Magical glue factory

Tech unicorns galloping toward end of the rainbow

Even an old financial wizard like Carl Icahn is buying into the mythology that has valued many start-ups at above $1 billion. He's plugging $100 million into Uber's arch-rival Lyft. But as similar creatures have been finding it harder to find believers in the stock market, the magic powering the gap between public and private company valuations is bound to wear off.

While Facebook has done well by sucking up online and mobile advertising spending, second-tier internet stocks have suffered something of a correction over the past three months. A basket composed of Twitter, Yelp, LinkedIn, GrubHub, Zillow and TripAdvisor has lost 12 per cent of its value. And that figure may be unduly flattering. Yelp, for instance, rose 20 per cent last week because the company appears to be hawking itself.

Though valuations of public internet stocks still remain extraordinary, there are no evident signs of retrenchment for private companies. Uber is seeking to raise $2 billion at a $50-billion price tag five months after it was valued at $40 billion. This giddiness may reflect the fact that growth companies are scarce, and public investors will ultimately place a premium on these unicorns, the Silicon Valley term for these $1 billion-plus private firms.

Unfortunately, initial public offerings aren't an obviously profitable exit for backers. There have been seven tech floats this year, and most small. Performance hasn't been that great either. Eagerly anticipated online bazaar Etsy has lost more than a third of its opening day value. Others have done less well.

Box, a cloud-storage firm that went public in January, is now worth just under $2 billion. That's below the headline figure on its previous funding round. Other unicorns which floated earlier have lost their horns. Hortonworks, a big-data software firm is now worth under $1 billion. Textbook firm Chegg is only worth about $700 million.

Facebook has shown that extraordinary companies can merit remarkable valuations. Perhaps SpaceX, Airbnb or Uber have earned their horns. Yet investors have bred 75 or so unicorns in the less-disciplined private markets. These beasts appear unusually fat compared to companies wandering in public. At some point, that disconnect will become apparent.