The investment industry calls startups exceeding US$1 billion in market value “unicorns”.
Recently, the stock prices of several unicorns have come down sharply following the listing of the firms, suggesting that venture capitalists (VCs) may have become overly aggressive, a Hong Kong Economic Journal report says.
The initial public offering price of Square, Inc., a San Francisco-based online financial services firm, valued the fintech firm at less than half of the valuation it achieved in the last funding round before it went public.
Other unicorns, like specialty camera maker GoPro Inc., peer-to-peer lender Lending Club and activity tracker maker Fitbit Inc., have plunged 35-80 percent in price from their peaks since they were listed.
Having raised a substantial amount of capital in recent years, VC funds have been flooded with cash and have therefore come under pressure to compete for good projects.
Even hugely expensive startups — as long as they are able to secure funding from prominent investors such as Tencent Holdings Ltd. (00700.HK) in earlier rounds of funding — will attract VCs to rush in and buy a stake as well.
Rather than reflecting their profit potential, the valuations of some unicorns result from the excessive optimism of VCs and their decisions to overpay.
If they are lucky, VCs can still cash out at a profit when the startups are listed.
But in some cases, once highly promising stars never got to debut on the stock market.
Mobile news app Flipboard pulled in over US$201 million from top VCs like Kleiner Perkins Caufield & Byers, GGV Capital and Insight Venture Partners.
But rivalry from Facebook, Twitter and Weibo soon emerged, and now the chances of an IPO look remote.
Flipboard is said to be looking for a buyer before its valuation erodes further, but so far there has had limited progress.
Social networking app Snapchat raised nearly US$1.2 billion from investors including Tencent and Alibaba Group Holding Ltd. and became the fourth-most valuable startup in the United States.
But the lack of a convincing revenue model and market weakness has hurt investors’ confidence.
Fidelity Investments, one of its backers, decided to mark down its holding in Shapchat by 25 percent in the third quarter.
VCs that invested lavishly in the past one or two years may now face a tough ride.
After their painful lesson, the industry is expected to be more cautious, especially toward expensive startups.
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