What's in a horn? Unicorn or Horse

from the human-edited captions published with the video. timestamps jump to that point in the video.

1. 0:20

   So, what's the deal with these unicorns? Why does everybody seem to be after a horn? I don't know either, But by the time this episode's done, maybe we'll know. Stay tuned. So, unicorns. Why do we care so much about them? The funny thing to me is that we called them unicorns because they were supposed to be so rare. They were supposed to be a company that didn't exist. $1,000,000,000 USD company. And it turns out, today there's more than a thousand of them.

2. 1:14

   So clearly, one of two things is occurring. Either they're not so rare as they used to be or inflation is really picked up. And I'll let you parse out which of the two is more responsible than the other. But I think the point still stands, which is: if unicorns are really meant to be the kind of companies that don't exist. What's going on here? One of the questions that ought to be immediately asked is what are these companies being measured by? When everyone wants to be labeled as a unicorn?, to generate the FOMO, where's the valuation coming from?

3. 1:51

   Valuation is always a tricky issue. Well, when we don't have cash flows to measure at least. And so it's very important to think about what's going on and whether there may be self-reinforcing feedback loops related to valuation as we're pursuing this kind of label. Very dangerous thing, right? It happens in other markets, but in particular, because private equity markets don't have the kind of market mechanisms that we may have in other circumstances, these issues these differences, these gaps, these mismatches between "true" value and stated value can become exceedingly extreme And in the absence of, again, other forcing mechanisms, these prices can diverge in dangerous ways.

4. 2:43

   But let's talk for a minute about how these companies might get to those valuations. So one of the ways that somebody could get to be a unicorn is through an actual valuation in a in a more firm sense, right? So, there could be a transaction in which an entire company is purchased for cash and the cash amount, the proceeds to the sellers, could exceed $1,000,000,000. I think anyone would agree that a company that meets that threshold deserves to be called a unicorn under the appropriate definition here, which is a 100% cash transaction for the complete acquisition of the assets or equity of a company.

5. 3:22

   Now, on the flip side, we may have deals that are, let's say, stock transactions, either entirely or in large part. Should a unicorn be deemed to be a unicorn? Should it be given its horn in situations like that? Probably in most situations, I would argue. Next, we have situations where, let's say a 5% or 10% or 20% raise, which may not even be a raise, a direct cash raise, but maybe a raise that scheduled or has conditions, has a portion of or all of its mark set at over $1,000,000,000.

6. 4:00

   These transactions start to get to be a little bit more complicated, even when they occur in public markets, for example, in partial flotation or listings. I think there's strange dynamics, many of which are well studied, that occur when you have limited, partial, fractional listings of companies or you have fundraising events where only a small percentage of the available company shares are provided to the financer.

7. 4:29

   We talked about FOMO earlier I think there's elements, behavioral elements or diversification elements, that can result in, let's say, are unjustified or unsustainable premia being assigned in situations like these. And finally, we have internal marks, in the absence of true liquidity, either derivative marks or purely hypothetical or comp-based, such as in 409As. And these are also, as we move through this spectrum, marks or labels that we should frequently question.

8. 5:07

   And so, obviously, companies that have true cash flow, not just cash flow, but free cash flow, in other words, real margin, real profit, are going to be warranted even if they have private marks that have limited indications related to them. But, if you have a company that's pre-revenue with intellectual property that doesn't have a firm basis for valuation and they don't have any true indicative bids for the the essence of the company in other words, a majority transaction in cash.

9. 5:45

   Then it strikes me that the label unicorn might not be warranted. Turns out it might just be, well, a horse. And I don't know what percentage of current unicorns fit into that category, but I suspect it's more than a few. In fact, I'd wager it's more than half of all unicorns today are companies that are pre-revenue or at least pre-profit, in other words, they have no free cash flow, that are saddled with large amounts of debt and equity, and that have dubious prospects with respect to the sustainability of their business model or the true value of their IP.

10. 6:23

    And in other words, I think we're going to have a painful time for unicorns and a good time to be buying horses. So, we'll see how it all ends. but in the meantime, I think I'm going to need to go shovel again. Wish I had a horse to plow, but we'll see. Good time to be in the market, like I said. See you all next time.