Last week, Japan’s Softbank invested $502 million into UK technology company Improbable – the largest-ever venture-financing round for a private British company. Founded just five years ago by two Cambridge University computer-science students, Improbable focuses on large-scale simulations in the cloud, enabling virtual worlds of unprecedented scale and complexity. Its genesis was in gaming, but its technology has also been used to model autonomous vehicle fleets. The funding is great news for Improbable and a significant vote of confidence in it from Softbank – best known in the UK for its recent £24 billion acquisition of Arm Holdings.
The move also creates another UK ‘unicorn’: the moniker describing private companies that are valued at over £1 billion. At the end of 2016, the UK had just eight of these rare creatures. This year, Improbable has joined the list, as did Brewdog last month after its capital injection from TCG, which also valued it at £1 billion.
There are now 194 unicorns worldwide, with a total value of around $676 billion. Among them are such well-known names as Uber and Airbnb, but also lesser-known companies such as Improbable. In the past, such companies would have already come to the public markets – but now there is a large chunk of market capitalisation that is unavailable to public-market investors. This is worth bearing in mind when making asset-allocation decisions between listed and unlisted investments.
But why don’t these companies succumb to the persuasive charms of the investment bankers and seek listings on the public markets?
Many companies simply don’t need the listed market as a source of finance.
Well, first of all, there is plenty of private-equity money seeking a home. ‘Dry powder’, as the unused capital floating around the private-equity arena is known, now amounts to $1.5 trillion. That is a lot of money looking for a return. It means that many companies simply don’t need the listed market as a source of finance.
The technology bias of virtually all unicorns probably has something to do with it too. Their strategies often involve growing quickly to exploit technology and growing a customer base that can, in due course, become profitable. Arguably, this can be better and more quickly financed with a narrow range of shareholders who know the company, who may be represented on the board and who can make funding decisions very quickly.
There are also the old arguments from private companies that they don’t like the external scrutiny and regulation that a listing brings. The alleged short-termism of listed investors and the requirement to produce quarterly earnings reports are often criticised. Of course, some of this scrutiny and governance is for all the right reasons. Take, for example, the recent criticism of the governance and non-voting shares of Snap (the owner of the ubiquitous Snapchat), the latest of the unicorns to have come to the market. I suspect these criticisms will prove well founded, but for now they are seen as obstructive and anti-entrepreneurial. We’ll see.
The valuations of these companies are often stratospheric on more traditional valuation metrics, with growth needing to continue at rapid rates to justify them. Former unicorn Twitter came to the public markets with precisely this problem. Today, it has a share price of $19 – well below its peak of $69 and also below the float price of $26. Of course, valuation ‘will out’ whether a company is private or public, as profits and cash must come in due course. Overvalued companies get found out eventually, whether they are listed or not. Hopefully Softbank has done its sums and will not have cause to worry on this front.
So, congratulations to Improbable – now a member of a rather exclusive club. I hope that it continues to innovate and prosper. We could do with a few more like it on this side of the pond.
A version of this article was published in Investment Week on 23 May 2017.