Unicorns: Prized Game For Investors On The Hunt

The popular website Airbnb gives travelers to Paris the possibility to stay a few nights in 40,000 different homes and apartments without a single Haussmanian building or bourgeois townhouse in the French capital entered on its balance sheet. Valued at over 25.5 billion dollars, some investors question how this brick and mortar-less company can reach valuation levels only previously reserved for hotel industry elites like the Hilton and Marriott groups. More head scratching occurred when Microsoft recently acquired LinkedIn for about the same amount, 26 billion, after the social network announced disappointing losses at the beginning of the year.

The answer to these perplexing situations lies in the mystical "unicorn" status - a term reserved only for the rare and highly sought after species of start-up companies (mainly tech) worth over 1 billion dollars. In 2015 alone, venture capital firms injected a record 128 billion dollars into unicorn companies. It's not only VC, though, who are chasing unicorns. Asset managers' increasing taste for this type of investment contributed to an increase of 44% in the volume of unicorn investments between 2014 and 2015.

But why is the unicorn so prized by investors? The simple answer is the return on investment that this type of company can afford. Since the financial crisis in 2008, interest rates have been down across the board for more traditional investment products, but unicorns can offer rates of return which go far beyond what is found on the market today. However, if all the unicorns were to stage an IPO at the same time and at their current dizzying levels of valuation, there simply would not be enough capital on the market to buy up all of their shares. Venture capital firms are aware of this, and must therefore tread carefully towards well-conceived exit strategies.

It's important to understand that not all unicorns are created equal. An over-evaluated unicorn is especially vulnerable to macroeconomic market forces such as increasing interest rates. Investors need to track and trap the right unicorn, that special one whose multi-billion dollar valuation will not disappear overnight in a puff of pixie dust. Investors should be looking for unicorns with a little more meat on their bones. That is to say, sound financial footing and a realistic performance outlook. Our example unicorn, Airbnb, posted higher than expected revenue for 2015; it's a sign that this one may be the real thing. The...