Unicorns & The Stock Market

unicornWhat is a unicorn? This is a tech blog so you can already assume I’m not talking about the mystical animal with a single horn on its head, often accompanied by a rainbow of colors.  “Unicorn” has become a widely used shorthand for startups who have won the techie jackpot: companies that are worth $1 billion or more, solely through fundraising and the generosity and faith of venture capitalists. (Mashable)

Feel enlightened? Great! Now we can talk about the issue at hand – How and why  famed Economist Paul Krugman, who I love to read in the New York Times, thinks situuations like Unicorn-tech-companies could be a significant contributing factor to an upcoming “bubble” (see also housing bubble). In a recent article, Moveable Glut,  Mr. Krugman starts off by asking the question, “What caused Friday’s stock plunge? ” Half-way down the article, he tries to answer that question, “Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.” THIS is the connection to unicorns and the stock market. Let me explain.

The Street has already warned us to Expect a Bumpy Ride when the ‘Unicorn Tech Bubble Pops – “As to what pops this particular bubble…  it will likely be a number of factors including the recent Chinese devaluation of its currency [check] and higher interest rates in the United States [likely coming]. He said public investors will feel the consequences when this bubble deflates because pension funds are putting money into unicorns as well via hedge and private equity fund investments.”

Once you connect the dots, all of these predictions are coming to fruition. So who are these unicorns? Well, older unicorns (like Google, Apple) have already taken a hit on the market in recent days; but, long term,  it’s the newer younger unicorns that are causing the angst.  Fortune maintains a list of the newbie unicorns. And you’re probably already familiar with at least a couple in the top 5:

  1. Uber – Get a taxi, private car or rideshare from your mobile phone
  2. Xiamo – Maker of consumer electronics.
  3. Airbnb – Rent unique accommodations from local hosts in 190+ countries
  4. Palantir – Software connects data, technologies, humans and environments.
  5. Snapchat – Photos, videos disappear in seconds

So what does all this mean?

  • POINT #1: “This most recent stock dip will be tough for even the most bullish venture capitalists to ignore, and it could compel them to start asking more from the startups they back.”
  • POINT #2: “For some time now, investor Bill Gurley has been predicting that there will soon be some “dead unicorns” in the tech industry, thanks to a complete “lack of fear” in Silicon Valley that is sending these valuations soaring.”

There is your answer,  Dead Unicorns (Wired). We already know tech companies are becoming more popular and prevalent on the stock market (see also Facebook IPO botch). Will these unicorns survive? Will they make it to the stock market? Once there, will they crash and burn or thrive? It’s all yet to be seen!

Meanwhile some people actually believe, “the US Federal Reserve, the European Central Bank and the Bank of England — have caused this bubble by keeping interest rates very low for a long time. Those low rates — effectively zero percent across much of the West since 2009 — have made money incredibly cheap to borrow. That has allowed investors to pump money into projects that wouldn’t get funding in any other environment.” (Business Insider)

Tech, Unicorns, Interest Rates, Pensions, Stock Market = all connected

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