A blessing of unicorns: value and opportunity

ATN-300Despite the title of this post, I’m not really looking to convey some sort of sacrament on start-ups with high hopes and extensive VC backing. A gathering of unicorns is referred to as a “blessing,” in the same way that a group of rhinos is called a “crash,” or along the lines of “a shrewdness of apes,” “an obstinacy of buffalo,” “a battery of barracuda,” or “a venue of vultures.”

Despite the warnings that crashes (valuations, not rhinos) are in store for many unicorns – as they join the ranks of “unicorpses” instead – it’s clear that the universe of cloud-enabled, app-driven businesses will spawn an ever-expanding constellation of young, high-growth firms with valuations in excess of $1 billion. I’ve been remarking on this in presentations since Uber’s valuation matched (and subsequently exceeded) that of Salesforce: Salesforce is a hugely successful cloud IT firm, but there are many more Uber-sized holes in the economy than there are Salesforce-sized opportunities in the software industry.

A recent LinkedIn post, Can Tech Make Buying a Used Car Less Sketchy?, drives home this idea. It focuses on a two-year old firm, Shift, which “has become the single biggest used car seller in San Francisco” with approximately 350 cars sold per month. Founder George Arison is attempting to revamp the used car transaction, “taking the sketchiness out of buying a used car.” Arison’s goal is described as taking “a sizable bite out of the $750 billion U.S. used car market.”

So what does Shift need to do to join the unicorn club of firms with $1 billion valuations? Let’s do a little math.

First, the valuation. Salesforce has a current valuation of just less than $50 billion, and FY15 revenues of just less than $5.4 billion, meaning that its valuation is currently 9-10x its revenues. But non-IT firms appear to get much greater leverage. According to a Business Insider report from December 2015, Uber is raising a round of funding with a valuation of $62.5 billion. Its 2015 revenues – net of payments to drivers – were likely somewhere between $1.5 and $2.0 billion. In round number terms (very round, with all of those zeroes!), Uber’s valuation is pegged – at least, by Uber – at 30-40x net revenues. This multiple is justified entirely on growth rather than profitability: Uber revenues are thought to have tripled (at least) in 2015, while losses increased from about $670 million in FY14 to nearly $1 billion in the first six months of FY15.

Airbnb provides another useful data point for this discussion. A Fortune article from June 2015 reported that Airbnb was seeking a $1 billion funding round on a valuation of $24 billion, with 2015 revenues of $900 million – a multiple of roughly 27x. Again, this is a growth-not-profit story: Airbnb is forecasting revenues of $10 billion by 2020; meanwhile, 2015 losses were thought to be about $150 million.

If we take Uber and Airbnb as models, Shift would expect its valuation to be about 30 times revenue, meaning that it could reach the $1 billion unicorn threshold (joining, according to CB Insights, 155 other members of the blessing) when it achieves net revenues of about $35 million.

The word “net” in the previous sentence is important: most of the value of a used car/truck is the vehicle itself, and Shift will need to pass the majority of vehicle payments back to the car owners. Additionally, to capture share, Shift will need to present a compelling value proposition to owners (/dealers) looking to sell their vehicles, which means it will probably need to take a relatively low premium on each sale.

The price of used vehicles has been going up; car shopping site Edmonds.com reported that it reached $18,800 in mid-2015. More detailed data indicates that 22.7% of these sales are “certified pre-owned” cars, presumably sold by dealers, and largely acquired via trade-ins (one-third of which are less than three years old) or from expiring leases (which also have an average term of roughly three years). It’s probably safe to assume that at least some of these newer vehicles will be sold directly by dealers, and that they have higher-than-median average prices; therefore, one would assume that Shift would have an average car price of less than $18,800. If we assume an average Shift sale of $12,000-$15,000, and an average commission of somewhat less than 10%, it seems likely that Shift would net $1,000-$1,500 per vehicle.

It seems like one would need a lot of $1,000-$1,500 transactions to join the blessing, but the leap isn’t actually that large. At $1,000 net per transaction, Shift would need to sell 30,000 cars to attain $30 million in revenue, but this is only 2,500 units per month, or just over seven times current volumes. If one assumes $1,500 net, the number drops to less than 1,700 units per month, or about five times the current rate of 350 units.

Of course, there are factors on all sides of this math. There will be costs beyond the cars themselves that will eat into (and if Uber and Airbnb are examples, well beyond) cash flow, and Shift will probably need to find a way to fund expansion in the face of losses. There may also be constraints of various types in markets outside of San Francisco that affect Shift’s growth trajectory. On the other hand, Shift may be able to expand its revenue stream by adding ancillary products, such as financing. And irrespective of these pros and cons, the firm will be able to paint a vision of enormous future growth: $30 million represents just 0.4% of the $750 billion market referenced in the original LinkedIn piece.

Is Shift on track to join the blessing? There’s no way to establish that in a blog post, and even a more extensive treatment would result only in a more detailed guess. The mere fact that it’s a matter for discussion, though, confirms the accuracy of the point about there being a large number of Uber-sized holes in the economy. No wonder those chasing the blessing veer from shrewdness to obstinacy, surrounded by the barracuda. If you’re in the startup community, I wish you good fortune: may you find richness (with martins) wisdom (with wombats) and charm (with hummingbirds), and avoid deceit (of lapwings) and the venue of vultures!