It may be a perfect storm for unicorns if the Federal Reserve raises interest rates soon: a sizable portion of unicorns, companies whose value has exceeded $1 billion, is held by private equity, which is sensitive to fluctuations in interest rates. Stock market bubbles are already speculative, and when hikes like the Fed’s remove tangible value from stocks and artificially inflate their worth, investors may be sent scrambling.
But if interest rates rise and the number of so-called unicorn IPOs increase, the current tech bubble may collapse as private equity begins to change course.
As IPO offerings are themselves devalued, they will become higher in supply, which could hurt the market as a result of overabundance and inflation. It’s a good idea to be wary of unicorns as an investor, as veteran investor Henry Kravis will tell you, but given that the current number of IPO offerings matches the number in the late 1990s before the big burst, it’s smart to be especially wary now.
Interestingly, some are arguing that this bubble is different. Financial bubbles are generally classified by object of speculation, by taking stock of their potential economic possibilities, or by the locus of speculation: is the bubble expressed in the prices of traded securities in the liquid capital markets, or is it driving the valuation of assets held? It’s this last avenue that changes the game for unicorns.
Unicorns’ value does not come from the public market or from a credit system. Their value comes from places like hedge funds or mutual funds and institutional investors who are paying premium prices for security. But in making purchases outside of the liquid market, investors give up the option to “get out quick”—they aim to make money somehow, even if the investment fails. All unicorns will either go public or they won’t, and that is a risk of its own.
It’s a risky choice, even if the payoff could be incredible. Expert investor Kevin Kinsella, founder of Avalon Ventures, thinks the current bubble is going to collapse one way or the other. He thinks the bubble will explode because of several things, including the devaluation of Chinese currency and the higher interest rates in the U.S. Public investors are going to feel the sting of failed ventures, Kinsella says.
He believes the unicorns that are going to be left after the bubble pops are the ones who represent real businesses instead of ones posing as businesses. For every ten losers, there’s only one winner—and very few people make plans with the expectation of losing.