In a 2010 interview with Business Insider, Mark Zuckerberg, founder and CEO of social media giant Facebook said:
"We used to write this down by saying 'move fast and break things.' And the idea was, unless you are breaking some stuff you are not moving fast enough."
Today, more and more companies around the world are living up to this notion with many changing the landscapes of entire industries as we know them (some are even creating new industries).
Indeed, entrepreneurs have made fortunes from investing in these companies that may not seem like much initially, but seemingly grow exponentially in value overnight. Some of these companies are even being referred to as 'Unicorns', which Wikipedia defines as:
'A recently introduced term in the investment industry, and in particular the venture capital industry, which denotes a start-up company whose valuation has exceeded (the somewhat arbitrary) $1 billion dollars.'
They're not as rare as they used to be, either. Companies such as Uber and SpaceX (founded by Elon Musk) are on the list of these so-called 'Unicorns', as is Atlassian which is currently Australia's one and only.
For all the companies that have officially been deemed 'Unicorns' however, there are many more aspiring to make the list, and therein lies the danger for investors.
Why investing in Unicorns is a dangerous way to make money
New technology can be extremely exciting. The innovation that goes into it is also important and could well be a defining factor in the strength of the Australian economy in the future.
But investors can also fall into the trap of simply assuming these companies are bound for success, sometimes not even considering the risks that come attached.
Take 1-Page Ltd (ASX: 1PG). Shares of the human resources business are up no less than 1,270% over the last 12 months. The company boasts a market value of almost $700 million, despite reporting revenue of just $158,000 in the six months to 31 July 2015.
For the sake of full-disclosure, I currently own shares in 1-Page because I believe what it is offering could become a very valuable tool for corporations in the future. It could even go on to rival the likes of SEEK Limited (ASX: SEK) and LinkedIn if everything goes according to plan.
I'm not saying the shares are over- or undervalued, but I am saying it's risky — the company will certainly need to grow its revenues substantially to justify its current price tag.
Then there's Freelancer Ltd (ASX: FLN), the freelancing and crowdsourcing marketplace. Freelancer has also recorded tremendous growth in the number of registered users and total projects posted to the site, and is another company that could have a very promising future.
But while there are reasons why both 1-Page and Freelancer could still be reasonable buys today, investors also need to keep in mind that these companies – and other tech groups aspiring for massive growth – are by no means guaranteed to succeed.
Case in point…
The Australian Financial Review recently highlighted another Unicorn named Theranos, which is reportedly worth US$9 billion. The company claims to have the technology to carry out comprehensive testing for hundreds of medical conditions using tiny samples of blood, rather than drawing blood with a needle.
Technology like that sounds exciting and, if it worked, could justify the company's price tag. But instead, Theranos' business model and processes have been called into question which could result in a massive devaluing of the company if proven to be true.
Indeed, some technology companies will produce truly incredible innovation and produce enormous returns for shareholders. But at the same time, investors need to remain sceptical and never fall into the trap of assuming they should be bought for easy money. By no means will that always be the case.
