Alert! Watch out for that Unicorn!

By Matthew Haan, Fall 2018 IAC Student Intern

Bulls, and kitties, and bears, oh my! I seriously doubt that Dorothy had any kind of financial plan for her arrival in the Emerald City, but it is hard to blame her for this oversight. How is someone supposed to focus on financial well-being when faced with witches, singing munchkins, and talking scarecrows? There is a lot to keep up with out there, and if Dorothy followed this blog, she would have known the importance of watching out for those bulls, and kitties, and bears (in addition to the lions, and tigers, and other bears).

This week we are adding to our financial farm by letting you know about unicorns. That’s right—unicorns. In the business and investment world, a unicorn is a privately held company with an on-paper valuation of at least $1 billion. Like that Pokémon you found in the park, unicorns can evolve into decacorns ($10 billion) and even hectocorns ($100 billion). Despite the assumption you have likely made about the rarity of financial unicorns, they actually have become quite prevalent. Companies like Uber and Airbnb were once on the list of unicorns, and this year the food delivery service DoorDash joined the list.

So what do you need to know about unicorns (other than that they are very real)? Unless you are Scrooge McDuck, you probably are not going to individually invest in a unicorn. But mutual funds and exchange-traded funds registered with the Securities and Exchange Commission may invest in unicorns, meaning you might be exposed to some of the risk associated with unicorns. What are those risks? I’m glad you asked! First, the nature of a privately-held company means there is always a possibility of weak internal control. This could lead to false reports or a misuse of capital. On a related level, false reports can lead to valuation issues. The New York Times reported last year that most unicorns may only actually be worth half of what they represent their valuations to be. Finally, unicorns and their securities may not be registered, and you might be missing out on crucial information about your unicorn.

The path to financial health is a lot like Dorothy’s trip on the yellow brick road. Sometimes it will be scary. Sometimes it will seem like you don’t have a path. And there will definitely be animals that accompany you on your journey. Along the way, if you find yourself traveling with a unicorn, you probably want to walk beside it rather than saddle up or hitch your wagon to it.