Unicorns: Is the muggle world ready?!
Welcome to Leadenhall Market, alleged and acclaimed as the inspiration for Diagon Alley in J.K. Rowling's Harry Potter series. In the heart of the City, nestled between the Walkie Talkie and the Gherkin, sits London's answer to the Galleria Vittorio Emanuele II. It's charming, and unsurprising that it inspired Rowling to create her magical high street, hidden in central London. In Rowling's world, unicorns are elusive, magical creatures. In the City of London, they are FinTech giants, some growing exponentially, some at the IPO stage of development as they go public. But, are we ready for the unicorns? After the flops of 2019, what's the current situation and what can we expect from 2020?
1. What is a 'Unicorn'?
My parents are never quite sure if I'm serious when I come out with terms like 'unicorn' when talking about work. Fear not, these are real corporate creatures which have mastered growing, though not yet floating. Investopedia (a good resource for debunking semantic landmines buried in articles you come across in your reading) defines a unicorn as a privately held start-up with capital of over $1 billion. These are the prey of venture capitalists, those investors hunting for huge returns on their capital, searching for the next Facebook, Amazon or Google phenomenon. Venture capitalists often invest in high-risk start-ups liberally, distributing their investments across a broad portfolio of stock in the hope that one of these investments will have struck gold.
Familiar unicorns include Air BnB, Pintrest, Uber (though admittedly this is no longer a private company), Lyft (similarly, this went public last year) and Deliveroo. Some of the first generation of unicorns we might pick out as Alphabet, Google and Facebook.
2. What progress have we seen from unicorns already?
If you kept up with 2019, you will have seen the first-quarter excitement at the prospect of Unicorns like Air BnB, Pintrest, Uber and Lyft launching their IPOs (i.e. making the transition from private to public companies).
Onlookers watched with gleeful expectation as Uber spread its wings to launch in May 2019, and catapulted into a brutal downward spiral. Simplistically, shares were priced too highly, investors lost confidence and the IPO was a flop. On the first day of trading, shares were down -7.6% of the IPO price, seven months on, the share price had fallen -38% beneath the IPO price.
WeWork released a prospectus for shares with a view to IPO in August 2019 but transparency on huge losses meant the company did not successfully progress through the IPO process to reach launch.
In September 2019 it was the home-fitness spin-revolution Peloton’s turn to go public. Though shares initially fell beneath the IPO Wall Street debut, fuelled by overpriced stock, the stock has made an undulated recovery, share price peaking in December 2019 at just over $36 per share, a level to which it has not yet returned.
3. How can we understand these trends?
Unicorns are usually tech-based start-ups. They often have very few tangible assets on their balance sheets and may exhibit heavy losses. The business model of many of these start-ups is dominance. Take the example of Amazon, which operated at a loss for years before investors saw a return on capital, waiting as the corporation undercut competitors to develop a market so broad and products so cheap that many of us do not think twice about using such an efficient, affordable service. It still weathers heavy losses today, but has achieved dominance across a number of sectors. Consider Facebook and Uber, though these corporations have offices, computers and personnel on their balance sheets, most of their value is tied up in intangibles such as technological innovations and goodwill. How should these be valued?
This is one of the difficulties unicorns have faced. There is yet to be an accepted objective valuation of data and innovation in business. These are prospective potential gains, there is no guarantee that the data collected and stored by these unicorns can be converted into value. Similarly, there is no guarantee that research and development will lead to infallible innovations which drawn in profit. In short, unicorns are flighty, unpredictable creatures.
High demand for unicorn stock has fuelled high valuations which have often be rejected by markets. Whilst venture capitalists are willing to take a punt on high-risk businesses which reap losses before bounty, shareholders are often far more risk-averse. Venture capitalists willingly search out seeds of innovation and data in businesses, which may germinate to produce blossoming profits. Shareholders want well-stocked storehouses as a buffer against fluctuating market conditions.
Valuation is not the only barrier to unicorn entry into public markets. Often innovative tech start-ups, the legality of unicorns has often been opaque. Uber is currently facing suspension of its London licence for failure to meet requisite thresholds of safety. Air BnB has long-since faced hostility regarding hosts’ tax payments, controversy over mushrooming house prices in hotspot destinations such as Porto, Vienna and Dubrovnik and negative impacts on the hospitality sector. Deliveroo and Uber have faced uncertainty regarding the status of workers (as either ‘self-employed’, or ‘employees‘ – a distinction which is important and incurs distinct regulatory requirements for corporations). The issue of competition law also surfaces where business models are based on dominance. For good insights, look at work by Lina Kahn on Amazon, statements made by Margrethe Vestager, EU regulatory reforms, and jurisprudence in the EU.
Do these different investor interests, and unique characteristics of unicorns render public markets impenetrable?
4. What can we expect from 2020?
There remains a herd of unicorns ready to take on IPOs over coming years, adamant to defy the trends of 2019. Air BnB is the most anticipated of these remaining unicorns, others include online mattress vendor Casper, who’s recent pricing of an IPO suggests that it has fallen below the requisite valuation to label it a ‘unicorn.’
Unicorns are not yet populating the skies of public markets. If market conditions change to weather the risk which characterises these corporate creatures, accepting higher-risk and long-term investment, perhaps this can change. By nature, unicorns are fast-developing beasts, likely to undertake work which falls outside the clear definitions of law. If legal certainty and commercial stability (factors likely only to develop with time) can be achieved, perhaps we shall soon see more unicorns present in stock exchanges across the globe.
The views expressed in this article are the author’s own and she is solely responsible for them. This article is not intended to be comprehensive, nor to provide legal or financial advice, and its contents should not be relied upon as legal or financial advice, either generally or in relation to any specific transaction. Although the contents of the article are current as at the date of the publication, the information it contains is for informational purposes only, is of a general nature and is not intended to constitute professional advice of any kind. The author accepts no duty of care to any person in relation to this paper and accept no liability for any person’s reliance on this paper. Should you have any questions on issues presented here or on other areas of law, please seek legal advice independently.