April 9, 2024
How to Invest in 'Crises Unicorns'
Dear Subscriber,
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| By Chris Graebe |
I don’t consider myself a masochist, but I love a good crisis.
Mind you, that’s not coming from Chris, the family man. I strive to make my personal life as crisis-free as possible.
But as Chris, the entrepreneur and startup aficionado, I welcome them from time to time.
I’m not wishing ill will on anyone. However, I can’t overestimate the link between adversity and opportunity. That’s especially true in the world of private equity — specifically unicorns, which are companies valued at more than $1 billion.
And I just learned from my Weiss colleague Juan Villaverde that the next potential crisis — expected to strike as early as this quarter — also could be a boon for another alternative investment: cryptocurrencies.
It involves the current mound of global debt and how it can potentially crack the very foundation of the world’s economy.
Juan, a crypto analyst at Weiss, tells me the last time we came close to suffering this fate in 2022, Bitcoin rose from $18,000 to $65,000 today.
As one of the first traders to identify crypto cycles, Juan is a wealth of knowledge. And I’d have no problem taking his recommendations with my own money.
For now, I’ll leave the crypto talk to him and explain how and why crises often positively impact unicorns.
Give me a disruptive shift in monetary policy, economic downturn, financial collapse, stock market bust or Black Swan event akin to a global pandemic, and I’ll show you a wealth of unicorns worthy of your investment dollars.
That’s because long-time horizons, low costs, adaptability and growth potential make these biggest of startups uniquely resilient against financial chaos.
The companies most likely to succeed, though, fill niche consumer needs and tackle problems with ingenuity. Disruptive innovation is their hallmark, often redefining what is known. Think of how Airbnb (ABNB) has changed the travel industry and booking a hotel room … or Uber Technologies’ (UBER) twist on taxi service.
But we can go all the way back to one of the most challenging times for Americans — the Great Depression — for the earliest examples of successful startups.
Colgate-Palmolive (CL), Coca-Cola (KO), Anheuser-Busch InBev (BUD), Procter & Gamble ( PG), General Motors (GM), Levi Strauss (LEVI), Walt Disney (DIS ) and Deere & Company (DE) were among the survivors and thrivers in the late 1920s.
Their focus: food, farming, healthcare, clothing, transportation and even recreation.
That’s been the pattern historically. Although as the world modernized, technological innovation played a much bigger role in meeting consumers’ needs.
Today’s Trillionaires Are Yesterday’s Billionaire Unicorns
We all know what happened during the technology boom and bust of the 1990s and early 2000s. These years were characterized by recession-fueled low interest rates, a strong economy and a worldwide obsession with one of the biggest innovations in technology: the internet.
Five years before the boom peaked in 1999-2000, several first-generation unicorns, including Netscape, Amazon.com (AMZN), Yahoo and eBay (EBAY) were already born, went public and experienced consistently rising stock prices.
Alphabet (GOOG), Google’s parent company, and Meta Platforms (META), formerly Facebook, were among the first startup unicorns. They quickly shot to billion-dollar valuations at a time when less than 1% of software startups reached this status.
Everyone wanted and needed access to the World Wide Web. So, computing became a huge priority and an essential part of peoples’ lives. Online shopping has become one of the biggest drivers of growth.
At the height of the boom, some dot-coms that never made a profit — or in some cases, not even a penny in revenue — went public via an IPO and raised a substantial amount of money. In fact, 1998 produced the most IPOs in the history of IPOs.
Then in March 2000, the bubble began deflating. Many dot-com startups were the subject of massive hype and investment as well.
The sector peaked at a value of $2.95 trillion before slumping to $1.195 trillion as capital dried up and investors left in droves … causing many companies in the industry to go bust.
The bust, which saw trillions of dollars of market value evaporate, worked wonders for separating the wheat from the chaff.
A new breed of tech companies popped up as a result of the Great Financial Crisis of 2008-2009 and ensuing recession. In fact, 2009 became a stellar year to launch a unicorn. That’s because — not despite — of the economic downturn, unemployment rates at 25-year highs of 8.5% and 2 million lost jobs in the first quarter.
Indeed, the bulk of those in the following list offered alternative — and often disruptive — services that saved people money:
- Airbnb
- Slack
- WhatsApp
- Square
- Uber
- Instagram (acquired by META/Facebook in 2010)
- Pinterest
Finally, the pandemic also proved to be a boon for a wide range of companies — Zoom Communications (ZM) and Peloton Interactive (PTON) to DoorDash (DASH).
But it didn’t last very long. Once the hype faded, some companies looked like one-hit wonders.
Zoom remains the most famous pandemic favorite, vaulting from a moderately successful company to becoming a verb. However, while Zoom's stock shot to a record $559 per share in October 2020, its shares trade around $63 as of this writing.
According to Crunchbase, close to half of the 171 companies that went public in 2021 at billion-dollar-plus valuations, are now worth less than $500 million. Just 40% of 2021’s IPOs are worth more than $1 billion. Several have filed for bankruptcy or gone out of business entirely.
Even the three largest IPOs from that period — Maplebear (CART), Kenvue (KVUE) and Birkenstock Holdings (BIRK) — are trading below their IPO prices. Only one, chip designer, Arm Holdings ( ARM), has recovered and currently trades near its initial price.
After a long spell of interest rate increases that tightened the capital markets, investment-worthy unicorns are slim pickings.
The IPO markets went into hibernation about two years ago. Yet, we’re only now beginning to see the fallout.
When new funding dried up in 2022, many of these companies still had about 18 to 24 months of runway before they would run out of cash, according CB Insights.
You can bet that many of the last ones standing, like in the past, will be those riding the stiff tailwinds behind rapidly developing technology and trends … and the hype that surrounds it.
Today, AI-focused startups dominate the landscape. And I’ll be keeping a watch out for any worthy of your investment dollars.
But all bets are off if that global financial crisis Juan alluded to comes to fruition. No telling what startups might pop up then and how much further crypto could rise.
Stay tuned, my friend!
Happy hunting,
Chris Graebe
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