HR & Management

Revealed: The overvalued $1bn+ unicorns "flying too close to sun"

3 min read

14 August 2015

According to Victor Basta, managing partner of M&A advisory firm Magister Advisors, a "class" of Icarus companies have been discovered in the famous $1bn+ unicorn club.

Pinterest, Shazam, Evernote and Snapchat are unlikely to survive without turning to other businesses for help as each are overvalued “features”, Basta suggested.

Microsoft’s market value at IPO was $500m, Cisco’s was $300m, while Starbucks was just over $100m. He argues that today 107 private companies are valued at $1bn+. To earn a spot in this club, startups need to have a sustainable business model derived from a “very high value product business” or a global platform, he said. 

However, Basta claimed that a few unicorns fall into neither category. 

“They are at huge risk of devolving into ‘features’, embedded within other platforms or products, or incorporated into competitors’ next releases,” he said. “This group of Icarus startups fly very close to the burning sun: simultaneously attracting ‘platform’ company valuations while shouldering the huge business risk of becoming low-value add-on features during the next few years.”

In a recent note, Basta concluded that Pinterest, Shazam, Evernote and Snapchat defined a new “Icarus junk debt category”

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Magister Advisors contended that the unicorn with the greatest risk is Shazam, a discovery-based app reliant on huge amounts of customer data. Basta claimed that Shazam would be best deployed, or owned and developed, by an existing platform player. That player could leverage its own installed base to provide the very best discovery experience across music, TV or other media.  

“A natural home for a Shazam-like experience would be in the product set of a vendor such as Apple or Google, and never as an independent whose data and development resources can isn’t as broad,” he said.

Pinterest has nearly $600m of venture capital and a $5bn private valuation that requires the business to achieve a $10bn plus valuation in short order, said Basta.

Ad revenue from “promoted pins”, or commerce revenue from buy buttons, are the most likely revenue sources, but Facebook and Google are already garnering the lion’s share of new mobile ad spend.

Basta added: “This doesn’t mean these companies aren’t valuable; engaging 20-25 per cent of online users as Pinterest does has strategic value to a larger player. But normally a company whose offering is at serious risk of being a feature needs to prove a lot more before commanding a valuation of more than $1bn.

“Put another way, a business whose offering is at risk of becoming a feature is only worth $1bn when it proves it’s worth $1bn.”