Unicorns may be mauled by bear market

After a year in which freeflowing capital fuelled unprecedented growth in socalled tech unicorns, the sector is bracing for a slowdown that could thin the herd.

Unicorns-a term coined for the usually rare billion-dollar, privately funded start-ups-have been proliferating in the US, China and elsewhere as venture capital investors bet on the next Google or Facebook. But the prospect of a "bear market" where prices are falling, combined with other factors, could send unicorns running for cover, observers who follow the sector say. Some warnings have already appeared.

Venture-backed start- ups globally saw a 30% drop in funding in the fourth quarter to $27.2 billion, according to a survey by KPMG and research firm CB Insights. A separate survey by 451 Research found more than half of tech investment bankers predict venture funding will tighten in 2016 compared to last year, the most bearish outlook since the 200809 recession.

Some unicorns have seen their value slashed by investors aiming to put a fair market evaluation on their holdings. Mutual fund company Fidelity last year marked down the value of its Snapchat holdings by 25%. In this scenario, cashhungry unicorns are likely to face a harder time getting fresh capital, said David Erickson, a senior fellow at the University of Pennsylvania's Wharton School and former Wall Street banker who led technology share offerings.

The weak stock market could impact private firms, potentially forcing a delay of initial public offerings (IPOs). If they need to raise cash, it will likely be "down rounds" with a lower valuation than prior funding efforts. "Valuations will typically come down," he said. Since the "softness might be prolonged, venture capital firms will be focused on protecting the value in their existing investments rather than spending too much time investing in new names".

Erickson said there are some similarities to the tech bubble of 1999-2000, even if the new firms have more developed business models. "While the companies are more seasoned, the issue similar to 2000 is that many are burning tons of cash," he said. "If they need to have enough cash to break even and if they can't access capital either through the public markets or private markets, then they face more difficult decisions."

Erickson added that "we are not quite at that dire stage now", but that if capital dries up, it may mean that promising start-ups would either need to sell themselves or "hit the wall". The unicorn populationestimated by Forbes this month at 173 companies worth a collective $585 billion- is still alive, but some are hurting.

CB Insights chief executive Anand Sanwal said he expects to see "some wounded unicorns" but that there is still capital available from private equity and corporate venture funds. "Some of those companies that got ahead of themselves on valuation are going to have difficult conversations. You can't just keep selling your dream and your business model can't be raising venture capital," he said.

Charlie O'Donnell at Brooklyn Bridge Ventures said many of the unicorns are likely to face a "down round" if they need new capital, because investors are more cautious. "It's not that they are concerned that the world will implode and that start-ups won't still be a good bet over the long term," O'Donnell said in a blog post. "They are just.... busy taking care of their wounded."

A report by KPMG and research firm CB Insights found that 2015 was a blockbuster year for start-up venture funding despite a cooling in the fourth quarter. For the year, the report found $128 billion in venture funding for start-ups, up 44% from 2014. The number of funding rounds was more than 7,800. But it noted that some companies which went public "fell short of recent private valuations, no doubt rattling VC (venture capital) investor confidence". The most prominent in the group was mobile payments start-up Square, led by Twitter co-founder Jack Dorsey.