YOUR PORTFOLIO
/ UNICORNS /
UNICORN
HUNTING
Far from stumbling upon the Next Big Thing,
Daniel Lanyon warns that anyone who invests
in start-ups is more likely to find themselves
down a dead-end
A
N EXTRAORDINARY
AND PROFITABLE
TREND has taken
place over the past 15
years. Markets have
been dominated by the meteoric
rise of tiny technology-enabled
start-ups that have become global
behemoths and household names
worth billions.
A quick thought experiment.
Amazon, Facebook, Google, Netflix
and PayPal. How many times have
you used at least one of these
companies in the past week? What
about in the past 24 hours? These
global winners are ubiquitous in
our daily lives but were once tiny
companies staffed by a few scruffy
nerds. Now they turn over as much
cash in a year as a small country.
GLITTERING PRIZES
Investors who saw the opportunity
have been hugely rewarded. A
$1,000 investment in Google at its
IPO back in 2004 would now be
worth $20,000. The same amount
in Amazon when it went public
in 1997 would have made you a
staggering $500,000 profit. And if
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you had taken a private stake in
either company before flotation…
you’d be very, very rich.
However, the reality for
most investors is likely to be
substantially different. Buying a
stake in Amazon in 1999 at the
height of the dotcom bubble would
have meant an entire decade in
the red before eventually realising
a 10-bagger. You’d have probably
sold.
Some clearly got it right, though.
According to CB Insights, there are
197 “unicorns” – another name for
a tech firm with a billion-dollar
valuation – that are still in private
hands. Together these are worth
$679bn, having raised $142bn
from investors. This year 22
companies have joined the global
unicorn club, while forty did so in
2016.
Some industry professionals,
however, question whether this
means we are entering another
dotcom bubble.
For Daniel Lockyer, fund
manager at Hawksmoor, the
current market reminds him of the
year 2000 in terms of valuations.
“Disruption is a big theme with
so much market share to grab
from incumbents and this is why
Uber, Tesla, and Just Eat and Purple
Bricks in the UK are so highly
valued,” he says.
HUNTING GROUNDS
Jason Hollands, managing director
of Tilney, says the real opportunity
is investing in firms before they
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commercialise a product or service.
The main challenge for investors is
getting access to such deals.
“A typical lifecycle for a tech
company will initially involve
bringing in some high net-worth
individuals as angel investors,” he
explains.
A disproportionate number of
unicorns evolve from a tiny corner
of California. Companies gravitate
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“Disruption
is a big theme
with so much
market share
to grab from
incumbents”
towards the richest pools of capital,
Hollands says, and in the world of
tech financing this means Silicon
Valley. James Anderson, manager
of the Scottish Mortgage trust, says
it has more to do with “network
effects” specific to west coast
America.
In his 2014 treatise Zero to
One, Peter Thiel – one of PayPal’s
founders and an early investor
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