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The private-market value of high-flying “unicorns” is certain to fall as the recent rout in stock markets and the continued weakness for initial public offerings take their toll. Lowered valuations reverberate in several ways, often leading to a slowdown in funding needed to keep companies afloat and also causing highly valued employees to head for the exits, several analysts said. Unicorns are privately held companies with valuations of $1 billion or more. CB Insights counts 152 of them, with a combined valuation of about $532 billion in the latest tally. But just like the value of a home for sale is not certain until it’s actually sold, the same is true of private companies. “The reset of unicorn valuations is not showing up just yet, but the conversations are happening,” said Anand Sanwal, CEO of CB Insights, which tracks IPO investing and unicorns. “We hear that companies are being advised to raise money sooner than later, as the capital available now may not be there in six months,” he said. The largest unicorn is Uber, the San Francisco-based ride-hailing company with a market valuation reported to be near $65 billion after completing a $2 billion funding round in early December. Following Uber is Chinese smartphone company Xiaomi, valued at $46 billion. Then comes accommodation-services provider Airbnb at $25.5 billion. Other high-profile unicorns include Snapchat, Spotify and Pinterest. There are various ways a company’s valuation is rated. A common method is tracking the market value of similar companies listed on stock exchanges. When their value falls, investors devalue their private counterparts. Valuations are based on the company’s latest funding round, which can vary in length from about one year to 18 months. The impact of the latest stock market crunch and weak IPO market is not yet baked in, but it’s coming. Last Friday, for example, Big Data analytics software maker Tableau Software ( DATA ) crashed nearly 50% after reporting fourth-quarter earnings that contained a weak Q1 outlook. Tableau’s report sank the stock of other Big Data companies, such as Splunk ( SPLK ), Qlik Technologies ( QLIK ) and Hortonworks ( HDP ). “The big drops we’ve experienced in the public markets will reach into the private markets, which is typically followed by a contraction in funding,” said Kathleen Smith, a principal at Renaissance Capital, which manages two IPO-focused ETFs. “The pure size of the private company valuations we’ve seen is unprecedented and not sustainable.” Lowered valuations have reportedly emerged in some areas. Jawbone, a provider of fitness tracking devices, last month said it had raised $165 million in funding at a reported valuation of $1.5 billion, or about half what it was valued at in 2014. The lowered valuation comes as fitness tracker Fitbit ( FIT ), which came public in June at a price of 20, closed Tuesday at 14.30. Also last month, Foursquare said it raised $45 million in a new round of venture funding. A report by the New York Times said Foursquare’s valuation was roughly half of the approximately $650 million that it was valued at in its last round in 2013, as it tries to bolster its location-data-based advertising businesses. As to how or when unicorn investors will get a return on investment, the IPO market is no place to look for that now. The IPO market in 2015, coming off two robust years, fell to a six-year low in the number of companies going public. There were no new issues in January, with just two in February thus far. “Pure and simple the IPO market is miserable,” said Scott Sweet, senior managing partner at research firm IPO Boutique. “IPO underwriters are in the most precarious situation we’ve seen in years. It’s the IPO buyers that are pricing these deals, not them.” One example is payment processing company Square ( SQ ), which debuted Nov. 19 at 9 a share, well below its expected range of 11 to 13. Square stock closed Tuesday at 8.62. “We need to see not only the market improve for all stocks, but especially for the few IPOs able to make it out now. If they don’t, it will close the IPO pipeline like a padlock,” said Sweet. The valuations of recent tech IPOs have been sharply cut. Security firm Rapid7 ( RPD ), which priced at 16 in July and peaked above 27 on its first trading day, closed Tuesday at 9.46. Hortonworks, which had a December 2014 IPO price of 16, closed at 7.43. Sharp declines have hit dating firm Match.com ( MTCH ) and data storage firm Pure Storage ( PSTG ). Action camera maker GoPro ( GPRO ), which came public in June 2014 at 24, closed at 11.39 Tuesday. “Spotify, Snapchat, Pinterest, name after name — they would not IPO in this market,” said Sweet. Scalper1 News
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