Jorge Francisco González Gasque
General Partner
G2 Momentum Capital
Expert Contributor

Unicorns on a Diet

By Jorge Francisco González Gasque | Wed, 07/13/2022 - 16:00

This is the story of a herd of very happy unicorns joyfully running through the prairies of the world. They were fat and strong, fed with increasing amounts of their favorite food, which, of course, is cash, as they welcomed dozens of new unicorns joining the herd every quarter. Life was good.

A few of these happy unicorns crossed over the very dangerous fence that surrounded their secure farm and ventured into that wild, inhospitable, unstable ground called the public markets. They did so because they knew that this is something they were expected to do someday. Being the young millennials that they were, they procrastinated and stalled the inevitable jump for as long as they could but, in time, they knew their time would come. Of course, their eager employees holding stock options but wanting cash were very enthusiastically pushing them to do it.

Some of them were frightened by the sore sight of the corpses and badly wounded bodies of some early crosser unicorns, like Uber and WeWork, but most of them remained confident that their story would be different. So, they went and met new friends in the financial community to help them prepare their IPOs or, even better, their hassle-free SPACs to make the big jump and become public companies.

The storm clouds were gathering and the sky turned gray as a very disrupting pandemic brought the world upside down. Those clouds would gain momentum with a stimulus check rainfall and a subsequent inflation bubble that triggered all the alarms of the people in suits. Disturbing images of a war erupted on the TV and everybody felt uneasy. The public markets took notice and decided it was time to kill those adventurous crossed-over unicorns, along with big strong animals like Apple, Amazon, Alphabet, Microsoft and basically everyone out there. There was blood all over the place.

The people in suits threatened first and fired later, with a couple of very harsh interest rate hikes, and all hell broke loose. The slaughterhouse ax swung away and no prisoners were taken. Blood multiplied and flooded the markets and there was chaos.

While the noise of battle and the cries of the fighters were heard throughout the meadow, even thick-skinned speculators that were betting on something wild called cryptocurrencies decided it was time to go home, leaving Bitcoins and Ethereums lying around, and the blood gushed out of the crypto rooms as well.

Words of Wisdom

Enter the same guys who were so benevolent in feeding those unicorns in the prairies but now felt a bit of pressure – you know them as VC funds. You see, their pride was hurt as some of those unicorns they created were thrashed on the public markets. For some that kept portfolios of companies even after they went public, the damage was more than just hurt pride. The damage was in returns, valuations and in the end, carried interest.

The straightforward approach would be to tell their portfolio companies: “You know guys, our unicorn valuations were probably too high and your brothers in the public markets can tell you just that. Can you please bring them down to the earth and you’ll keep chugging along as unicorns? – well, maybe some of you would now become soonicorns, but that’s all right. You’ll get back here sometime.”

They took a tougher road and declared: “Guys, money will be tight in the future, for real. So, you better find a way to make yourselves profitable – or at least, less of a burner. Make money last long and maybe fire a few of your stock option-loving employees. When and if you raise money, expect down rounds, because that’s the way it will go down now. From now on, we (and our colleagues) will only invest in lean, mean unicorns. You are now officially on a diet.”

What’s Next?

Like a strong believer in the power of venture capital, I am extremely confident that this phase will be overcome in the future. Maybe in the near future. We all knew those valuations were sky-high, right? We knew that public market valuations were high as well. In the end, by extracting comparable benchmarks from public companies, you determine the value of the private companies, so it was all tied together.

As valuations come down to earth, the real value of the brilliant unicorns roaming the prairies will shine because of the big endemic problems they correct, because of the disruptions and life-changing new games that they bring, and because the fresh thinking that they were created with is utterly real. These great companies will glow long after the blood dries and the screaming ends. These unicorns are here to stay and will continue to change the world and create huge economic wealth.

And the wealth they create will make their founders and their funders rich. Maybe with just a little more moderation.