Dan Primack is one of the writers we read regularly. A few years ago, he popularized the 1 term “unicorn” for a private, venture-backed technology startup which had at least a $1 billion valuation. He picked this because, at the time, he didn’t believe that such creatures existed. Time has proven him wrong, and the unicorns such as Uber, Airbnb, and others have multiplied.

Historically, of course, these companies would have gone public long before reaching such a lofty valuation. However, in these times of activist investors, Dodd-Frank, etc., the benefits of being a public company have outweighed the drawbacks. An even more important enabler has to do with the many new ways for founders to get liquidity from their private company stock.

In a recent newsletter, Dan writes

Since landing in San Francisco on Wednesday afternoon, I’ve met with an assortment of senior venture capitalists, bankers, entrepreneurs and crossover investors. All of them have, in one way or another, been involved with so-called ‘unicorn’ companies. As in the past, they are nearly unanimous in sentiment. The difference now is that their sentiment is fear.

The past several years of raising too much, too high, too soon has run smack into a much more conservative investor ethos. Later-stage tech startups can still raise growth equity — and still lots of it — but not necessarily at the terms they were receiving just two months ago.

Dan points out that this doesn’t necessarily mean we are headed for a crash, nor does it appear to have trickled down to the lower financing rounds, yet.  However, it can trigger a vicious circle, as investors choose to no longer support the high valuations, which in turn leads to distress for those companies which do not have positive cash flow, leading to a still lower valuation.

Our crystal ball is a bit cloudy, but this does seem like the proverbial canary in the coal mine for technology companies. Those with solid business models and positive unit margins will continue to thrive, while those with weaker models may pass by the wayside.

1 The term is generally credited to Aileen Lee of Cowboy Ventures.

2 Now, in addition to unicorns, there are also “decacorns” (valuation over $10 billion) and even “dodecacorns” (valuation over $50 billion). Our favorite species of unicorn, though, is the “my little pony,” which is a startup valued at over $10 million.