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.
My generation’s Cuban missile crisis is on the front pages. All manner of existential questions come to mind. But as a starter, what’s a simple passive-orientated investor supposed to make of armageddon?
Past performance is no guide to future results. But history rhymes. What has happened in prior conflicts?
I’ve taken a cursory look at the UK and US equities markets. Even for these markets, the most mature in the world, data prior to 1950 is pretty thin. But I’ve found one study on each side of the pond and overlaid them on top of each other – hey, I said ‘cursory’! The background thin graph is Dow Jones; the foreground thick blue line is UK Equities (from a recent Barclays Equities Gilt Study). Both are nominal price indices – i.e. before inflation and without reinvestment.
Here’s what I observe:
Something’s been on my mind quite a bit recently, and I realise I don’t read much about it. At it’s simplest, it’s how to think about my portfolio’s income versus capital gains.
What I think I know about Capital gains vs Income
I have always liked Income. I see it as something which is hard to fake; it is closely related to a company’s cashflow, not some mumbo jump Snapchat-like handwavey numbers. If a company increases its dividend from 50p/share to 55p/share that tells me quite a bit about its profitability and prospects; if a company share price rises from £10 to £11 that tells me next-to-nothing about the company’s performance or prospects.