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By Hamish Thompson ([email protected], @HamishMThompson)


Sky-high valuations for business that are essentially ‘features’ define a new Icarus ‘junk debt’ category of Unicorns

Analysis of the current crop of Unicorn businesses by Magister Advisors points to the existence of a sub-set of companies within the list that are now reaching mythical valuations.
The common vulnerability in this ‘Icarus’ sub-set of highly-valued Unicorns is the absence of a platform or a sustainable USP, creating a huge risk that they will devolve into ‘features,’ embedded within other platforms or products, or incorporated into competitors’ next releases. These Icarus class start-ups are attracting ‘platform’ company valuations while shouldering the huge business risk of becoming low-value add-on features during the next few years.

Victor Basta, managing partner of M&A advisory firm Magister Advisors, said: “Microsoft’s market value at IPO was $500 million. Cisco’s was $300 million. Today an eye-watering 100 plus private companies are valued at more than $1 billion. To warrant this, each must have enduring long-term value, derived from either being a global ‘platform’ company, or at the very least a very high value product business. In our view there are some significant deviations from this essential rule.”

“Inevitably our Icarus list will be controversial but we highlight Pinterest, Shazam, Evernote and Snapchat as Unicorns with a serious long-term risk of being embedded out of independent existence. Their current valuations are essentially skyhooks and therefore unsustainable.”

“We’ve traded a market bubble for specific company bubbles, inflated by the ready availability of venture capital chasing the next big thing.”

Magister Advisors contends that the unicorn with the greatest risk is probably Shazam, a discovery-based app reliant on huge amounts of customer data. In Magister Advisors’ view Shazam would be best deployed, or owned and developed, by an existing platform player. That player could leverage its own installed base to provide the very best discovery experience across music, TV or other media.

“A natural home for a Shazam-like experience would be in the product set of an Apple or Google or another broad-based vendor, and never as an independent whose data and development resources can never be as broad.”

Pinterest, another Icarus candidate, has nearly $600 million of venture capital and a $5 billion private valuation that requires the business to achieve a $10 billion plus valuation in short order. Ad revenue from ‘promoted pins,’ or commerce revenue from buy buttons, are the most likely revenue sources but Facebook and Google are already garnering the lion’s share of new mobile ad spend, leaving less room for others, especially single feature-focused businesses that lack a wider social utility. Pinterest’s commerce revenues need to be very large to be worth anything; even $500 million of product sales hardly validates a $1 billion company value. Set these challenges alongside the innovation treadmill; Twitter has shown how much damage a company valuation can receive if innovation slows down for even 6 months, so execution risks are huge.

Victor Basta added: “This doesn’t mean these companies aren’t valuable; engaging 20-25% of online users as Pinterest does has strategic value to a larger player. But normally a company whose offering is at serious risk of being a feature needs to prove a lot more before commanding a valuation of more than $1 billion.”

“Put another way, a business whose offering is at risk of becoming a feature is only worth $1 billion when it proves it’s worth $1 billion. Caveat emptor.”

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