Do unicorns exist? In Silicon Valley, they do. Unicorns are tech start-ups that begin with a billion dollars or more of venture capital behind them. In fact, there are more unicorns there than Harry Potter has seen in his world because, at the moment, tech is ripe with speculation. Already, Wall Street is worrying another investment bubble is about to pop, like the dot.com boom earlier. Back then, dot.com companies were those that shifted their business model from bricks and mortar to the internet and had lots of venture capital behind them because speculators were certain the new economy couldn’t fail. But not everyone drank the Kool-Aid. So, when more prudent investors asked, “Where’s the money?” the bubble burst. (“Unicorns and Rain Clouds,” by Nick Bilton, Vanity Fair, October 2015, pgs. 168-177.)
Nick Bilton is among those who fear the bubble may be growing again. The gimmick of the first dot.com bubble was to offer a faster way to get products into customer’s hands. The new start-ups make the same promise but they plan to make money by doing it faster, sometimes in as little as 30 minutes. Uber is one example: a company valued at 5 billion dollars but burning investors’ capital at the rate of half a billion a year. How long, one critic asks, “Can these companies continue to sell a dollar for 70 cents…” (Ibid pg. 174.)
To be honest, the valuations placed on these companies aren’t real. They are speculative. When one venture capitalist asked the CEO of a start-up how he arrived at his company’s valuation, the answer was, “We need to be valued at a billion dollars to be able to recruit new engineers. So we decided that was our valuation.” (Ibid pg. 177)
Despite the apparent similarities with the past, some experts disagree with Bilton’s gloomy assessment. This renaissance is different, they claim. The reason for exponential growth is the mobile phone. It puts the consumer in the palm of an entrepreneur’s hands, which makes it a fast and easy way to grow a market. Besides, as one entrepreneur observed, the new goal isn’t to make millions. It’s to create a better world. (Ibid pg. 174.) A nice thought but not one likely to convince a fry cook at a local bistro. He can’t afford to live in Silicon Valley because the real-estate is so hot.
Regrettably, the fear of missing out (FOMO) may be racing ahead of common sense. In 2015 alone, start-ups have been born and died at the rate of one per week.(Ibid pg. 177.) How does a person decide when to get in or get out of a bubble? Bilton offers one piece of investment advice. Watch the Prostitute Bubble. (Ibid pg. 173) When ladies of the night begin to disappear for want of customers, it’s probably time to sell your unicorn.