Bonfire of The Unicorns?

Bonfire of The Unicorns?

Kate Clark from The Information is often highlighted in That Was The Week. This week she writes about the broader implications of Hopin selling its events business to RingCentral. Her headline screams about The Unicorn Fire Sale Ahead.

So a Bonfire of the Unicorns is this week's theme.

It may seem like a depressing and pessimistic headline, and indeed, the chasm between the 2021 valuations achieved by companies and the 2023 reality seems massive. But the reality is that Hopin's business has not been able to realize the kinds of revenues anticipated by investors.

Hopin is a Covid-era Unicorn. It built software for virtual events. The software's promise was always ahead of its capabilities, as is often the case with startups. It acquired competitors and adjacent companies to fill out its offering, and it did host some significant events and drove early promising revenues.

But Covid restrictions relaxed, and real-world events returned. Its revenues flattened and declined. A look at Hopin's funding history clearly shows this rise during the Covid period.

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This week's sale announcement of core products to RingCentral does not disclose deal terms. Hopin is left with the products derived from its acquisition of StreamYard.

Hopin, one of the most iconic startups of the pandemic era, said this week it sold its virtual event and webinar hosting business to RingCentral, and that its founder and CEO, Johnny Boufarhat, is stepping down. The sale marks a pitiful finale for the once-heralded startup.

Axios reported, "No financial terms were disclosed, but the price is said to be in the "low hundreds of millions" of dollars."

And continued:

"Hopin plans to use some of the proceeds, plus existing cash, to provide partial liquidity for its venture capital backers, who invested more than $1 billion. Specifically, those participating in the Series B round and beyond can expect to recoup around half of their outlays.

They'd also remain shareholders in the remaining company, which is pivoting to focus on a video streaming product called StreamYard (based on a 2021 acquisition). There might even be a rebrand in the future.

Among the changes will be the departure of Hopin CEO Johnny Boufarhat, who netted nearly $200 million via a secondary tied to the 2021 venture round.

Not all investors, however, seem interested in sticking around for what's effectively a new company, revalued closer to $400 million, and are expected to exit effectively. Likely parties here are crossover firms like Altimeter Capital Management.

The new valuation should help Hopin attract new employees, as the prior price made hiring difficult."

So, investors will not get back the $1 bn the company had raised but will retrieve something while having a stake in what remains of the company.

Clark compares Hopin to Clubhouse, another high flier during Covid with a valuation to match. She goes on to say, "Hundreds of other unicorn startups will likely wrestle with a similar fate: They must find a shot-gun marriage or face collapse."

This is in a week where it was reported that Union Square Ventures has marked down its assets by about 26%. Some commentators are reacting and suggesting that the markdown is too aggressive. Based on the trends, it may be too little. Most funds have yet to go through an audit that will force the re-valuing of assets, but it will likely be ugly when they do.

In that context, it isn't surprising that:

...the market for new venture funds remains trapped in molasses. One new fund we have been working closely with over the past two years encapsulates this pretty well. A year ago, they were able to go from first LP meeting to getting a check in six to eight weeks. Then the markets imploded in the second half of 2022. Now it takes nine months to go just from the first meeting to second meeting. LPs love the. thesis and love the team, it's just that they cannot make investment decisions.

The blockage in venture capital is a symptom of the 2020-2022 investment cycle. Hundreds of billions of dollars of value are trapped inside valuations that cannot be carried forward without significant structural adjustments in cap tables and valuations. Inside rounds (see the Carta state of the market report) and down rounds are needed to clear the blockage. In the absence of that, companies will run out of cash and be closed or sold for pennies on the dollar, as happened to Clutter this week.

This creates a tricky situation. There is a lot of real innovation that can drive enormous value happening in 2023. LK-99 is this week's startup of the week and is a good example of what is coming. AI is obviously similar in terms of its value-creating potential. Money is hard to come by from traditional sources. This opens up a lot of opportunities for non-traditional investors to take advantage of the gap. Family Offices, Endowments, and Angels can come into their own for the next one or two years and own significant stakes in the next generation of wealth creation. Inventing the future is valuable, and funding that value creation is lucrative. Money will start to flow, but we may be surprised where it comes from as the system tries to unblock itself.

In that vain - hats off to Pat Gallagher of Tuesday Capital for raising a new seed fund this week. And to Steffan Tomlinson for becoming CFO at Stripe. Both good friends and worthy winners in a week of gloomy news.

Essays of the Week