years, we’ll start to see some of the 80+ unicorns that exist today collapse. Gurley’s primary area of concern are the privately-held companies “that raise lots of funding at higher and higher valuations eventually build up tons of liquidation preferences.”
“Disruptions: Are Eager Investors Overvaluing Tech Start-Ups?” – The New York Times
Well-known tech writer Nick Bilton argues that in the startup market space,”enthusiasm is once again getting ahead of reality” and that VCs are making numerous bad bets (to the tune of $200 million in some cases) because they’re under-pressure to deliver a return of 10 times on investments (these enormous returns would compensate for all the other companies that promised a return of 10 times but ended up tanking instead).
So, if there’s one thing we learned from all the smart people who rang the alarm bells, it’s probably this: most startups are insanely overvalued, and many of these startups’ valuation on paper will never materialize in reality.
But for all the brouhaha surrounding the unicorns lately, most investors seem to be oblivious to one fact: the value of every tech unicorn in the United States combined is still less than one Facebook.
Research compiled by CBInsights highlighted that the combined worth of all U.S.-based tech unicorns is $211 billion. Facebook, on the other hand, is worth $229.99 billion.
Take a look at this graph:
The highlighted bar represents the combined value of all U.S.-based tech unicorns.
Here’s a table that compares the cumulative worth of all 57 U.S.-based tech unicorns relative to other public tech companies (for example, unicorns are worth 7.94 Netflixs, 7.79 Intuits, or 1.19 Amazons):
In other words, if all of the U.S.-based tech unicorns we’ve been hearing about fails, it’d only be equivalent to 0.29 Apples.
Reality is often different from what is portrayed in the media: even if all these unicorns fail, it most likely won’t be the end the world (even though those in Silicon Valley want you to believe so…). Breathe easy, people.