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Finance: ‘unicorns’ continue to flourish despite high-profile sagas

Jonathan Watson, IBA Finance CorrespondentWednesday 23 February 2022

By January, there were reportedly almost 1,000 ‘unicorns’ globally - unicorns being the term venture capitalists use to describe privately-held startups with a valuation of $1bn plus. Interestingly, the recent scandals involving unicorns don’t seem to have had a chilling effect on investors.

Famous former unicorns include Airbnb, Facebook and Google, but not all unicorns go on to enjoy success on a similar scale. Just ask Elizabeth Holmes, founder of blood testing startup Theranos. In early January, she was found guilty in California on one count of conspiracy to defraud private investors and three counts of wire fraud against investors. She could now face prison, with sentencing in September this year.

Theranos is not the only high-profile startup to garner headlines in recent years. Tim Weiss, Assistant Professor of Innovation and Entrepreneurship at Imperial College Business School sounds a note of caution. ‘The dynamism and boldness which startup culture celebrates can be dangerous’, he says. ‘Rule breaking is allowed and positively encouraged – it’s creative disruption after all.’

One might have expected this to dent investor enthusiasm for startups, but recent statistics suggest that hasn’t happened. Over 500 venture-backed companies became unicorns in 2021, according to data and software company FactSet. This was a big increase on the 178 companies reaching unicorn status in 2020.

Of these companies, approximately 60 per cent were based in North America. 84 companies became unicorns in North America in 2020 and this more than tripled to 310 in 2021. In Europe, nearly 60 companies became unicorns, quadrupling the previous year’s total.

In developing markets, many startups have grown quickly and entered the unicorn club. In India, for example, 2021 was dubbed ‘the year of the unicorn’ for the country’s startup ecosystem, with 39 startups achieving billion-dollar valuations during the year. India now provides the base for the third highest number of unicorns of any country after the US and China.

The scandals will lead to more scrutiny and to better business decisions

Alejandro Paya
Senior Vice Chair, IBA Closely Held and Growing Business Enterprises Committee

‘In 2021, Indian tech startups raised a staggering $24bn from global investors, higher than any previous years,’ says Kosturi Ghosh, Chair of the IBA Corporate and M&A Law Committee’s Current Legal Developments Subcommittee and a partner at Indian law firm Trilegal. ‘The hype machine is still well and truly churning.’

A perfect storm of factors seems to have created this funding boom, says Ghosh. These include low interest rates in the US; an expanding online consumer base in India; market leaders listing on stock exchanges; and China’s crackdown on technology companies, which has made India the next favoured destination for investors.

‘The pandemic has really not slowed down startups’, says Ghosh. ‘In fact, most large startups have been on an acquisition spree, chomping up smaller players who were in trouble or couldn’t raise capital.’ However, funding typically works in boom and bust cycles, so this level of activity is likely to end soon.

Recent revelations from Silicon Valley have had a big impact in the media, but haven’t really changed the investment climate, says Alejandro Paya, Chair of the IBA Closely Held and Growing Business Enterprises Committee and a partner in the Barcelona office of the law firm Cuatrecasas. ‘There’s still a lot of interest among professional investors in disruptive businesses and in technology’, he says. ‘The pandemic has accelerated a large number of companies and the use of a number of technologies.’ Capital will keep chasing tech-enabled businesses, adds Ghosh.

The hype around start-ups can encourage bad judgement from those who bankroll them and those who work for them. Scandals such as Theranos are therefore helpful, argues Paya, because they remind investors to focus on the fundamentals when considering where to put their money. ‘This will lead to more scrutiny and to better business decisions’, he says. ‘We are not seeing a general slowdown because of this.’

What Ghosh calls ‘FOMO (fear of missing out) deals’ are based on false market signals, poor due diligence or investors jumping on a bandwagon because they don’t want to miss the next big thing. ‘Staying disciplined after investment, installing proper corporate governance procedures, regular monitoring and auditing of financials, ESG goals and market scenarios and of course, patience are key factors for success.’

If investment does slow in 2022, it’s likely to be for other reasons. The emergence of the Omicron variant of Covid-19, for example, has thrown a spanner in the works, as have the world’s widely publicised supply chain problems.

Perhaps most significantly, is that inflation is back, notes Julian Birkinshaw, Professor of Strategy and Entrepreneurship at London Business School. Current levels in Europe and North America are at four to five per cent and once inflationary pressures start, they can be difficult to control.

‘Inflation is bad for business because it creates uncertainty and reduces investment’, says Birkinshaw. ‘It’s also uncharted territory for anyone less than 50 years old, as the last period of significant inflation was more than thirty years ago.’

Image: Niphon Subsri/Shutterstock.com

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