We keep hearing about unicorns, these billion-dollar companies waiting in the wings, with amazing valuations and pure paths to disrupt existing technologies. We know them all, we hear of them and we hear of eager anticipation and ever higher valuations for them all, including Uber, Airbnb, Square, Pinterest and so many others that sound and are so exciting and are even ingrained in our lives before we even realized it.
Right now there's a frenzy out here in San Francisco. I am more afraid of being hit by a speeding fastball of money being thrown at a start-up than I am of anything the Giants can throw from the mound. These prospective public companies are being bid up by the same investors over and over again and they scream hot, hot, hot.
But, I say, hot to whom?
Just like what Clint says in that seminal stock movie, Magnum Force, "A man's got to know his limitations." I don't know nearly as much as everyone at Dreamforce, where I am coming from in San Francisco, to determine winners and losers. I don't know which ones are part of a bubble and which ones are ingrained in the firmament.
But I do know one thing they don't out here: I know the stock market and I can tell you that this stock market is uniquely inhospitable to pretty much every single unicorn out there save two. That's right, these venture capitalists can speak endlessly about total addressable markets and the destruction of current competition as we know it. But do they know anything about the real end market? The stock market? Do they know about that kind of demand that ultimately controls the profits the insiders can make?
I do, and to be honest, we don't want any of these companies to come public, because we don't have enough of what these companies really need: money on the sidelines coming in to buy these deals.
Now, let's be sure, I am NOT talking about Airbnb and Uber, which are NOT valued at ridiculous valuations because they are used by so many people that there will be an appetite for both retail investors and institutional investors. These will most likely be bid up huge, not unlike Facebook (FB) or Alibaba (BABA). We have plenty of room for them, particularly if they limit the number of shares offered.
In fact, those two companies will mistakenly become the poster children of people who talk about a bubble brewing. Trust me when I say these two will make those pundits look like idiots because these companies are so pervasive worldwide, growing fast, and they offer so much value as to be unmistakably loved by the public, all of whom could be prospective buyers of newly minted shares.
No, I am not talking about Airbnb and Uber. I am talking about all of the so-called disruptive companies that make for a more shared, algorithmic economy that deliver things or crowd source anything or enable mobile payments and digital wallets and alternatives to everything allegedly disdainful to the average Joe. Many of the unicorns are variants of these kinds of technologies and let me tell you something, they look like a lot of the disappointments that current litter your screens every day.
Memo to venture capitalists and investment bankers everywhere. We are wise to your games. You will tell prospective buyers that if you want a piece of Airbnb or Uber you have to buy shares in Ubermenschen deliveryRatingscloudBankandeating corp, a business that not only brings you what you want and does what you want but is actually a total substitute for you so you can spend more time playing cool video games and pretending to work at your jobs.
Think of it. Look at the money that's been lost in the cool things that you may use: Yelp (YELP), Box (BOX), Twitter (TWTR), HomeAway (AWAY), GrubHub (GRUB), Millennial Media (MM), Rocket Fuel (FUEL), LendingClub (LC) and Etsy (ETSYF). These are the "thanks for nothing" companies, meaning thanks for bringing public companies that ultimately killed our portfolio.
The unicorn companies follow in the footsteps of these companies and these footsteps led right into quicksand that engulfs so many money-losing portfolios.
I think the average investor has tired of exactly these kinds of stocks and without quid pro quos -- buy the couple of winners and take some of the losers -- many of these money-losing companies will find the IPO window nailed shut, boarded up and even, in some cases, armed with claymore mines and quad fifties trained on them.
So, memo to many of the unicorns out there: Never forget that your real end market isn't the consumer, it's the stock customer and in this miserable environment you aren't welcome until you grow not just a horn but some profits, which in many cases are as rare as, well, unicorns themselves.