Why are we seeing so many unicorns?

Unicorn / Photo: Shutterstock
Unicorn / Photo: Shutterstock

Tech companies are staying private for much longer than they used to, reaching huge valuations. Why? Follow the money.

Technology companies raising money on the private market at valuations in the billions of dollars are no longer a rare sight, but when an Israeli company does it, it is still worthy of note. The world does not stand still, and we have been given a reminder of how the technology investment market has changed: instead of companies raising money and developing in the public market, a great deal of money is being invested in the private market, producing more and more unicorns (private companies worth over $1 billion).

Last week, three Israeli or Israel-related companies announced large financing rounds: Lightricks, which develops image processing applications for social networks, raised capital at a valuation of $1 billion; Monday.com, which develops systems for managing work processes, completed a financing round at a valuation of $1.9 billion; and Compass Networks, a US company founded by Israeli Ori Allon, has achieved a valuation of $6.4 billion.

Each of these financing rounds presents a different aspect of one of the outstanding trends in technology investment.

1. How is a jump in value justified?

Monday.com and Compass each completed its second financing round in less than a year. Monday.com increased its value almost fourfold, from $550 million to $1.9 billion, while Compass's value doubled to $6.4 billion. What explains these sharp increases? To some extent, this can also happen in the public market, but these are still exceptional increases in value that do not occur in the public market unless companies substantially their guidance.

Monday.com says that its revenue tripled in the past year, while its value increased at a slightly faster pace. Didn't the investors anticipate this growth rate a year ago? It is possible that since Monday.com and Compass are still at stage of gathering momentum, it is hard for them to give precise guidance, and the result is that they surprise people again and again, and thus fulfill the dream and bolster certainty among their investors. That enables them to convince new investors that success is at hand.

This, however, may not be the sole explanation. Keep in mind the current investment environment, in which a great deal of money is flowing into the market, and investors are searching for companies to invest in. In the cases of Monday.com and Compass, they are late-stage investors. There are many companies at these stages, but there is also fierce competition to invest in them. Both new and veteran investors are therefore willing to increase company valuations steeply within a very short time span.

2. How much of the money is used for growth?

Lightricks announced "completion of a $135 million financing round" at a valuation of $1 billion. "The aggregate amount raised by Lightricks is now $205 million," the announcement stated. The actual situation was different - $100 million, half of this amount, was used to buy shares from the company's founders and employees ($45 million in the previous round and $55 million in the new round).

In general, there is no problem with selling shares - companies remain private longer, and this is an opportunity for the founders and employees to cash in. In this case, they sold nearly 20% of the company, which is a substantial exit and larger than the usual practice. Lightricks initially funded its activity from its profits (bootstrapping), an unusual model for startups, which usually need external capital in order to grow fast. This probably enabled the founders to retain large holdings in Lightricks, and they therefore decided to sell some of their shares.

This money is invested in the company, but the company does not see any additional cash. It is therefore not being used for the company's growth, and cannot be treated as a "company financing round." Had the company been public, these shares would have probably changed hands without the company's mediation.

3. Why are companies unwilling to hold public offerings?

Wix, which has developed a system for building websites, is currently listed at a $7.5 billion market cap, 12 times the valuation in its IPO nearly six years ago. The current market cap of CyberArk, which held its IPO a year later at a valuation of $470 million, is $5 billion. Nowadays, such companies would remain privately held rather than hold IPOs at such low valuations. The money pouring into the tech industry as a result of the current near-zero interest rate and investors' search for returns enables companies to remain private for much longer.

Monday.com cofounder and CEO Roy Mann told "Globes," "The current financing round is designed to enable us to hold an IPO at the time we think is right." It is generally said that companies do not currently need the public market to raise capital, but now it is becoming clear that companies are simply not ready. Why were companies formerly ready to hold offerings at early stages but now no longer? The answer is probably the large amounts of money finding their way into the industry, enabling companies to invest much more in growth. Since there are big opportunities, companies are investing a lot of money in marketing and sales in the hope of a big payoff later. Such investments used to be more restrained, but today, growth is the name of the game, and this postpones offerings. Furthermore, if you can sell shares on the private market, as the Lightricks founders did, it detracts from the incentive to go public.

4. Softbank still a high roller

It was reported last week that Japanese company Softbank was raising a new $108 billion fund, two years after raising a $100 billion fund - the largest in the world. Technology giants Apple and Microsoft were among the investors in the fund. The fund will reportedly focus on artificial intelligence, but this fund will invest in almost every sphere.

Softbank is a major investor in Compass. This is nothing new, but the spurt in Compass's value in the space of one year is also a result of Softbank's strategy. The Japanese company is putting huge amounts of money into companies in order to spark their rapid growth and put them ahead of their competitors. The fund looks ahead to the long term, and wants eventually to have holdings in leading companies in every sector.

Unicorn: A private company that has raised money at a valuation of over $1 billion

Number of unicorns worldwide: 384

Aggregate value of unicorns: $1.2 trillion

Number of Israeli unicorns: 15

Number of non-Israeli unicorns founded by Israelis: 9

World's largest private company: Chinese media company Bytedance ($75 billion)

World's three largest private companies: Bytedance; shared travel company DiDi ($56 billion); and e-cigarette company Juul Labs ($50 billion)

Published by Globes, Israel business news - en.globes.co.il - on August 5, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Unicorn / Photo: Shutterstock
Unicorn / Photo: Shutterstock
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