Flight to quality – Unicorns and donkeys part III

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The market is calling out the donkeys disguising themselves as unicorns.

• The market has gotten off to a terrible start in 2016, but it is also taking no prisoners when it comes to separating the unicorns from the donkeys (see here and here).
• Until recently, any company whose business is based upon the network economy could do no wrong and had easy access to capital through the private and public markets.
• This was because there was an oversupply of positive sentiment and cash and a shortage of paper.
• With the weakening growth in China and rising interest rates elsewhere, it is clear that quantitative easing is now over.
• This, combined with a large increase in the number of companies in the networked economy all looking for capital, has played merry hell with valuations.
• The result has been that only the well established players with hundreds of millions of users and fast revenue growth can still command high valuations.
• This leaves the also rans (donkeys) struggling to raise money and the IPO window in the public market is slamming shut.
• Furthermore, those companies that do not really have an ecosystem and are trying to sell hardware are also really struggling as the smartphone market is slowing to crawl with IoT and wearables yet to really emerge.
• This is why GoPro, Under Armour, FitBit are all in free fall followed by would-be ecosystems and services like Twitter, Square, Box, Dropbox, Xiaomi. GrubHub and DoorDash.
• In the meantime the true unicorns: Facebook, Uber, Airbnb, Linked-in, Amazon and Spotify are faring much better both in terms of fundamentals and in holding their valuations.
• This is the classic flight to quality observed when the risk appetite of investors evaporates and I see no reason why thigs should improve in 2016.
• I think that the key to being a unicorn is in becoming to the “go-to” place for a service as it is then that real monetisation can begin.
• The rule of thumb that I apply here is:
• A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit.
• Once this has been achieved, then there are real fundamentals to a business which is then in a much better position to survive when the going gets tough.
• Everyone else including those that are trying to monetise hardware without an ecosystem, are going to have a very difficult time this year.
• I do not want to back any company that does not either have a thriving ecosystem or a commanding position in the market that it serves.