Unicorns: Armageddon Will Have To Wait by Sven Weber, SharesPost Investment Management

Fidelity Investments recently marked down the valuations of some of the highest-flying unicorns in its portfolio. Not surprisingly, the news stoked the current narrative that the market for late-stage venture-backed companies is falling apart.

A look at two different sets of numbers tells a different story.

Unicorns – More Companies Rising Than Falling

First, based on The Startup Stock Tracker data from The Wall Street Journal, the internal rate of return (IRR) for these investments in companies on this list-primarily unicorns-is a very respectable 17.5%.

How do you get to that number?

30% of these companies have a fair market value below the initial investment cost from the respective investors. The average write-down from the initial investment in this group is 25%. At the same time, 70% of companies on the Journal’s list are above the initial investment cost. The average increase in this group is 81%.

So as of March 31, 2016, the total performance of these investments is 1.4x the initial cost, and based on the reported initial investment date, a 17.5% annualized rate of return.

What investor wouldn’t be interested in this kind of performance?

 

Unicorns The Increasingly Crowded Unicorn Club InfographicCapital Is Not Drying Up

Second, capital has not stopped flowing to late-stage venture capital companies.

In fact, capital inflows in “mega rounds”-those financings of $100 million or more-were at an all-time high in the first quarter of 2016. As of March 31, early PitchBook data covering companies with U.S. locations shows that in 1Q 2016, about $8.8 billion was invested in these mega rounds across 23 companies. That’s up from $6 billion in 21 companies in 4Q 2015.

This increase represents an annualized investment rate of $35 billion for 2016, up from $26 billion in 2015 and $16.7 billion in 2014.

In truth, Armageddon for this asset class will have to wait.

Sven Weber is managing director of SharesPost Investment Management in Menlo Park, California.This article represents the views of the author only and does not necessarily represent the views of PitchBook.

Mutual Funds Unicorns