When the unicorn loves its name recognition, but Wall Street, less so

This Kat recently suggested that a widely recognized trademark does not necessarily mean a strong brand (using Uber as an example). That raises the question: might such a trademark nevertheless provide a commercial benefit? The answer may be “yes”, at least when unicorns are concerned.

No, this Kat is not asking Kat readers to enter the world of ancient mythological beasts. Rather, we refer to the corporate “unicorn”, the name given to a privately held start-up company with a valuation of more than $1 billion.

More generally, the unicorn has come to describe a privately held start-up that shows rapid growth but, alas, no profits; a company whose financial foundation still depends upon outside private investment, leading to an increasing company valuation after each round of private funding, much to the joy of those investors who got in at the beginning when valuations were much lower as well as to the delight of the fledgling company, who coffers race far ahead of its profit and loss statement. In the unforgettable words from Jerry Maguire-- "Show me the money."

But the unicorn phenomenon has come under pressure as of late. The trigger is recent developments that have occurred when unicorns seek to take the company public via a public offering of shares (i.e., an IPO). At least until quite recently (here, "Silicon Valley Is Trying Out a New Mantra: Make a Profit"), the focus of private investors in a unicorn has been on company growth, not profits. All too often, the unicorn’s motto has been--“Burn, baby burn” (not buildings, but the unicorn’s cash reserves), all in the name of adding more and more customers or the equivalent; profits are for corporate sissies.

It is here that that a well-recognized trademark may play a commercial role.This is because part of the dynamic of multiple funding rounds by private investors is the FOMO phenomenon (“fear of missing out”), i.e., a private investor’s concern lest it fail to get a piece of the investment action in a unicorn. At its heart, FOMO (like so many market phenomena) is driven by psychology.

That said, one of the factors that contributes to FOMO in the context of investing in a unicorn is the name recognition of the unicorn. Greater name recognition of a unicorn will be more likely to channel a potential investor in the direction of that unicorn. As such, greater name recognition may well provide an edge to the unicorn in attracting additional private investors.

Given this, it is in the interest of both the early round investors and the unicorn itself to promote the company’s name recognition as a way of taking advantage of FOMO, lest an investor fail to invest in a company with such a recognized name. But the value of such name recognition has limits, especially when there is a new sheriff in town in the form of post-IPO public discloures (beginning with those dreaded quarterly reports) that reveal little profit or, more likely, losses with no profits in sight.

Cases in point: both Uber and Lyft were widely recognized names (and enjoyed especially high valuations by virtue of the dynamics described above) before their much-ballyhooed initial stock offerings this year, only to see their respective stock prices subsequently plummet when continuing company losses were reported. Their name recognition may well have helped fuel their respective initial offering prices, until commercial reality and the public disclosure thereof came to the fore.

At least these two companies could parlay, for a while, the benefits enjoyed by their high-profile company names and rich valuation while they were still private companies. Pity poor WeWork, which saw that its high company valuation of $47 billion, in part thanks to its strong name recognition in the media and relevant public, come crashing down as it was forced to withdraw its IPO last month in the face of mounting skepticism regarding its business model (long-term obligations in the billions of dollars owing to landlords, on the spending side, against short-term rentals on the income side), as well as questions about its governance.

A well-recognized name and mark can take a unicorn only so far. Just ask WeWork, which seemed to be the quintessential corporate unicorn. Who will be the next unicorn to test the limits of the commercial value of its widely recognized name when the company is offered to the public?

By Neil Wilkof

Picture on left is from the Special Collections, University of Houston Libraries and is made available under the Creative Commons CCO 1.0 Universal Public Domain Dedication

Picture on right is by RaphaelQS and is made available under the Creative Commons CCO 1.0 Universal Public Domain Dedication