Sunday 22 September 2019

LinkedIn co-founder believes many unicorns are an endangered species

Reid Hoffman, chairman and co-founder of LinkedIn. Photo: Bloomberg
Reid Hoffman, chairman and co-founder of LinkedIn. Photo: Bloomberg

Reid Hoffman, the venture capitalist who co-founded LinkedIn, said many private companies with multi-billion dollar valuations are unlikely to see those values recognized in the public markets.

There are currently more than 140 closely held startups with valuations topping $1bn, a designation that used to be so rare any company reaching it was known as a "unicorn", according to a database by CB Insights. Hoffman, inset, expects that only a third to a half of these companies will actually "survive and thrive."

"Valuations are much higher than when companies go public," Hoffman said in an interview with Bloomberg Television's Emily Chang.

"Public markets have a lot of interdependent feedback", whereas private markets have big investors willing to do what they can to get in a deal - meaning "it's very easy" to get a high valuation, he said.

As hedge funds, mutual funds and other investors vie to put money into hot startups, pre-IPO valuations have soared. As a result, companies are waiting longer to go public and collecting on this glut of funding that's inflating their values beyond what they can reach in an initial public offering. The latest example is Square Inc, the payments startup that is set to go public this week at a valuation of as much as $4.2bn.

That's well below the $6bn the company sought in its last funding round in 2014. Hoffman said the venture firm where he works, Greylock Partners, is increasingly wary of late-stage private financing.

Companies are sometimes seduced into high valuations with deals that allow their investors some protection from risk, like getting their money back even if things go wrong. Liquidation preferences, which allow some big investors to get paid back first, are also common.

"We push very heavily against any of our portfolio companies doing that," he said. Hoffman is on the board of room-rental startup Airbnb, which is still private and was recently valued at $25.5bn.

Yet even at that valuation, he said, "I don't worry about it."

"There's a lot of headroom for what Airbnb can bring to hosts and guests around the world," he said. (Bloomberg)

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