Bill Gates Warns About Unicorn Valuations, Says Investors Should Beware

Is the Silicon Valley gold rush slowing drying up? For the next two years, it might be, Bill Gates, the founder of Microsoft, has warned. He urged tech investors to be more careful, especially when it comes to so-called unicorns, those private companies that have been valued at $1 billion or more.

In the next two years, the number of those valuations will likely fall, a decline that ought to trigger a departure from investment practices of the past, Gates predicted in a recent interview with the Financial Times.

“There is some sorting out that is taking place,” Gates said. “It never should be a case of closing your eyes and saying ‘Oh, it’s a tech company, just throw money at it.’ That strategy worked for about two years; now you actually have to open your eyes and look at the company,” he added, noting that in the long term venture capital nevertheless remains attractive.

Gates is hardly the first business leader to issue such a warning, particularly in the wake of years of Wall Street investors who poured cash into startups they hoped would yield gargantuan returns, the way early investors in Google and Facebook profited. With so many investors pursuing this goal, others besides Gates have pointed to signs of an impending technology bubble in venture capital, especially given sliding stock values since the start of 2016.

In November, the mortgage lender LoanDepot, valued at $2.6 billion, postponed its initial public offering. The week before, Square Inc., a startup for mobile payments, cut its initial IPO valuation of $6 billion by about 35 percent. And six months after LendingClub Corp., a peer-to-peer loan startup valued at $1 billion, went public in December 2014, its shares had fallen below their initial public offering price of $15.

“I don’t think people had really dug into some of the underlying risks,” Michael Tarkan, an analyst at Compass Point Research & Trading LLC, told Bloomberg at the time. Instead, investors “were really thinking about the growth.”

Analysts have suggested that this climate of volatility has pushed tech companies, like Uber and Airbnb, to remain private. Still, others are biding their time, quietly preparing to file for an initial public offering, likely waiting for market conditions to improve.