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Scott Kirsner | Innovation Economy

Getting real about unicorns: Billion-dollar valuations can be fanciful, but Mass. startups seem more grounded

DraftKings, one of the state’s “unicorn” companies, this year opened a new headquarters in the Back Bay. David L. Ryan/Globe Staff/File/Globe Staff

Lots of homeowners — maybe even you — have had the experience of getting a bit braggy about their home’s value, only to find it isn’t exactly worth that much when they try to sell.

We’re at a moment in the business cycle when some entrepreneurs are going to have a similar experience. After spending years boasting about what their companies are worth — or at least buying into the imaginary valuations that investors put on companies — they’re discovering that stock markets or potential acquirers might not agree.

And it could get a lot worse in a bear market.

WeWork the operator of shared office space, thought it would be able to sell stock at a $50 billion valuation this month, but even after slashing that number in half, the company wasn’t able to engineer an initial public offering.


Dropbox, the file-storage and synchronization service, was valued by its private investors at $10 billion, but today it has a market cap just shy of $8 billion.

Companies such as Peloton, the maker of Internet-linked exercise gear, and Uber have gone public only to see their stock prices drift downward.

People in startup land have been talking about “unicorn” companies, privately held companies with a putative value of $1 billion or more, since 2013, when the term was coined by venture capitalist Aileen Lee. Massachusetts has its own small flock of these horned wonders. They range from Intarcia Therapeutics, a Boston company developing implants capable of delivering prescription drugs, to DraftKings, the operator of a fantasy sports site that lets players win (or lose) real money. Intarcia was once valued at $5.5 billion — but that was before one of its products was rejected in 2017 by the Food and Drug Administration. DraftKings is reportedly raising a new funding round that would put a $2 billion price tag on the company.


But while companies like Airbnb and Epic Games, maker of the online game Fortnite, have valuations in the double-digit billions ($35 billion and $15 billion respectively, according to the startup research firm CB Insights), most Massachusetts companies are further down the list, in the $1 billion to $2 billion range.

That can be a good thing when it’s time for a unicorn to grow up — by going public or being bought by a bigger company.

“A lot of investors have this ‘Go big or go home’ mentality,” says Darshana Zaveri, managing partner of Catalyst Health Ventures, a Braintree venture capital firm. “They want to see the big valuations and founders that have a change-the-world mentality. But what does that result in? There’s a lot of froth out there, but not a lot of exits,” she says, using the term for an acquisition or public offering.

Zaveri says that two companies her firm backed were bought by the medical device maker Boston Scientific in 2018 — one for $600 million, another for $275 million.

Many startups attract sky-high valuations because they’re growing fast, regardless of whether they’re doing it profitably. But, contends Andy Palmer, “The financial nature of these businesses matter in the long-term.”

Palmer is a serial entrepreneur and investor who runs Tamr, a Cambridge data-management startup. “The rental scooter business may feel sexy and hot at the moment, but it doesn’t mean it’s a better business in the long term, financially.” (The scooter startup Bird, founded in California in 2017, is valued at north of $2 billion but is probably not yet profitable.)


“Increasingly,” Palmer says, “capital efficiency is starting to matter to people — even in the Bay Area.” Capital efficiency refers to companies that raise a little money but make a lot of progress with it.

Palmer says Massachusetts companies tend to do better in downturns because they’re more capital-efficient, and they “have this really solid foundation.” As an example, he cites CarGurus, of Cambridge, a car-shopping site that weathered the 2008 recession and figured out how to be profitable before it hit the Nasdaq exchange in 2017.

Ralph Folz agrees with Palmer, and he sounds a bit of an alarm: “There will come a time when profit matters again and cash matters again to startups,” he says. “It may not be as sudden or hyped as the era in the early 2000s, but these changes happen pretty quick when they happen.”

Folz serves on several startups’ boards and is an angel investor; he was previously CEO of WordStream, a Boston company that helps customers manage their online advertising campaigns. It was acquired by the publisher Gannett last year for $150 million.

The investment banking machinery that was gearing up to take a lot of companies public is currently “on pause,” says Michael Greeley of Flare Capital Partners, a Boston venture firm. And the narrative of the next few years could turn out to be “what happens when plentiful capital is no longer plentiful,” he says


Melissa Withers, managing director of RevUp, a Providence investment firm, writes via e-mail that we’ve bred unicorn companies “to fulfill a fantasy where success is so very narrowly defined.” Raise a couple billion, and you need to live up to those high expectations.

“In this razor-thin range of ‘good’ outcomes, they’re all prone to catastrophic health issues,” Withers says.

Unicorns have been in the spotlight for the past few years. That’s partly because a high valuation creates perceived momentum: It can make it harder for competitors to raise capital, says Liam Donohue of the Boston firm 406 Ventures, and it can make you look like a more appealing employer to prospective hires.

Lofty valuations also create buzz, because the media — present company included — use fund-raising and valuations to try to understand who’s doing well, in the absence of other data, like revenue and profit margin.

Says Tim Healy, former CEO of EnerNOC: “A company with lots of hype, but minimal awareness of the company’s financials, can command a higher valuation than the same company once its financials are more widely known.” (EnerNOC went public in 2007 but is now owned by an Italian energy company.)

Unicorns may have gained the ability to fly the same way Wendy did in “Peter Pan”: a little bit of pixie dust, and a lot of belief.

Scott Kirsner can be reached at Follow him on Twitter @ScottKirsner.