Troubled Unicorns No One Wants to Talk About Anymore

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Special to 24/7 Wall St. From PrivCo

All too often the top 5% of high-growth companies are fawned over in the media, while the other 95% receive no attention at all. But what about those companies with big dreams of gaining membership to the unicorn club who get their horns clipped too early – they seem to be shunned and ignored until extinction is imminent. There are companies that are ignored after their initial growth spurt, and the best example we could think of was Gilt Groupe.

There were nine investors in Gilt Groupe’s Series E round in May of 2011. In 2011, those nine investors thought they were investing in the next startup to revolutionize the retailing market. Instead of getting the next Amazon for high fashion, they got a SpaceX test rocket. Lots of excitement, a bit of fizzle, and just when everything looked like it was about to take off, a catastrophic explosion occurred. Gilt Groupe was sold at a massive discount almost overnight, embracing an all-too-literal realization of what its business actual does.

But what if those investors could have seen the warning signs? Valuing a company is hard enough as is, and the art of valuation becomes increasingly more difficult in a new industry, even if the science (user metrics, basket sizes, growing market share) seems sound.

Giving our clients various metrics to help them make a more scientific decision is what we do at PrivCo. No financial model is perfect, no valuation tool is bulletproof, no forward-looking projection is gospel, but each piece of information helps. Taking the past as precedent, we utilized PrivCo’s private company financial database to present a number of factors about similar companies that PrivCo has access to. This would include everything from revenue, to latest funding rounds, market overviews, and the competition. The companies we’ve presented here have all made it past their initial growth curve. They were growing ­— now they’re not. No tombstone has been written for any of the companies presented below, but the available data may presage concern. None of these companies is predestined to see the same fate as Gilt Groupe, but, in a number of cases, the comparison with Gilt Groupe’s growth and decline progression should serve as a warning for investors.


Latest Funding Round: January 2014
Funding to Date: $1.1 bln
2015 Revenue: $400MM

Dropbox has undergone the unfortunate but all too often repeated path in Silicon Valley of being crowded out in the marketplace it helped create. While it’s not at Myspace-to-Facebook proportions, Dropbox was revolutionary for a time but is now dealing with the race to the bottom for consumer cloud storage. The company recognized this early on and has made a pivot to enhance its enterprise and business services, though it has found this market already populated with cloud and tech behemoths like Amazon, Google, and new entrant Box.

The company last raised equity in January 2014 (a $500MM debt round came four months later). Its valuation took a hit last March (actual markdown occurred in October ’15) when Fidelity marked down its shares in the company by 20%. For Dropbox to fully recover to its $10bln valuation, it will have to demonstrate that its enterprise-focused business is not only viable but growing. It has been two and a half years since it last received money and with revenues remaining flat, raising a down round at this stage could be the beginning of a downward spiral for the company. Dropbox is more likely to IPO than raise at a lower valuation, and it would be prudent to do so on the heels of Nutanix’ and Twilio’s debuts this year.

Latest Funding Round: December 2011
Funding to Date: $948.2MM
2015 Revenue: $125MM

LivingSocial has seen its revenue fall dramatically over the past few years. In March of this year, the company cut nearly half of its staff. These are both tell-tale signs of a company in decline, and it will be interesting to see how the leaner operation will impact its market strategy going forward. While LivingSocial didn’t get crowded out by competitors, its acquisitions, offerings, and expansion all played into the corporate paralysis it finds itself in today. The company is testing out new products such as “Restaurant Plus” while scaling back its daily deals offering.

As the company scales down, its revenues have declined; this, however, might not be a bad thing. If LivingSocial can sustain its revenues above $100MM, efficiently utilize what remains of its nearly $1bln in funding, and finally provide some signs of growth for its new products, it could raise funds again. Growth and user metrics might take a few years to reverse the trend and grow again, and it’s hard to say whether LivingSocial’s balance sheet has the flexibility to withstand that without an additional capital raise, given that its last raise was in 2011. The next year for the company will be pivotal as its new products and leaner structure will provide a make-or-break scenario for the company and its investors.

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