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Square’s IPO: the beginning of the end of the unicorn-driven tech bubble?

November 14, 2015

By Rupert Neate : theguardian – excerpt

The $1bn-plus valuation of a number of Silicon Valley firms far outstrips their ability to deliver such returns – and many investors now believe it’s a question of when, not if, the bubble will burst.

There are a lot of people in Silicon Valley and New York betting on “unicorns” – the new breed of tech startups like Uber, Square, Airbnb and Snapchat that have been valued at least $1bn.

Not since the last dotcom boom has so much money been poured into so many hyped companies. As startup founders and their investors hope to turn their paper unicorn fortunes into cold hard cash, some of Silicon Valley’s most successful investors are warning a reckoning is coming. And on Monday that magical thinking faces one of its biggest tests.

Square, the mobile payments platform co-founded by Twitter’s Jack Dorsey, will sell shares in New York at a $4bn valuation. A year ago, private investors valued Square at $6bn. Now questions are being asked about whether Dorsey can really juggle his duties at troubled Twitter and a once hot startup that has yet to show any signs of making a profit. If Monday’s initial public offering (IPO) goes badly, a lot of other profitless unicorns will start feeling the chill.

One big problem for the unicorns is that there are simply too many of them. When the term was coined by venture capitalist Aileen Lee in 2013, unicorn was the perfect way to encapsulate something rare, magical and mythical: in this case, a $1bn startup.

“The number of unicorns is a sign that there is a bubble in the private market – in the dotcom era there were 10 or something, now there are too many to count,” he said. “That for me is a sign that these values are untested and out of step with reality. And none of them are making money, they are all buying revenue with huge war chests.”

Patrick reckoned the 2.0 tech bubble will come to be defined by the unicorn. “Whether it’s the ‘big swinging dick’ of the last one [the build-up to the financial crisis], there is alway a name that attached to a bubble; for this one it will be the unicorn.”

But he added that he doesn’t think the bubble is about to burst just yet. For that to happen, he said, there needs to be an “insanity event” – “something that in hindsight is so extraordinarily crazy, but looked normal at time”.

“Last time it was AOL-Time Warner [a $165bn takeover]. It’ll be an event when everyone goes, ‘Oh my god, that was nuts’,” he said. “That’s what I’m waiting for, and when that happens you blow the whistle.”… (more)

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