Magical mules

Silicon Valley unicorns to starve without tourists

Silicon Valley unicorns are beginning to starve without the financial tourists. Funds of the mutual, hedge and sovereign wealth variety have been feeding tech start-ups and their $1-billion mythology. As valuation clouds darken the rainbows, these outside investors will retreat. That should help venture capitalists get back to reality.

Nearly $60 billion was plowed into private firms last year, according to Thomson Reuters data, about twice as much as in 2012. These figures understate the recent growth, however, as they only count investment rounds when the lead investor is a venture capitalist. Over 80 per cent of unicorn funding rounds in the last three quarters of 2015 were led by different kinds of investors, California law firm Fenwick & West reckons.

The new money is coming out of deep pockets. Mutual funds Fidelity and

T Rowe Price, which have nearly $3 trillion of assets under management between them, bought stakes in Uber, Airbnb, Pinterest and Dropbox, for example. Sovereign wealth funds like Singapore's Temasek, Qatar Investment Authority and the Kuwait Investment Authority have ridden the unicorns, too.

Locals are benefiting handsomely from all the magical thinking. On average, venture capital funds have generated a return of 11 percent a year over the past decade, according to Cambridge Associates. That compares to 6.8 per cent for the S&P 500 Index.

As public tech stocks have tumbled, however, so too have valuations of the private ones. Mutual funds have been marking down the value of their investments in Zenefits, Snapchat, Dropbox and many others. This hot money is going cold.

It will take more time for entrepreneurs and their backers to come to grips with the lower valuations. Some will burn through cash. At least half the approximately 240 global unicorns won't exist in a couple of years, either going bust or getting bought, predicted Jim Breyer, an early Facebook investor, at a Breakingviews event in San Francisco last month. That should scare away plenty of other tech funders discomforted by the madness and leave the venture capitalists to tend to the thinned herd and breed a new one.