• marktluszcz

Beware of "Fakies"...



A recent Wall Street Journal article (http://graphics.wsj.com/billion-dollar-club/) has suggested that 80 companies have now entered the "billion dollar club". This is one of the benchmarks against which start-ups are being judged today and it is of course great to be part of this club. This club is real, and it is quite an accomplishment for a company to be part of it. But it only tells part of the story. It really does not address how meaningful and impactful a company has become.

It is here where I take exception with the recent trend of calling all of these companies Unicorns. Achieving Unicorn status is an exceptional accomplishment. It is like winning the Superbowl: it is rare and bestows upon the company and its founders the status of legends. It is a rewards for building a truly meaningful company.

So do all of these companies deserve the status of Unicorn? Of course not. My sense is that at least 50% of these are "Fakies".

We have gotten to calling companies "Fakies" those that have only gotten to the "billion dollar club" through the back door and whose business model still remain questionable. These are companies that have gotten some late stage investor to peg the billion dollar price or more on the back of small investments - think of funding rounds representing less than 2%-5% of the total valuation. Can we really say that this is representative or material enough?

Don't get me wrong. There is nothing bad about taking cheap money, in fact I always encourage it. However, that in it itself is not enough. These companies could certainly not stand up to the scrutiny of an IPO or sale process at that price. Is this not the real acid test to greatness?

Real Unicorns are those that have 1) been sold for more than $1 billion or 2) had an IPO for more than $1 billion. All other are still works in progress....so why give them the status? Its akin to celebrating winning the final before playing it. Simply dumb. Think of FAB which achieved the status of Unicorn, only to be sold for $15 million. The sad truth is that their business model was shaky from the start, yet they rode the wave and glory of being classified as a Unicorn.

Of course there is a third category of companies that are true Unicorns and that is companies that have made a truly global impact such as Uber and AirBNB. Are these companies worth their respective valuation? Unlikely, but there is no denying that they have had a truly material impact on their industries and by this measure alone they are very unique. A Unicorn if I ever saw one.

"Fakies" are multiplying, so don't get fooled. Real Unicorns have a great business, one that is growing fast and one that stands up to third party scrutiny. My current favourite "Fakies" include: Ola Cabs, Slack, Tango, Shopify, Shazam, Transferwise, Pinterest, and Evernote to name but just a few.

Talking "Fakies" on Bloomberg TV.

* This post was first published on LinkedIn.


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