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February 4, 2016 By Helen Brown 5 Comments

How much is that unicorn in the window?

This month we welcome HBG’s Angie Stapleton who has become quite the expert on tech startups. Angie navigates us through the terminology around startups, shows how and why unicorns fly so high, and gives us insight into what their value might mean for fundraising.

unicornWhen I was a little girl, unicorns were everything. I mean, if you didn’t have a Lisa Frank unicorn lunch box, hello, you may as well just go back home. Today, a new kind of unicorn reigns king… tech start-ups.

In recent years, tech firms with valuations of $1 billion have become all the rage, the Silicon Valley darlings, the UNICORNS of the investment world. In fact, investors have even come up with a new name for tech firms whose values rise above $10 billion… DECAcorns. I’m guessing this is because “unicorn” just didn’t encompass enough magic and whimsy.

With news of these fairy-tale creatures running loose (in what seems like herds!), I started to ask: what does it take to be a unicorn? Can something named after a mythical creature be too good to be true? And, most importantly, what does this mean for development professionals who are pinning their hopes of a major gift on unicorn-produced prospects?

Tech Firm Valuations… more art than science

So, I started this process by asking how companies even receive unicorn status. According to CB Insights, there are now a record 152 unicorns, with a combined valuation of $529 billion. VentureBeat expands their industry segments just slightly and reports those numbers even higher, with 229 unicorns raising a $1.3 trillion valuation. We’re producing unicorns at a rate never seen in history. So, what is driving it?

Investors searching for the next big thing.

I was looking for an algorithm, some sort of equation, to tell me how to look at a company (their revenue, forecasted growth, etc.) to factor into their valuation. Turns out, it’s not that simple.

We know how a company receives a dollar-amount valuation: for the sake of easy math, if an investor pays $100 million for a 10% stake in a firm, that gives a company a valuation of $1 billion. What is much harder to determine is how an investor and the company determine that $100 million is worth a 10% stake.

That’s the magic. That’s where unicorns are born.

In most cases, this gray area is what has allowed recent tech valuations to balloon to such staggering – and some would say, unrealistic – heights in recent years. Bloomberg explains in “The Fuzzy, Insane Math That’s Creating So Many Billion-Dollar Tech Companies”:

Since private tech companies often lack earnings or enough historical data to inform projections—or… any significant revenue—investors can’t rely on the metrics available.”

The article goes on to give the following equation, essentially pinning a valuation to four factors: 1) what the founders think their company is worth, largely based on competitors, 2) actual revenue growth or potential thereof, 3) protection clauses for investors in case things head south (more on this later!), and 4) straight-up FOMO (fear of missing out). And they’re being serious.

Unicorn Valuation

Slow-Gallop Towards an Exit

In particular, 2015 provided a breeding ground for unicorns. Super low interest rates and outrageous amounts of capital allowed companies to simmer, hosting several rounds of private funding and increasing valuation. So, once a company reaches their desired valuation, what happens? As this TechCrunch article explains, start-ups generally have four outcomes: get acquired, go public, stay private, or flame out. Hint: nobody likes the last one. So, let’s discuss the first three…

  • Get Acquired: You know this drill; this is the kind of deal that gets your prospect on the Forbes So in development, we love when companies get acquired. This option seems to be the one that has investors the giddiest. We’ve seen a couple success stories (most notable, Facebook’s acquisition of WhatsApp and Google’s $3 billion acquisition of Nest), with even non-tech companies getting in on the action this year (Walmart, Home Depot, etc.).
  • Go Public: Historically, this has been the most favorable exit strategy. However, 2015 saw a pretty steep halt with just 23 tech IPOs raising a total of $4.2 billion, down from the 55 firms that raised $32.3 billion a year earlier. With recent regulation, such as Sarbanes-Oxley and the 2012 JOBS Act, it’s just easier for companies to stay private. Another issue here is once your company has high valuation, there is concern an IPO may not actually produce the market cap. In fact, almost 30 percent of unicorns floated with a lower valuation than promised last year (think: Square). That’s not to say they won’t rebound; Facebook certainly did, and look how well that’s turned out.
  • Stay Private: As The Telegraph reports, while Amazon and Yahoo! floated at less than $500 million in the Nineties, it’s just not necessity today. Historically, IPOs have helped startups do three things: raise capital, provide liquidity, and legitimize the company. Today, start-ups can do all that and still remain private. Many are now hosting what’s been deemed a “private IPO.” Using this model, firms are raising un-heard-of levels of late-round capital. This has allowed companies like Uber and Airbnb (the source of long-awaited IPO whispers) not to float, when in years-past they would have by now. The issue here is eventually they have to turn a profit.

The Billion Dollar Question: How do they actually make money?

So, private or public, to be a unicorn, you should make money, right? Well… that my friends, is the billion-dollar question. As it turns out, there are a few ways a majority of tech firms bring in revenue. This interactive graphic, conceptualized by SEER Interactive and designed by O3 World, describes how popular Internet companies do just that. Generally, there are five options:

  • Advertising: The most recognized way to add revenue is by selling ad space. Twitter has historically made up to 85 percent of its revenue this way. In 2015, Instagram and Pinterest both widened their ad buying to all business markets. Interestingly enough, the advertising market has become so huge that entire new unicorns are being birthed to help companies manage it.
  • Subscribers:  Companies like Netflix – and its rivals Amazon and Hulu – plan on becoming profitable through subscription fees, with Netflix expanding globally and promising to be profitable by 2017. But, that takes a lot of subscribers, and they’re still not there yet. So, it looks like you can thank investors for your “Making a Murderer” binge, not your $9.99.
  • Freemium Services: Similar to the subscriber model, a company provides a base service and then charges a fee for premium features. Think Dropbox, Evernote, Hootsuite, and the list goes on and on. Outside of advertising, this has become the most dominant model (and arguably, the most successful) for our tech friends.
  • Lead Generators and Partnerships: Here, firms receive an affiliate fee if a user purchases something from their site. So, when you log on to sites like Mint or Ravelry, they are literally banking on you signing up for a credit card or buying one of the crochet patterns they recommend.
  • Royalties: This can really work two ways: a company can take a percentage of each transaction (like when you buy an app) or companies can come to an agreed upon fee or percentage for use of its platform. For example, everyone’s favorite fruit, Apple, receives big bucks from Google to be iOS’s default search engine. Google, who’s main model is advertising, relies on this search traffic to boost their advertising rates, in turn making millions. It’s nice when we can work together!

When looking at a unicorn, it’s important to remember that companies combine these methods to drive revenue. For example, let’s look at one of my favorite companies: Spotify. The company is based on the freemium model, making about $2.4 billion in premium subscriptions. However, it uses advertising to produce income from its free tier. Most recently, it announced a new deal with Starbucks to take streaming into a retail setting in hopes of attracting premium customers. My guess is there are also royalties in play here, though the terms of the deal are being held close to the vest. Turns out, companies don’t like to talk about how much money they pay each other.

 Major Gift Prospects: Swipe Right for Investors

So, what does all this mean for your development prospects? Who is making money, and who is not?

Earlier, I alluded to protection clauses being added into investment agreements, and as it turns out, this is key. As valuation soars, investors know there is a chance a company may not live up to their unicorn/decacorn status upon exit. And while investors like betting on unicorns, they don’t like losing money in the process. To entice funders and especially the old firms that generally provide late-round infusions (think: the Goldman Sachses of the world), companies are including insurance policies for investors – you’ll see them discussed as “senior liquidation” and “downside protection.”

  • Senior liquidation means that funders get their money back before anyone else, often with a profit.
  • Downside protection ensures a funder’s stake in the company and guarantees they would receive extra shares if a company floats at a lower valuation.

Essentially, these two types of insurance cover that fuzzy gray area I talked about earlier, where the valuation-magic happens. Funders also generally use a portfolio approach, meaning that even if one company doesn’t deliver, they could still see great returns elsewhere.

While these insurance policies may protect investors, what about the folks building the companies?

Perhaps not surprisingly, founders and senior level execs are being protected in ways similar to investors. However, employees pinning their hopes to a big payout at the exit may want to hold off on their excitement until they see if the company actually lives up to its valuation. While the protection clauses do just what they’re supposed to – protect investors – they also dilute the shares or options being offered as compensation to employees.

The good news is, we see founders making money – and donating it! Just take a look at the growing members on the Giving Pledge list and new foundations being set up like the recent announcement of Reed Hastings’ new education fund.

Where is all this going?

Well, that seems to be the big question of 2016… We live in exciting times! The optimists are saying that technology will keep these unicorns galloping. The pessimists are saying don’t let that bubble pop you on the way out.

So, what do you think? Are your fundraisers frantically scheduling meetings in Silicon Valley? Are unicorns here to stay or will they return to mythical status in 2016 and beyond?

Filed Under: Effective searching, Prospect identification, Researching Companies, Researching Individuals Tagged With: Angie Stapleton, IPO, private company valuation, prospect research, Silicon Valley, tech, unicorns, valuing high tech companies

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David’s career in prospect research began in 2009, as a graduate research assistant at the Shippensburg University Foundation. In 2011, He became a development researcher for the University of Virginia. In 2015, David became assistant director of prospect research at the University of Baltimore, serving for 3 years. Recently, he was the director of development for Trees Forever. David Joined the Helen Brown Group as a research assistant in January 2020. He earned a B.A. in Theater at Indiana University of Pennsylvania and a M.A. in Applied History at Shippensburg University. David is a member of APRA and APRA Great Plains.

Kenny has worked in development since 1999 and has been involved in prospect research since 2002.

Prior to joining The Helen Brown Group, he was the director of donor and prospect research at the United Way of Massachusetts Bay. Kenny is a member of APRA and NEDRA.

Tara first began her career in development in 2002 supporting the Major Gifts department at Simmons College, and ultimately went on to serve as Assistant Director of Prospect Research. Since that time, she has also worked as a Senior Research Analyst at MIT, as Associate Director of Prospect Management and Research at the Harvard Graduate School of Education, and as Director of Development Research at Combined Jewish Philanthropies (CJP).

Tara originally joined the Helen Brown Group team in 2007 and served as a Research Associate and ShareTraining coordinator until 2008 – she rejoined the company as a Senior Researcher in 2013 and was promoted to her current role in 2018.

She has been an active volunteer with NEDRA for many years and served on the board of directors from 2010-2016. During her time on the NEDRA board, she served in many different roles, including terms as Vice President, Secretary, Chair of the Website and Technology Committee, Chair of the Volunteer Committee, and as Chair and Editor of NEDRA News. She is currently a member of the NEDRA Bootcamp faculty. In addition, Tara has also been involved as a volunteer with Apra, serving stints on the Membership Committee, Chapters Committee, and Bylaws Task Force.

Angie began her career in development in 1999 at Virginia Tech in Corporate and Foundation Relations and later in prospect research at the University of Connecticut Foundation.

A graduate of the University of Tennessee at Martin, her experience includes grants management at the University of South Carolina, program evaluation for South Carolina Research Authority and human resources analysis for Nissan North America.

She returned to development in 2007 and worked in various prospect research positions at Vanderbilt University, including Associate Director. She was named Director for Vanderbilt University Medical Center’s research office in 2015, and joined The Helen Brown Group in 2016.

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Josh began his career in development as the Phonathon Coordinator at Keene State College. He then worked at non-profit consulting firm Schultz & Williams in Philadelphia.

He started his research career at the University of Pennsylvania as a Research Assistant in 2005. He then moved over to the Wharton School of Business, where he became the Associate Director, Research and Prospect Management. Josh joined the Helen Brown Group in 2016.

Josh is also a Colorado licensed Realtor and graduate of Lehigh University.

In March 2017, Kristina joined the Helen Brown Group as a Research Associate. Before joining HBG, she was the Research Manager at Pratt Institute in Brooklyn and an Associate Manager of Prospect Research at City Harvest, a food rescue organization. Kristina started her non-profit career as a legal assistant at the Metropolitan Museum of Art in 2004.  She is a member of Apra and Apra Greater New York. She was Apra Greater New York’s Director of Programming from June 2014 to May 2016. Kristina graduated from The University of Chicago and the Bard Graduate Center.

Grace began her career in development in 2001 as Executive Assistant to the Chief Development Officer with Brigham and Women’s Hospital (BWH), a Harvard Medical School-affiliated academic medical center.

In 2003, she became a prospect researcher for the BWH principal and major gifts team and spent the next 11 years in various research positions with BWH, culminating as Assistant Director of Prospect Research. She has been affiliated with The Helen Brown Group since January 2014.

Heather began her career in 2002 as a prospect research coordinator for the Rocky Mountain Elk Foundation and then moved to Carroll College in 2004.

In 2005, Heather began working on her own as a freelancer and eventually started her own consulting firm, Willis Research Services, in 2007. She joined The Helen Brown Group in 2012.

Heather is a member of the Association of Professional Researchers for Advancement and the Montana Nonprofit Association.

Jennifer began her career in development at her alma mater, Wheaton College, where she was an administrative assistant for the major gifts department.

She joined The Helen Brown Group in March 2008. She earned a master’s degree in library science from the Southern Connecticut State University in May 2009. Jennifer is a member of APRA and NEDRA.

Rick has been a member of the Helen Brown Group team since 2005. Prior to joining HBG, Rick was director of research at St. Paul’s School in Concord, New Hampshire. Rick has worked in development since 1996, both in prospect research and major gifts fund raising. His experience includes the University of Vermont, Phillips Exeter Academy and St. Paul’s School.

Rick is past president of NEDRA and is a member of and frequent volunteer for APRA.

Josh began his career in development as the Phonathon Coordinator at Keene State College. He then worked at non-profit consulting firm Schultz & Williams in Philadelphia.

He started his research career at the University of Pennsylvania as a Research Assistant in 2005. He then moved over to the Wharton School of Business, where he became the Associate Director, Research and Prospect Management. Josh joined the Helen Brown Group in 2016.

Josh is also a Colorado licensed Realtor and graduate of Lehigh University.

Mandi has worked in prospect research and management since 2006. She began her development career as a research analyst in development research at City of Hope, an NCI-designated comprehensive cancer center in Los Angeles. From there, she became the manager of prospect development at Huntington Memorial Hospital, a community hospital in Pasadena, CA. Most recently, she was the associate director of prospect research and management at Occidental College, a private liberal arts college in LA.

Mandi has a BA degree in print journalism from Southern Methodist University and a master’s degree of library and information science from UCLA.

She joined the Helen Brown Group in May 2019.

Kelly began her career in development in 2008 as an administrative assistant in Major Gifts at Wheaton College.

In 2010, she became a research analyst at Dana-Farber Cancer Institute in the Division of Development & Jimmy Fund as part of the prospect identification team. Kelly joined The Helen Brown Group in 2013.

She is a member of APRA and NEDRA.

Jayme began her career in development in 2008 at the Rutgers University Foundation, where she spent the next seven years, first in prospect management and then prospect research. She spent several years at Monmouth University as their senior prospect research analyst, working with the fundraising staff, university president, and top leadership. She has worked as both a volunteer and consultant for non-profits in the areas of research and writing.

She earned a bachelor of arts degree from Drew University and a master of communication and information sciences from Rutgers University. She is a member of APRA.

Jayme joined The Helen Brown Group in April 2019.

Julie has managed finances for The Helen Brown Group since its founding.

In her spare time, she is an editor for the PBS series Masterpiece at WGBH. Julie was nominated twice for an Emmy award for her work on the PBS show Zoom.

Heather began her career in development in 2001 as a prospect researcher for National Wildlife Federation (NWF). She was with NWF for more than thirteen years, including nearly five years as director of research and analytics. Heather is a former secretary of the board of directors of APRA-Metro DC.

She joined The Helen Brown Group in October 2014.

David began his career in development at The Gunnery school in northwest Connecticut in 2011, where he worked in database management and prospect research. Subsequently, he joined the College of Saint Rose as a development research analyst before leading Albany Medical Center Foundation’s prospect research efforts as Associate Director of Prospect Research. He has a Bachelor’s Degree in Sociology from Siena College and is a member of APRA and CASE.

Michele began her career in development in 2012 when she joined the UC Berkeley corporate and foundation relations team as a development analyst. She spent a year and a half at Cal before returning to UC Davis as a prospect analyst. She was with the prospect management and relations team at UC Davis for almost three years prior to joining the research and relationship management team at George Washington University as a Senior Prospect Analyst in 2016.

Michele received her BA in creative writing from Florida State University and her MA in higher education leadership from CSU Sacramento. She currently resides in Northern Virginia, is a member of Apra International, and serves as the social media chair for Apra Metro DC. Michele joined The Helen Brown Group in July 2018.

Angie has worked in development since 2002, partnering with a wide range of nonprofit institutions. She began her professional career at Vanderbilt University in research and prospect development.

She has also worked with a number of community nonprofits in front-line fundraising, grant-writing, and event management. Angie holds an MPA in Nonprofit Management from the Indiana University Lilly Family School of Philanthropy and a BS in Journalism from Middle Tennessee State University. She resides in Nashville, Tennessee, and is a member of AFP Nashville and APRA MidSouth, where she has been active on the executive team.

She joined The Helen Brown Group in October 2015.

Maureen has been a part of the non-profit world since 1991. She started out in annual giving at Harvard Law School and continued her career as director of annual/special gifts at UC Santa Cruz.

In 1999 she made the switch from front-line fundraising to serve as director of prospect research/management at Bentley University and in 2001 began her role as administrator for the North American Foundation for the University of Manchester. She became part of the HBG team in September of 2011.

Helen has been a development professional since 1987. Her previous experience includes The University of North Carolina at Chapel Hill, the Albert Einstein Institution, Boston College, the Harvard School of Public Health and Northeastern University.

Currently she works with a variety of clients to establish, benchmark and re-align research departments; identify major gift prospects; and train researchers and other fundraisers through on-site and web-based training services.Helen is a former member of the board of the Association of Professional Researchers for Advancement (APRA) and is past president of the New England Development Research Association (NEDRA). In 2006 she received the NEDRA Ann Castle Award for service to the prospect research community.

Helen is Special Advisor on Fundraising to the North American Foundation for the University of Manchester and is a member of the board of directors of Factary Ltd. (Bristol, UK). She is a member of NEDRA, APRA, the Association of Independent Information Professionals (AIIP), Women In Development, the Association of Fundraising Professionals (AFP) and Researchers in Fundraising (UK).

Helen is a frequent speaker and has led seminars for a number of professional associations, including Action Planning, AFP, APRA, the Council for Advancement and Support of Education (CASE), NEDRA, RIF, the Planned Giving Council of Central Massachusetts, the Georgia Center on Nonprofits, the International Fundraising Congress and Resource Alliance.

Helen is also co-author (with Jen Filla) of the book, Prospect Research for Fundraisers (Wiley & Sons, 2013).