Market Forces Also Apply to Unicorns (it just takes time)

While the unicorn club of startups were doing amazingly, insanely well, they commanded an endless stream of press coverage. Stories of overnight riches appeal to the populace. Jealously often begets just as much attention to overnight implosions and associated schadenfreude, so I expect many stories of the fall of these unicorns, too. A particularly interesting article popped up at Techmeme today, one that I thought balanced the typical pomp and glamour of unicorn stories with rational arguments.

TL;DR? Yes, all will eventually be subject to, whether in private or public, market forces, supply and demand, and capitalistic gauges of success (value). It’s really beginning to show up now.

Perhaps it was just a phase. Over the past 3-4 years, you weren’t trying if your startup wasn’t pitched as the disrupter of a trillion dollar industry and your goal wasn’t to become a complete monopoly. You didn’t “win”, unless you’d ground your competitors under the heel of your boot, on the way to at least 1 BILLION users.

There are still a couple of those, whose visions of such grand proportions are not yet over (perhaps Uber and Airbnb?). For most, though, they’re simply also-rans that haven’t undergone the level of scrutiny publicly traded companies do. And with mutual funds openly adjusting their book values down, even the private markets look less like the way to avoid the spotlight. (Okay, some are still fighting this – “Some venture capitalists anticipate further markdowns by mutual funds. That could make some startups more reluctant to seek mutual-fund money, since public disclosure of their valuations is watched so closely.“)

The revaluations are good and fair. This is the system returning to a period of normalcy, before the cycle repeats itself. It’s starting to sound a bit like the early part of 2007, when the MBS and CDO bagholders were only beginning to mark down the absolutely toxic investments on their books, all the while offloading them as fast as they could and getting on the opposite side of the trade. I just watched The Big Short.

Take a Look At The Banks

There’s a lot of worry about the state of the credit market in the United States and everyone’s along for the ride down. Despite a few attempts at clawing back up, the bears have a stranglehold of Wall Street and markets around the world – the TSX has been beaten down as well. The volatility index has spiked up to its highest levels in over 3 years, indicating that fear is driving the markets.

I believe the reaction has been exaggerated and many solid companies are getting oversold. Even the industries directly related to the credit and investment concerns – the brokerages and the banks – there are many companies that have little exposure. For example, Bank of America doesn’t even play in the subprime mortgage market, but its stock has been battered, just following along in the sell-off. This is a stock that deserves a good, hard look. Its fundamentals are solid and the recent pull back presents a nice buying opportunity.

Additionally, Goldman Sachs looks like it could benefit from the whole mess. It doesn’t have much exposure to the space either, not to the extent of some of the other investment houses. Additionally, it is financially strong and could look at picking up one of the other brokerages while they’re weak or at least pick Bear Stearns’ assets apart should they go under.

Take a look at the space. It’s risky, but there’s also a lot of opportunity. Let’s see if the Dow can form a nice ‘W’ bottom and start bouncing back next week.