The Download: Lack of transparency among ‘unicorn’ start-ups is backfiring

Theranos is losing business deals, according to a recent report. Above, Elizabeth Holmes, founder and chief executive of Theranos, left, speaks at the Fortune Global Forum in San Francisco last month.
(Jeff Chiu / Associated Press)

A year ago, investors clamored to get a piece of hot tech start-ups like Zenefits and Snapchat. Some even argued that it was unfair that regular investors couldn’t access the world’s fastest-growing private companies.

Today those investors are probably happy they never had the chance. Each day there’s a new report casting gloom on Silicon Valley’s herd of magical billion-dollar “unicorn” start-ups: missed targets at Zenefits, share markdowns at Snapchat, a cash crunch at Jet, an executive exodus at Rent the Runway. Dropbox faces doubts about its revenue potential. Theranos is losing business deals. And don’t forget WeWork’s highly risky real estate deals, and unrealized revenue projections at Lyft. Flipboard failed to find a buyer. Square priced its IPO underwater. Zirtual and Homejoy — not unicorns, but highly valued and highly funded all the same — abruptly shut down.

Each new report is shocking because we receive little information on the health of these private companies — we know only what they choose to share. Usually those are impressive-sounding figures like “400% revenue growth” (from what base? $1?) or a robust “revenue run rate,” a decidedly non-GAAP measurement. Worse are the totally meaningless, hard-to-contextualize stats: Start-up X has reached 5 billion “impressions” per month! (But what about profits? Does this revolutionary business model actually work? No comment.)


I understand why start-ups prefer to focus on growth rather than succumb to the quarterly pressures of Wall Street. But these companies are not tiny fly-by-night upstarts. They employ hundreds (in some cases, thousands) of people and have raised hundreds of millions of dollars in funding. The stakes are high. And with plenty of late-stage private capital available, they’ve been able to put off going public longer than ever.

There’s a standard answer most techies, and venture capitalists, and start-up entrepreneurs have for the enduring, inevitable, annoying tech bubble question. If you fall into one of those categories, you are required to have an opinion on it. They say, “This time it’s different.”

Today’s era of magical billion-dollar unicorns is different from the dot-com bubble, they say, because today’s start-ups have real revenue, or the systemic risk is much smaller, or the opportunity is much bigger. More people are online. More people have mobile phones. More industries are ripe for disruption.

But at least in the first tech bubble, we knew how much money the start-ups were burning because they were publicly traded. We may have ignored that information at the time — it was a bubble! — but at least the information was available.

Today’s information scarcity makes us rightly wonder, with each new piece of bad news, if any hot start-ups aren’t hiding dysfunction just beneath the surface. The closer we examine the country’s most valuable start-ups, the more flaws we see. Meanwhile, the blogging, tweeting commentariat relishes the sordid wreckage of it all. (News that Snapchat’s mutual fund investors had marked the start-up’s share value back up didn’t make the same waves as the initial news that the shares were marked down.) Many have been calling for this tech bubble to pop every month since Facebook went public. Finally — maybe! — this time it’s really here. Call it schaden-funding.

Whether recent start-up revelations paint an accurate picture of the health of these businesses is beside the point. For investors, narrative is king. It’s hard to drum up excitement from investors when so many of Silicon Valley’s rocket ships now look like battered question marks. When that happens, start-up chief executives lose the benefit of the doubt. Top employees leave. Competitors move in. Momentum halts. And investors look elsewhere for growth.

But the lack of transparency hurts everyone. Some start-up CEOs didn’t know their mutual fund investors would publicly disclose their valuations until Fidelity started marking them down and the press caught on to it. Some early-stage venture investors didn’t know their portfolio companies had ratchets in place — terms that dilute their shares if the last investors don’t achieve their desired return — until their companies went public.

Staying private for as long as possible, with the luxury of not disclosing information on the health of their businesses, was the start-up world’s way of controlling the narrative. That plan is crumbling, leaving young tech companies to grapple with a concept made popular by futurists in their own community: “Information wants to be free.” Sounds great — until you’re on the other side of it.

Erin Griffith is a writer at Fortune.

Twitter: @eringriffith