Investing in unicorns

2020 has proved anything can happen. Even so, when my eyes glanced over the phrase ‘parade of unicorns’ I did a double-take. As it turned out, mythical creatures hadn’t appeared in the high street – instead it was a parade of ‘unicorn investments’. It seems they are as prevalent in investing as they are on every little girls’ Christmas list.

“A big business starts small.” – Richard Branson, founder of the Virgin Group

Aileen Lee, a venture capitalist, coined the term unicorn in 2013 to indicate a privately held startup company valued at over $1 billion. In 2013, there were only 39 companies that were considered unicorns. While some unicorns remain private, through increased availability of private capital some do come to market via an ‘IPO’ – an initial public offering.

Learn more in our 60 second guide to IPOs

There are two such unicorns – or, to be more accurate, ‘decacorns’ (those companies over $10 billion) – which are expected to begin trading in December.

DoorDash, a food delivery business, which has competitors such as Uber and Just Eat is the first. It is hoping to raise up to $2.8 billion* from its IPO, which could value the company at as much as $31.6 billion.* Next is Airbnb, the holiday rental website, which intends to sell shares at between $44 and $50 each, valuing it as high as nearly $35 billion.* This would return Airbnb’s valuation to pre-pandemic levels.

But it’s important to remember that demand is important when it comes to IPOs. Too little interest may mean that the price of the shares fall once floated or that the IPO is cancelled altogether. This happened recently with Uber and WeWork. DoorDash and Airbnb aren’t the only unicorns looking to test the water. Online shopping app Wish, payment processing firm Stripe, and dating app Bumble are also rumoured to be candidates.

Like any investment, IPOs can be risky and the attractiveness will vary from company to company. Just as you can leave asset allocation to a multi-asset fund, there are a number of fund managers who will invest in either private companies or IPOs from time to time.

For example, Scottish Mortgage Investment Trust recently increased the maximum amount it can invest in unquoted companies from 25% to 30%, because, as co-manager James Anderson said: “The bulk of our emergent opportunities lie in unquoted companies.” Merian UK Smaller Companies, Baillie Gifford Shin Nippon, and Fidelity Special Values, also have the ability to invest a small percentage in unquoted firms.

Scottish Mortgage co-manager, Tom Slater, explained more in this interview:

Social media Pinterest, IPO-ed in April 2019 at a value just over $12 billion. It’s a top ten holding in Artemis US Smaller Companies and has been a strong performer in 2020. According to manager Cormac Weldon, “it’s carving out an interesting – and profitable – niche for itself. The stock has performed extremely well recently, returning 185% over the six months to the end of October.”**

The smaller companies team at Marlborough are specialists in this area and likely to invest in early-stage companies. Just this week, Guy Feld, co-manager of the Marlborough UK Micro-Cap Growth fund, and Eustace Santa Barbara, co-manager of Marlborough Special Situations fund, told us more about the AiM market, the UK’s junior stock market.

Similarly, the team that runs LF Gresham House UK Micro Cap fund are specialists in this field with years of in-depth knowledge around the opportunities in pre-IPO companies. They have extensive experience of investing in unquoted companies and the private equity sector.

*Source: NY Times, 1 Dec 2020, Airbnb seeks valuation of nearly $35 billion in IPO
**Source: fund commentary, October 2020