Sunday, April 3, 2016

The SEC on Start-Ups, Eye-Popping Valuations and Unicorns

Last week, comments from Securities and Exchange Chair Mary Jo White’s speech “Protecting Investors in an Innovative Financial Marketplace” included:
  • “It is undisputed that venture investing is not for the faint of heart … While the common refrain is that 9 out of 10 start-ups fail, an equally interesting statistic … is that 70 percent of failed start-ups die within 20 months after their last financing, having raised an average of $11 million. In other words, not only are these investments highly risky, they fail quickly too.”
  • “A current feature of the pre-IPO financing market  … that has gathered considerable attention recently [is] unicorns … I am speaking not of the creatures of fantasy, but of private start-up firms with valuations that exceed $1 billion. By one count, there are nearly 150 unicorns worldwide, many based here in Silicon Valley.  And, they do not appear to be an endangered species. One survey shows that there were 52 unicorn financings in the last three quarters of 2015 compared to 37 such financings over the 12 months that ended in March 2015.”
  • Beyond the hype and the headlines, our collective challenge is to look past the eye-popping valuations and carefully examine the implications of this trend for investors, including employees of these companies, who are typically paid, in part, in stock and options. These are areas of concern for the SEC and, I hope, an important focus for entrepreneurs, their advisers, as well as investors.”

  • Regarding startup failure – By increasing their focus on customer acquisition, rather than fundraising, start-ups will likely increase their potential for success. 
  • Regarding Unicorns –  As some successful start-ups avoid the scrutiny of regulators such as the SEC by remaining private, the term Unicorn will  continue to be embraced by market participants.
  • Regarding eye-popping valuations –  Asset valuation is always challenging and often only validated in hindsight -  and the investment process remains a mix of skill, art and some luck.  

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