Unicorn epidemic portends wild ride for startups

The Unicorn Club -- companies valued at more than $1 billion -- is filling up, but no one knows whether it's a good or a bad sign for tech

Oragami unicorn
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In perhaps another sign of an overheated tech economy, the Unicorn Club -- which consists of tech startups valued at more than $1 billion -- has become so crowded they've formed a new club for "decacorns," or companies with valuations exceeding $10 billion.

Currently, more than 80 tech startups make the cut for the Unicorn Club, but the A-list of companies soaring to the stratosphere, as assembled by Fortune, contains only eight -- for now.

"It used to be that unicorns were these mythical creatures," said Jason Green, a venture capitalist at Emergence Capital Partners whose investments include Yammer, which Microsoft bought for $1.2 billion. "Now there are herds of unicorns."

Is it a sign that another tech bubble is forming? Talk of bubbles inevitably heats up around every big IPO or high-ticket acquisition and is bolstered by anecdotal evidence of Silicon Valley excess and startups burning through cash.

In fact, the burn is so bad that even venture capitalist Marc Andreesen has been speaking out -- and he should know: The co-founder of RapGenius, one of the companies Andreesen backed, could be its poster child. As Valleywag said, "One way to [stop the excess] is to stop giving people millions upon millions of dollars to waste."

Bill Gurley, the Benchmark Capital investor who backed Snapchat and Uber, is also sounding the alarm. "I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now -- unprecedented since '99," Gurley told the Wall Street Journal.

But others argue that the tech industry is different now from the last two bubbles. Smartphones, cloud computing, and connected everything have infiltrated every part of our lives -- and the economy. "I do not believe that we're in a tech bubble," Tom Reilly, CEO, Cloudera told Fortune. "We are just seeing the convergence of some pretty amazing trends: cloud, big data, interconnectedness, mobile, and social."

Jyoti Bansal, CEO of AppDynamics, concurred: "We are not in a bubble, especially on the enterprise technology side. We're going through a massive shift in enterprise IT spending -- a $2.76 trillion marketplace -- because of disruptive changes driven by the cloud, mobile, the Internet of things, and the unprecedented connectivity that is changing the way we all live and work."

The boom is not all marketplace-driven, however. A six-year equities bull market has left investors and companies with record-breaking piles of cash. With interest rates low, many are choosing to lavish it on tech startups, each round of funding seemingly higher than the last.

Even VCs like Gurley, who predicts a market pullback, continue to invest. "You can't choose not to play," he told Fortune. "[If] your competitors are raising $150 million at high valuations and pouring it into sales, you either can do something similar or be conservative and no longer matter."

Of course, that sounds uncomfortably similar to what Citigroup CEO Chuck Prince said about his bank's commitment to leveraged buy-out deals -- right before the financial meltdown: "As long as the music is playing, you've got to get up and dance. We're still dancing."

Despite any similarities seen with earlier bubbles, many economists predict the music won't stop in 2015. Then again, perhaps the song we should really be singing is Bob Marley's: "In this great future, you can't forget your past."

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