Investing in Unicorns

I’ve just discovered a unicorn. Or more to the point, I’ve just learnt that one of my angel investments has become a unicorn. A real one!

Unicorns – myths and reality

What am I going on about, you might be asking? In the investing world a Unicorn is a common nickname for a startup business that reaches a valuation of $1bn+. That’s the type of unicorn I’m talking about. There are dozens, but not hundreds, of unicorns in the world. In the UK the better known ones include Asos, Deliveroo, FarFetch, Funding Circle, Transferwise and Zoopla.

But many so-called Unicorns are not ‘real ones’, to my mind. How come? Because the valuations are often something of a fantasy, and concocted out of funny structured notes for the benefit of the media/credulous staff/others, rather than being a true reflection of the value of the company. I do speak from some experience here, sadly.

For me a ‘real’ Unicorn is one where investors are able to sell shares at a Unicorn valuation – i.e. a price which values the company at $1bn+. Asos and Zoopla pass this test – both are now public companies worth >>$1bn, and their investors have full liquidity. Deliveroo does not pass this test; the large sums being invested at $1bn+ valuations represent money going in to the company, but (to the best of my knowledge) existing investors have not had an opportunity to sell any holdings and, if they did, it would be at a significant discount to the headline valuation.

When is it wrong to take a 40x profit?

So, in my case I received one of those rare but delicious emails this week telling me that I have an opportunity to sell my shares in an angel investment that I made around 10 years ago, and sell them at a significant profit. The total valuation at the offer price is a smidgeon over £1bn. For the record I bought shares at a little over £10/share and can now sell them at £400/share, so this is almost a 40x gain. Happy days! I’ve held these shares so long that the annual rate of return is not as high as you’d think, but it’s around a very respectable 40% p.a.

I now face the quite complicated decision of whether and how much to sell. I haven’t had these decisions very often in my life but I do know from experience that they are difficult decisions to get right, and easy to regret with hindsight. While it is easy to say ‘you are never wrong to take a 40x profit’, you’d have said something similar about a year ago when this same investment offered me the chance to sell at £100/share. I did in fact sell some of my holding back then, enough to receive my original investment back again plus a profit. Now there’s been a 4x gain in <12 months after that sale, my decision to sell a year ago isn’t looking so smart!

The factors that I’m considering right now include:

• Do I need the money? Not really, though I would like to have some ‘angel’ funds back to make new angel investments from.
• What will happen to the business going forward? I don’t really know. I have not been given any trading / financial information about the business let alone any projections. Information is highly asymmetrical, with me in the wrong place.
• Who is buying? A very smart private equity firm. Almost certainly the price is going to go up from here.
• Who is selling? The founder/CEO is selling a portion of his stock. For me this is the main signal. He is the best informed person at the table. He is also the main asset/strength of the business. I know he doesn’t really need the money, yet he is choosing to sell about 20% of his holding. I am minded to follow his lead – and sell roughly the same proportion of my position.
• Will I have future opportunities to sell my shares? This is a big unknown. My biggest error in selling a privately held position came many years ago, when I sold too early partly due to my belief I might never get another chance. In that case, future chances came relatively thick and fast; had I known this, I would have acted differently. In this unicorn’s case, I suspect there will be an exit/IPO in the future at a valuation of at least double today’s price, but it could be 10 years away. Having my funds locked up under somebody else’s control, with no visibility, is not very appealing – hence I’d rather retrieve some of it now.
• Can I give these shares to charity? Giving shares with high unrealised capital gains to charity is highly efficient philanthropy. However, for most private companies it is difficult, as there are transfer/sale restrictions. Alas in this case I can’t do it.

Overall I am looking to take about 20% of my value off the table. This way round, if the downside scenario occurs where something bad happens and I end up making nothing more, I have still received a decent return (of 5-10x) on my original investment. But if in fact there is an upside outcome, e.g. the share price goes up another 5x, then while I will kick myself at selling 20% in 2017 instead of letting it quintuple, I will still have quadrupled the value of my remaining holding from 2017. Let the game (re)commence.