Don’t pretend tech unicorn valuations are meaningless

Magical Unicorn Forest
Photograph by Getty Images/iStockphoto

Two weeks ago, I wrote about how investors were finally beginning to pull back on valuations of private tech startups, after a multi-year rocket ride that created more than 130 companies valued at $1 billion or more. And I’m hardly alone. In short, we seem to have reached peak unicorn.

In response, many have shrugged and said something like, “Even if all of these companies were to completely fail, it wouldn’t really have a broad economic impact. The amount of venture capital invested each year is tiny compared to the public markets, and just half of the amount of VC invested in the dot-com boom.”

To be clear, I’m not predicting that all of these companies will fail, or anything close to it. Instead, I think the next step will be a series of so-called “down rounds,” or at least structured debt financings that don’t officially affect equity values. Plus a bit more M&A activity.

But it’s also not appropriate to brush off potential unicorn struggles as something that would only affect a small group of wealthy investors.

When valuations begin to contract, so can company growth, particularly when it comes to hiring. Growth—even in something as seemingly random as valuations—begets growth. If capital availability tightens, it can lead to layoffs.

In response to a request from Fortune, research firm PitchBook reports that 91 U.S.-based unicorn companies employ around 57,000 people. And that’s a low estimate, given that PitchBook doesn’t have data on some companies and has dated figures for others.

Just look at the employee count jumps for a few unicorns between August 2014 and August and/or September 2015:

  • BuzzFeed: +613
  • Cloudera: +411
  • Dropbox: +798
  • Thumbtack: +449

The downside of the valuation peak is almost certain to result in fewer jobs, which has all sorts of negative economic consequences (less spending, etc.).

Now, I’m not saying you should be shedding tears for tech workers, and I’m sure that some San Francisco housing advocates would celebrate widespread tech layoffs. Instead, it’s simply a reminder to all of us that these much-derided, made-up valuations of “unicorns” have tangible effects on real people. Just because it won’t create widespread panic doesn’t mean it’s inconsequential.

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