Are Unicorns Real?

We all know what a unicorn is from the practical sense - a mythical animal typically represented as a horse with a single straight horn projecting from its forehead.  In the investment world, a unicorn is a privately held tech startup company with a value of over $1 billion.  The term was coined in 2013 as it describes the rarity (1 in every 1,538 tech companies originated from 2003-2013) of a company achieving this status.  Some “unicorns” are household names - Airbnb, Uber and Pinterest - and some are not  - Jawbone, Domo and Houzz - and then there’s some that are well known but for the wrong reasons (looking at you Theranos).  

Often times, these private companies decide to list their stock on public stock exchanges through an IPO (Initial Public Offering)  which results in receiving cash for giving up some ownership (shares of stock) in the business.  An investor’s success  is measured years down the line based on the performance of the stock.  Today’s IPO’s are much larger and more established than those that occurred during the dot-com bubble in the late 90’s with an average of 11 years in business today, compared to only 4 years back then.  More prominent are the successful  IPO’s (Amazon, Google and Facebook to name a few) but more often than not, IPO’s don’t live up to the hype.  In the 90’s, some of the biggest disappointments included Pets.com, Garden.com and e.Toys.com.  Some of the current crop who have failed to live up to the billing include, Groupon, Fitbit, Blue Apron, Lending Club and Snap Inc (Snapchat).

With technology ever-changing, it’s very difficult to pin down which companies will come out on top and more often than not the tech company issuing the IPO is not profitable.    For a company to be sustainable, they need to show consistent profitability over time.  Famous investor Warren Buffett hasn't bought an IPO Since 1955 and urges investors to avoid IPOs at all costs...

“I think buying new offerings during hot periods in the market ... I don’t think it’s anything the average person should think about at all,” 
- Warren Buffet -

The bottom line is this: Don’t think it’s a stock being purchased, approach an investment like buying a business.  In baseball terms, new company stock is similar to the chances of hitting a home run.   While there is always a chance that happens, most likely that will not be the outcome.