Some of the unicorns prancing through investors' portfolios are worth less as public companies than when the investments were made, meaning paper profits could turn into real losses, industry insiders say.
Unicorns are startups that are valued at $1 billion or more, most often focused on the technology sector. These private companies are found not only in venture capital portfolios, but also in private equity and hedge funds. Family offices, sovereign wealth funds and outsourced CIO firms also are buying unicorn securities as an equity investment.
These seemingly magical companies with their rapid growth also are found in defined contribution plans because mutual funds also invest in their securities.
But unicorns are starting to lose a little of their power to enchant.
“The dirty little secret about unicorns is that they are not worth $1 billion,” said John Backus, managing partner of early-stage venture capital firm New Atlantic Ventures, Reston, Va.
“Even though at a high level these companies may look like billion-dollar companies, they are not really worth that,” he said. “We are seeing that now in the public markets as these companies adjust their valuations” as they go public, said Mr. Backus, who is also on the board and on the executive committee of the National Venture Capital Association, a Washington trade group.
For example, in Square Inc.'s October SEC filing in preparation for its initial public offering, Square's valuation is lower than its last private funding round and is roughly the same as the company had been valued two or three years ago, he said.
Square is seeking $13 per share in the IPO, whereas a 2014 funding round of convertible preferred stock went for about $15.46 per share, according to SEC filings. Investors in Square — which offers a mobile app for small merchants to accept credit cards — include JPMC Strategic Investments, a private equity and venture capital arm of investment bank J.P. Morgan Chase & Co., and venture capital firms Rizvi Traverse, Khosla Ventures and Sequoia Capital.