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Monday 21 January 2019

Fantastic beasts and why not to buy them

Unicorns – privately held companies worth billions such as Uber, Palantir and Airbnb – increasingly look overvalued. Politics may bring a dose of reality

This year, a lot of so-called “unicorns” are going to have to face reality. That is the current tech investor jargon for privately held companies valued at more than a billion dollars. A rush of them is planning to go public soon, selling shares to outside investors. But hopes for some of them – and valuations – look somewhat fantastical.

Some unicorns are household names such as taxi apps Uber and Lyft or property-renting giant Airbnb. Others, such as Palantir, a big data company, are less well known. None look like obviously cheap investments at a moment when listed tech stocks are flagging.

Take Palantir, whose valuations have ranged from $20bn to $41bn. That is high for a secretive company with only about $1bn in total annual sales. And it is astronomical for a company that is very reliant on one client – the US Government.

The shine has recently come off WeWork, the office management business, which has long had a valuation merrily divorced from its fundamentals.

But, for some of these companies, there is a bigger issue here. Most of these companies face a particular problem: lots of them have changed the way that the world works – and the world may have views about whether it wants that to continue. Their success may be a fatal flaw.

A large part of the value of these companies has been in finding ways of doing things differently within existing rules. The loopholes they step through might be fine for a small company – but not at their current size. And especially not if they grow.

Some banks have put Uber’s value at as high as $120bn – quite the five-star rating. But part of the value in the company has been that a driver spending 40 hours a week picking up Uber customers is not employed by Uber – merely a contractor.

Uber is facing trouble on this front even in laissez-faire places such as the UK, where courts have taken issue with this relationship. Meanwhile, conventional taxi drivers are on the warpath in lots of big cities: there is a political constituency for deleting Uber.

Airbnb has a similar problem. It has now become prevalent enough to face serious restrictions in San Francisco, Amsterdam and Berlin.

If you disrupt and reshape the room-rental industry, do not be surprised when the authorities start treating you – and taxing you – like a hotel. Oh, and do not be shocked when existing hotels support them in that action.

Palantir, meanwhile, is a big data company being sold in the wake of the Facebook and Cambridge Analytica controversies: it is operating in a space where regulation is going to grow, not recede.

Some of these unicorns may grow into the valuations being bandied around for them. But the notion that the political and regulatory environment will not shift against them? That’s a fantasy.