Date
27 July 2017
A model tries out a virtual outfit in front of a digital screen. Internet brings excitement and new business opportunities for many startups. Photo: Xinhua
A model tries out a virtual outfit in front of a digital screen. Internet brings excitement and new business opportunities for many startups. Photo: Xinhua

Why unicorn startups fail

My friend who works for a company selling traditional environmental protection products recently told me that her company has seen steady growth in revenue and profit as well as adequate cashflow over the past few years.

However, her company has a much lower valuation than her husband’s internet firm which was established just three years ago and is still in the red.

She joked that her job could be a good hedge for her husband’s if one day the internet bubble bursts.

In fact, I have seen many unicorn startups, those with valuations of over US$1 billion, fail after several rounds of financing.

Some investors feel frustrated when this happens because they thought unicorns should be more successful and bring in large profits to offset their losses from other deals.

Things are changing, however. As competition becomes more intense and valuations for startups get higher, the number of unicorn startups is swelling.

As a venture capitalist, I have reservations about the term “unicorn”. More than a third of the unicorns have valuations of US$1 billion or US$1.1 billion just to meet the criteria for being a unicorn.

Meanwhile, hedge funds or mutual funds have a higher engagement in unicorns than private equity (PE) or venture capital (VC) funds.

Unlike the PE and VC, hedge funds require much lower investment return rate. They will be satisfied with even 50 or 100 percent rate of return, like those from pre-IPO projects, and they are willing to invest at high prices.  As a result, they have “created” more unicorns with negative profit.

The “unicorn” tag won’t protect these firms from failing. Many will fold up because of product failure, others due to internal conflicts, high costs or wrong market positioning.

In my next articles, I will discuss the experience of several renowned unicorns to show why some win while others lose.

This article appeared in the Hong Kong Economic Journal on Nov. 19.

Translation by Myssie You

[Chinese version中文版]

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MY/DY/CG

Director at Spring Capital

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