Anatomy Of A Unicorn: Why Tech Start-Ups Are Staying Private by Kara Sprague & Simon London, McKinsey & Co.

Up-and-coming technology companies are no longer racing to list their shares on public markets. A massive increase in late-stage venture capital has enabled many start-ups to reach valuations of more than $1 billion while remaining in private hands.

Will the tech unicorn go the way of the dodo? It depends on a number of factors. In this episode of the McKinsey Podcast, McKinsey partners David Cogman and Kara Sprague talk with McKinsey’s Simon London about why dozens of billion-dollar technology start-ups in Silicon Valley and elsewhere are choosing not to go public—and whether the unicorn phenomenon is cyclical or here to stay. An edited transcript of their conversation follows.

Anatomy Of A Unicorn: Why Tech Start-Ups Are Staying Private – Podcast transcript

Simon London: Welcome to this episode of the McKinsey Podcast. I’m Simon London, an editor with McKinsey Publishing. Today we’re going to be talking about unicorns, the new breed of companies valued at a billion dollars or more, but which remain in private hands. The first unicorn didn’t appear until 2009. But today, there are more than 100 worldwide.

To discuss the issues, I’m joined today by Kara Sprague, a McKinsey partner based in San Francisco, and also by David Cogman, a partner based in Hong Kong. Kara and David, thanks for joining today.

Kara Sprague: Thank you, Simon. Looking forward to it.

David Cogman: Thank you, Simon.

Simon London: Perhaps we should start by defining our terms. Kara, could you tell us more about these unicorns? How many are there? Where are they based? And what kind of businesses are they in?

Kara Sprague: As you said in your introduction, Simon, there are more than 100. The latest count from CB Insights says there’s 164.1 This rate of growth and the number of unicorns is actually quite fast. When we last looked, at the end of last year, there were 146. Most of them are based in the United States or China. But there are also some that you could find in India, Germany, and elsewhere around the world. The list includes many familiar names like Airbnb, Uber, SpaceX, but also some names that many probably haven’t heard of. For example, companies like Tanium, which specializes in IT security, or MongoDB, which works on databases.

What they all have in common, as you mentioned, is that they are worth more than $1 billion in value. And they remain in private hands. There’s even some of these unicorns that we could call decacorns, which are worth more than $10 billion in value.

Simon London: David, from a China perspective, what jumps out at you at the list of unicorns?

David Cogman: A bit under a third of the companies are China based, but you look at the type of companies you have there and it’s actually quite a bit different from what you would see in the US. The US tech sector tends to be a lot more, if you like, “real” tech.

Whereas what you have in the China tech sector is a lot more intimate, and a lot more, if you like, sort of reseller business models. So, companies that are providing intermediation through a service. Things like social media—e-commerce is obviously a very big issue. E-commerce in China is absolutely huge. It’s a massive market, and much, much better developed than most other countries right now, including the US.

So you have a slightly different mix of types of companies. The China Internet sector itself is, in a way, fundamentally different than the US because it’s basically dominated by three behemoths that function as platforms. The end game for a lot of the Chinese start-ups—well, not just the end game, but right from the outset many of them want to be on one of those platforms, and on two of those platforms, and potentially acquired by them at the end of the day. It’s a lot more organized around that exit route than perhaps the US would be.

Kara Sprague: If you look at the range and variety of the unicorns in the United States, it’s just much broader. For example, we talked about Uber and Airbnb, which are representative of these sharing-economy companies. You see many of those also popping up in international markets.

But also in the United States, you see a number of these security players. I already mentioned one. You see Palantir, for example, doing things in advanced analytics. There’s Stripe in payments, there’s Slack in collaboration software. So the variety of what is making it and scaling to $1 billion is just much broader.

Simon London: OK. Obviously these are some pretty big companies. And in some cases, they are pretty well-known brands. The obvious question is why are they still in private hands?

David Cogman: Fundamentally, they’ve taken the decision to stay private for longer because that was possible. It wasn’t possible 10 years ago or 15 years ago. They’d hit a point where they had to go to public funding because they just couldn’t continue to finance themselves and finance their growth.

Now that there is a substantial amount of capital aimed at the late-stage sector, that allows them to stay private for longer. In the venture-capital sector itself, you’ve got unprecedented levels of fundraising. A few hundred billion of uninvested funds sitting there, and it has to be deployed. Now, venture capital is fundamentally a bit of a cottage industry. It doesn’t scale very well. It’s all based on a small group of people searching for opportunities in a defined area, industry or geographic.

That’s put more pressure to get money into investments. But I think what’s really changed the game has been the entry of a lot of money from outside the traditional venture-capital industry. So, buyout funds looking to get into late-stage limited partners, pension funds and so forth who want to do pre-IPO investments into some of these more prestigious companies like Facebook.

The numbers in those industries absolutely dwarf what you’ve got in the venture-capital industry itself. You’ve got something close to about $1 trillion that’s getting recommitted into private-equity funds at the moment. Then if you look at the broader limited-partner industry itself, there’s $30-odd trillion of capital in that.

Simon London: If we’re advising these kind of companies, what do we tell them about how to think about an IPO strategically? When’s the right time to do it? And indeed, are there types of companies for whom, frankly, it may never make sense?

Kara Sprague: The way I like to think about this is, think about your growth and acts. For example, a tech company starts out in a prelude, and that’s when tech companies are searching for the thing that’s going to be able to scale to material customers.

Think about it as them searching for their first real product offering that could be repeatable and sold to a number of players. When they finally find that, that would be their act one. Now, act one, depending on the market you pick, will last only so long. If you’re Google, and your act one is search, it’ll last for a very long time. But if you’re a smaller company or a company

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