The Symbolic Value of Billion Dollar Valuations
By Toppan Merrill
1 min read | Industry Insights Insights Home

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The unicorn ranks have expanded rapidly in recent years, with more than 200 companies in the US alone now holding the vaunted status, and more abroad. This expansion, together with the ongoing wave of potential unicorn IPOs, raises the question: Does unicorn status even matter anymore? 

To examine what lies ahead for unicorn companies in the near future, Toppan Merrill commissioned Mergermarket to speak with four experts.

Toppan Merrill question: With the largest tech companies now boasting valuations hundreds of times higher than US$1bn, do you think the number still carries symbolic value? Leading industry experts weigh in...

Lise Buyer, Class V Group says: At the proverbial end of the day, valuations are always meant to reflect the discounted stream of projected future earnings for companies. Admittedly, sometimes one has to look very far into the future to make the math actually work, but any round number valuation really reflects the theoretical economic prospects for the business. Numbers like a trillion garner headlines, but aren't meaningful —or generally sustainable  — other than as correlated to the underlying fundamentals of any one business.

Kevin Kennedy, Simpson Thacher adds: Clearly the US$1bn valuation mark needs to be inflation adjusted at some point. Inflation can be cost of living, but it can also be just the number of companies out there. The name is about rarity, right? A unicorn is something so scarce that it is actually mythical. If every other company has a US$1bn+ valuation, then it's more like a mule and less like a unicorn.

All the same, I think people will still talk about it. I don’t know if the US$1bn nomenclature was so much about the valuation as it was about the phenomenon of a lot of really robust private companies that hadn't yet gone public. In my mind, it was always less about how much they were worth and more about the fact that there is a group of companies that would've gone public much sooner in their trajectories in other eras than these folks have chosen to. 

Eric Sibbitt, O'Melveny & Myers weighs in: I think the US$1bn valuation still carries weight as a significant mark, but it doesn't generate as much of a wow factor as it did at one point in time. Valuations have increased overall. There used to be a lot of attention in the media tracking the increasing number of unicorns, but I’d say it doesn't create as much buzz as it did a few years ago.

Sean Ammirati, Tepper School of Business says: I think it's important to go back and remember where the term unicorn was originally coined. I’m pretty confident that the first time that handle was added to startups was in 2013 when Aileen Lee, who is the founder of Cowboy Ventures and was at Kleiner Perkins before that, wrote an article for TechCrunch called “Welcome to the Unicorn Club: Learning from Billion Dollar Startups.” The point she was trying to make was that for a Series A, US$400m venture fund, which is a very standard type of VC fund, they needed companies to reach an exit at over a US$1bn valuation for them to hit their return targets for investors. She walks through the math on why this is the case, and for what it's worth, I believe that math still holds to this day.

So in that sense, the US$1bn valuation is still very relevant for that style of venture firm. I believe  it's still the goal for Series A investors managing multi-hundred- million-dollar funds. If someone is going to invest in a US$400m dollar fund, they need to return multiples of US$400m, and remember that the return curve of a venture fund follows a power law curve. That means that in most of the best- performing funds, the best investment in the fund drives as much of a return as the rest of the deals combined. So if that is the profile these investors should be expecting and you've got US$400m to invest, you need companies to exit well north of US$1bn.

To view the full report, click here. 

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