"I think you're going to see a lot of failure in 2015," venture capitalist Bill Gurley of Benchmark Capital tells Fortune for a cover story ("The Age of Unicorns") about how all these companies are now raising money at sky-high valuations.
Unicorn is what people in the Valley have started calling companies that have been valued at $1 billion or more, because those companies are rare, like unicorns, geddit?
Unicorns are so common now that VCs have invented a new term — decacorn, meaning a company that is valued at $10 billion. And there are eight of those!
Uber, valued at $41.2 billion, is valued more highly than 70 percent of the companies on the Fortune 500 list.
Instacart, which delivers groceries, is worth $2 billion, up from only $400 million just six months ago.
Pinterest is worth $5 billion.
Says Bill Gurley of Benchmark Capital:
I think you're going to see a lot of failure in 2015. If you're a public company worth $3 billion and your stock trades down to $1 billion, you can survive it because you can still issue options to hire new employees, etc. If it happens when you're private, though, it becomes immediately harder to hire or to get incremental investment.
Says VC Alan Patricof of Greycroft Partners:
At some point all of these companies will be valued on a multiple of Ebitda. If the IPO market goes away, or for any reason there's a blip in the outlook, people could be left holding a lot of inventory they wish they didn't have.
But have you seen Alan Patricof? He has white hair! He's 80 years old! What does he know? Ebitda? Is that like GAAP or non-GAAP?
Look, it's different this time. That's what some people are saying. These new companies have real customers and real revenues. This isn't some pie-in-the-sky stuff like in the first dotcom bubble.
You might remember that last time it was different this time too. Everything was different. Business was different. Economics was different. The way you estimated what a company was worth was different.
But one rule applied then and it probably still applies now: What goes up must come down.