Saturday, 26 December 2015

Start-up unicorns: does IP matter?

Surely one of the more colorful terms in the world of start-ups is the word "unicorn." As most readers are probably aware, in
addition to being the name of the mythical animal with a single long horn protruding from its forehead, unicorn has come to mean within the venture capital industry a privately-held start-up company whose valuation exceeds one billion dollars. These valuations are not based on the amount of actual sales, which are a bare fraction of that amount, if at all, but rather some combination of hard data and different degrees of wishful thinking about the future prospects of the company. Fortune magazine estimated as of early 2015 that were over 80 unicorns, and Institutional Investor magazine recently claimed that there are now over 120 such companies, the dearest of which is Uber, valued at between $50- $60 billion dollars.

How IP affects the valuations of unicorns is uncertain. While the role of IP as part of such valuations will vary from company to company, it is this blogger's anecdotal impression that, overall, factors such as network effects and scaling are much more central than the value of the IP to a company’s unicorn status. This observation should not come as a surprise. All that readers need to do is to recall the huge valuations given a few years ago for patent portfolios held by companies such as Motorola Mobility and Kodak. A fortiori, given how we now know that these valuations were wildly excessive on the high side, any expectation that IP will be correctly priced in valuing a privately-held start-up is simply unrealistic. Beyond that, as far as unicorns are concerned, there seems to be a disconnect between the value of a company’s IP and its valuation. Unicorns may be nourished from various source of value, but IP does not seem to be one of them.

Indeed, the recent piece that appeared in Institutional Investor magazine expressed concern that the obsession with achieving a high valuation will work to the detriment of such a start-up company, because it may mean that senior management is spending too much time promoting the notional valuation of the company at the expense of the day-by-day running of the business. There was even a suggestion that unicorns are the most recent manifestation of the "subprime" phenomenon. Depending upon the industry involved, one wonders whether closer attention to the IP position of unicorns might prove useful in giving a more accurate picture of their value.

After all, valuations do not take the place of receipt of cold cash or its equivalent, which is the ultimate name of the game. Here, a unicorn valuation may actually work to the detriment of the company. This was pointed out in a recent Bloomberg interview with Alan Patricof, a well-known U.S. investor. He noted that since the IPO market remains tepid, a unicorn that wishes to cash out at this time will most likely have to find an acquisition partner. However, the larger a unicorn's valuation is, the more difficult it will be for the acquirer to come up with the necessary funding to consummate the transaction. As a result, more may paradoxically be less. Can it be that a unicorn may wait, hoping for the IPO market to awaken, or be forced to settle for an amount less than its valuation warrants? Whether the mythological unicorn has anything to offer its current manifestation in this respect remains to be seen.

1 comment:

Unicorn fancier said...

The ratio of IP content to cash in hand in Unicorns varies considerably between sectors, and the distribution of IP rights across territorial markets is often very patchy. There has been some relevant writing on this topic on the Aistemos blog (see though it has tended to focus on patents to the exclusion of other IP rights.