The other day I mentioned lessons entrepreneurs can learn from unicorns. Not the mythical horses with a horn, but the high tech startups that boast a minimum $1 billion valuation.
Aside from object lessons, however, there's the other issue of how long many of these companies can continue. Fred Wilson of Union Square Ventures recently pointed out that a "tremendous number of high growth companies [are] raising money this year with negative gross margins," meaning that they sell goods or services at a loss. Fortune wrote about VCs who are keeping dying unicorn lists. And now even some of the people who thought that "damage from a correction in pre-IPO tech companies would be fairly contained."
Some in the industry, like VC Marc Andreessen, have said that there is no tech bubble, although he's warned about venture-backed startups burning through cash too quickly. But there's a real danger here, even if all these companies are still privately held and not able to directly tip the equities market:
Investors are quirky and far more subject to the pull of emotions then they would like (or would like anyone else) to think. Should some of these deals head south, they're going to take a lot of money with them. That will make many investors panic and decide that high tech investments aren't safe -- at least for an extended period of time -- which will further rattle all equity markets.
As investors get worried, they could also look to accelerate their exit strategies from other companies so as not to get caught again. That could push other firms into rushing plans to the detriment of the business or finding themselves closed down if investors decide to cut off funding even though they had supposedly committed to money over a number of installments.
It may be that some of the unicorns are working on something meaningful and useful. However, when the plug gets pulled, chances are that all the work goes down the tubes, unless the company sells off the intellectual property to help recoup some of the lost investment.
When a company goes under, the employees and all the vendors that made money from the commercial relationships with the former firm get hurt. If a number of unicorns go under, that could mean some significant shakeups in areas of high tech concentration, such as San Francisco, Seattle, greater Los Angeles, the Boston area, various cities in Texas, and other parts of the country.
Gun shy investors
Once shot in the foot, twice as careful. People who had put money into early stage companies, assuming that the good times would never stop, will now be wary about funding other tech ventures. Some of the early stage individuals may have significantly less now to invest than before.
One would hope that going forward people would be smarter. It doesn't take either much memory or research to see how negative margins, too much spending, and a lack of realistic plans for moving toward profit caused a huge meltdown in the sector in the early 2000s. But it seems that we may be stuck by a generational problem, with people every 20 years thinking that they've unlocked the secret to easy money.