Mythical Promise? “Unicorns” and Private Company Investment

Welcome to the January 2022 edition of our newsletter!  In this issue, we’ll examine the growth of private companies seeking access to public capital markets, including “unicorn” firms, and discuss ways to identify and manage risk.

Between Two Worlds: Private Companies Accessing Public Capital

Even with the proliferation of publicly-traded companies, including smaller companies going public via special purpose acquisition vehicles, many early-stage companies remain privately held, yet seek outside investment from the general public.  Companies with promising technological advancements or other unique market niches which can drive their valuation to $1 billion or more, so-called “unicorn” companies, are in many ways leading this effort. The U.S. Securities and Exchange Commission has noticed, and has begun discussing rules which would require such companies to report detailed information not typically disclosed by privately-held firms — information such as earnings, outlook for risks, and executive compensation.  The venture capital industry has, predictably, resisted such efforts, arguing that the capital needed to drive innovation would be stifled by greater transparency.

Such investments come not only from venture capital funds, but also wealthy individuals who may not want their involvement to be publicly known at any given stage of investment.  Yet those same potential investors would be well served to use the commission’s proposal as a guideline for their own due diligence.  What is known about the existing risks around a company’s product development, growth and efforts to obtain market share?  What other risks exist throughout their industry, and to their sources of funding?  How does the experience of the management team fit into that landscape, and how well positioned are they to grow?  While something akin to what the commission has proposed would help answer many of these questions, it also blurs the line between what it means to be a private company versus a public one.  As many disrupted, and disrupting, industries maintain something of a “wild west” feel, and as regulators try to catch up to emerging technological trends, the task falls to investors and their counsel to fill in gaps and seek answers for hard but necessary questions.