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TCV Insights

Angels and Unicorns

Is the age of Unicorns over?

Probably not. However, while investing in Unicorns can be intoxicating, Angel investors should think long and hard about this as a viable strategy. As reported in a December 30th article in the Wall Street Journal (“IPO’s Fell Short of Expectations in 2019”), Initial Public Offerings (IPO’s) disappointed many pre-IPO investors last year. According to the article, most of the companies that went public are trading well below their last private market valuations and below the expected IPO price. And while the average IPO stock is trading 23% above its offering price, that is below the nearly 30% gain in the S&P index and, of course, below what typical IPO’s are able to garner after their first day of trading.

This poor performance is reflected in the share prices of the SBDC’s that invest in pre-IPO offerings. These company’s share prices lag well below their book values. For example, Sutter Rock Capital Corp. (ticker SSSS) is currently trading at about 60% of book value, which presumably reflects the sum of the last private market values of its individual holdings. Even more alarmingly (and perhaps an opportunity in disguise), Firsthand Technology Value Fund (SVVC) is trading at a mere 31% of book value (Note that SVVC has declined 50% over the past 12 months while SSSS has increased 19%). Apparently, Mr. Market values the holdings of SSSS much higher than those of SVVC, but who knows if that is an efficient assessment? These are not widely held investments (market efficiency is suspect) and it is not easy to assess the value of the aspiring Unicorns that comprise their portfolios. Another interesting situation is that of Boston-based Allied Minds plc which trades on the London exchange (ticker ALM.L). Allied Minds is a holding company (not a VC) that starts NewCo’s to license technologies from federal and university labs. The company, which was initially funded by Invesco plc with $25M, spun up some 30+ companies before going public in July of 2014. Their IPO gave the company a market capitalization of some $691M at approximately $200 per share. The price per share then rose quickly to over $700/share by April of 2015, but unfortunately, it has recently been trading between the upper $40’s and low $70’s. Does Allied Minds hold any potential Unicorns? That is hard to tell, but one thing is for certain, anyone investing in a start-up with the hope of it becoming a Unicorn is likely to be disappointed.

Here’s why – first and foremost, Unicorns virtually always have several rounds of funding with each round at a higher valuation until a PE or VC firm shows up and demands a better deal, resulting in a cram down of earlier valuations. As an investor, now you’ve lost up to 30% or more of what you thought you had. Then, if the company actually does get to the stage where an IPO is possible, as we have seen above, the IPO valuation may well be lower than where a VC last valued the company. And, given the time it is taking these Unicorns to IPO, you may have been waiting 10 years or more before you see the possibility of a return on your investment. You were probably better off in an ETF or mutual fund!

Does this mean that you should give up being an angel investor? Of course not. But be realistic about the companies in which you place your bets and forget chasing Unicorns – you want to invest in companies that will be acquired by a strategic buyer in 5-7 years. And, if you invest in a VC, be sure their focus is realistic.

Douglas Zeisel, TCV Managing Partner


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