Mergers and Acquisitions

When Technology Unicorns Fall, We’ll All Stumble


This time it's different. The current tech startup boom -- led by $1 billion technology unicorns -- is nothing like the dot-com bubble and bust from around 2000 to 2002. At least, that's what the pundits keep saying. But frankly, I'm a little worried. For all of us. Here's why.

Take a look at the billion dollar startup club, as tracked by The Wall Street Journal. Those companies are so-called unicorns because they're allegedly rare and mystical. Only, they're not so rare anymore because tech startup valuations have skyrocketed. And that's cause for concern.

Follow My Logic...

Here's how the hidden technology unicorn problem will likely unfold -- impacting all of us -- over the next 18 to 24 months...

1. You: Let's assume you launch a tech business right now. Chances are, you won't buy much hardware or software. Instead, you'll launch a service on public cloud infrastructure from Amazon, Microsoft, IBM or some other IaaS (infrastructure as a service) provider.

2. Thousands Like You: Only, you're not unique -- at least not when it comes to consuming IT. Startups across the globe are launching their services on commodity cloud infrastructure. Everyone wins thanks to low-cost, on-demand infrastructure. Sounds great. But is it?

3. Growth First: Instead of driving towards profits, your board decides that growth is the way to go. It's time to raise money to drive revenue growth and expansion. Don't worry about profits yet. Just grow, baby, grow.

4. Pay Your Bills: Good news. You raised lots of money. So did thousands of startups like you. As a result, you and all those other startups can keep paying your cloud bills. Yes, it actually costs money to keep your lights on in somebody else's cloud. And the cloud bills grow as your company grows.

5. Raise More Money: Good news. Your company grew revenues. Time to raise more money at a higher valuation. Profits? Can we please delay that conversation a bit longer?

6. Everyone Benefits: More good news. Revenues over at Amazon Web Services, Microsoft Azure, IBM Cloud and other IaaS providers continue to skyrocket. All those startups are consuming more and more cloud services from the cloud giants. Awesome.

7. Hiccup: Oops. You're not growing your business as quickly as you had hoped. Other IT startups are starting to feel similar pressures. Only, it's not just the IT startups. Retail startups, healthcare startups, media startups -- you're all running in public clouds. Venture capitalists start to get a bit nervous. VC money is starting to get more difficult to find. You may actually need to take a "down round" of financing. So do other startups.

8. A Few Unicorns Die: The current mobile, cloud and analytics booms start to mature. A few unicorns die -- but don't worry. The media says those are isolated deaths. Only, they're not.

9. Everyone Feels the Pain: Suddenly, growth over at Amazon AWS, Microsoft Azure, IBM Cloud and other IaaS providers starts to slow. Dead unicorns, it turns out, are bad for business. Even worse, some surviving IT startups have overdue accounts. Yes, the IT giants are starting to feel the pain as some cloud customers implode or limp along. Blue chip tech stocks feel the pain of slowing cloud growth. You feel the pain, too, since your mutual funds and exchange traded funds (ETFs) hold those tech stocks.

10. Even Hardware and Software Suffer: Meanwhile, traditional IT giants -- the ones that sell servers, storage and networking -- also start to feel the pinch. After all, those giants have been selling converged infrastructure into cloud data centers. And now, as startups implode, the cloud data centers don't need to add as much horsepower every month. And don't forget: Some of the biggest SaaS clouds -- like -- are built on traditional software from the likes of Oracle. Slowing growth and unicorn deaths are good for nobody -- except bankruptcy lawyers.

This Sounds Familiar

Does all this sound far-fetched? Perhaps not. Rewind to the dot-com boom. Anybody else remember a data center provider called Exodus Communications? In some ways, Exodus is a distant relative of today's cloud providers. The company offered co-location centers, hosting services and data center services. Exodus's valuation went from $0 to $37 billion from 1996 to 2000. But by 2001, the company went bankrupt because many of its customers -- IT startups -- had folded.

Fast forward to the current unicorn boom. As I consider the potential scenarios above, I see two clear wildcards for today's IT market and all of us who work in it:

  • How many money-losing startups are public cloud customers right now?
  • How many of those money-losing startups will be around in 18 to 24 months, and at what valuations?

Until the answers to those questions are known, it's impossible to say exactly how painful an IT startup correction could be for the rest of us... actually, all of us.

Don't Panic, Stay Focused

Am I worried about a tech market correction? In some ways yes -- mostly because such a correction could significantly hurt my retirement savings. The good news: Many unicorns do generate profits -- unlike the dot-com age, when startup profits were nearly impossible to find.

In terms of day-to-day business, After Nines Inc.'s team has survived and navigated market corrections before -- from the dot-com implosion to the the great financial recession of 2008.

Instead of chasing those unicorns, stay focused on your customers. Stay on top of accounts receivable. And stay focused on your mission.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.