This sounds impressive: There are 88 private startups each worth more than $1 billion in Silicon Valley. This is more than any other region worldwide. But some are saying this is actually troublesome.
And while they are worth $1billion, many of them are going public without yet making a profit. Lyft and Uber are just to examples. This trend makes a turn for investors and doesn’t bode well for smaller startups.
“If today’s unicorns turn out to have created most of their value for private investors before floating, the public will take note,” The Economist reported.
The market for sure has taken note. “The latest generation of Silicon Valley startups is now sprinting to the public markets, raising hopes among large and small investors eager to invest in these high-profile, fast-growing firms. But the class of 2019 is far different from its predecessors. These companies, including gig economy darlings like Uber and Lyft, are generally older and larger, powered for years by billions of dollars of private money that has reshaped the startup world,” The New York Times reported.
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Because these startups are mature it could result in wild swings meaning both big gains and big losses for new investors. The maturity of these companies could also mean that the fastest phases of growth are already behind them.
“As a result, there is an increased risk that in this wave of tech I.P.O.s, an elite group of investors, like sovereign wealth funds and venture capitalists, will grab a larger share of the winnings compared with new investors,” The NYT reported.
“Individual investors are going to get in too late,” Jason DeSena Trennert, managing partner at Strategas Research Partners, told the NYT. “They’re going to be the last investors in, and that’s the concern.”
Among those 88 are Uber and Lyft. Ride-sharing giant Uber has raised more than $20 billion during the last ten years. While Lyft has priced its I.P.O. at $72 a share, raked in $4.9 billion over seven years. Meanwhile, both companies have faced protests from their drivers over low pay. 2020 presidential candidate Bernie Sanders has backed the drivers in their demands for more money, especially in light of the IPOs.
Over the last few years, the profile of startups in Silicon Valley have changed drastically. “Mutual funds and hedge funds — the typical investors in a start-up’s I.P.O. — began buying stakes in large private companies as a way to build up larger stakes before the new businesses went public,” The NYT reported.
As a result, venture capital investments into American companies grew to $99.5 billion in 2018, the highest level since 2000, according to CB Insights. Valuations of startups have boosted to unique heights due to these investments. Currently there are now at least 333 so-called unicorns, companies valued at $1 billion or more, according to CB Insights. Compare this to 2014 when there were around 80.
“The magnitude of the audiences that can be reached and the monetization per user has grown,” Matt Murphy, a partner at Menlo Ventures told The NYT. “Their growth potential is much higher than was previously anticipated.”
There has been a decrease in the number of public companies in the United States. According to a working paper from the National Bureau of Economic Research, the number of listed companies has dropped by 52 percent since 1997, to just a little more than 3,600 in 2016.
,As a consequence of this long-term decrease in publicly available shares is why some analysts expect Uber, Lyft and other prominent start-ups to receive a warm response from the institutional investors who tend to buy freshly issued shares.
“There’s an element, I think, of pent-up demand here,” said David Ethridge, who advises on public offerings at the consulting firm PwC. “I think people will have a feeling of, I don’t really want to miss out.”
