"Fat skinny" is a term used in fitness to describe a seemingly skinny person who is unfit and suprisingly has a lot of body fat. Likewise, a "fat skinny startup" is a colloquial term describing startups that have a burn rate that exceeds their revenue.
Alarmingly, some of these fat-skinny startups have a valuation that exceeds billions. Here is a chart from CB Insights that shows that out of the top 10 Unicorns, Uber's valuation more than doubles 99% of all the unicorns that exist in the world today, with the third highest valuation belonging to SnapChat at over $15 billion.
With Uber's recent disclosure over its net income- that shows an operating loss of $470 million from a revenue of $415 million, one has to wonder how a company that has such a high burn rate could possibly have a valuation that is the second highest in the world, and higher than 80% of the companies in the S&P?
Of course, Uber hasn't had such a good couple of weeks, with the recent California ruling that classified an Uber driver as an "employee" and not a "contractor", this could potentially signal the downfall of the highest rise to unicorn status from a startup that has only been around since 2009, in addition to the troubling fears that this ruling could also impact many other startups that utilise "contractors" on their sites, potentially taking down the valuation of all the startups based on crowdsourcing services.
The third unicorn on the list with the highest valuation- SnapChat, also faces a challenging monetisation dilemma. Although SnapChat is secretive about its number of users and revenue, a look into the archives of the Sony cyberhack shows CEO Evan Spiegel's mindset in making the company profitable, and reveals that SnapChat had only financing left for 13 months with a burnrate of more than $30 million per year in late 2014.
The more sensible Evan Spiegel in an email response to Mitch Lasky (Partner at Benchmark Capital and on the Board of Snapchat who wanted to push the company into a multi-billion dollar valuation based on no revenue):
"I 100% understand your perspective on the raise. That said, I would prefer to keep the valuation of the co at $800mm going into a potentially turbulent time in the market. We have 13 months runway, and with a minimally successful monetization scheme we will be able to comfortably extend that. I don't think that monetizing the business will affect our ability to raise at high valuations -- Facebook was bringing in money in the very early days and didn't have any problem attracting high valuations. If anything, we need to monetize the business in order to create leverage for future financings as needed. In the next two weeks I want to focus on the monetization product rather than a potential financing. It's almost there and it's really awesome. If we have a business that is sustainable over the next 2-3 years we will be in a much stronger position."
5 months later in May 2015, SnapChat closed a funding round of $537 million with a $15 billion dollar valuation and Evan Spiegel begrudingly stated in media interviews that the current focus for SnapChat was growth and not monetisation, heeding Mitch Lasky's and Benchmark Capital's unicorn-pushing objectives.
In comparison, the UK is much slower about building its unicorns, but invests in companies that have been around for a longer period of time. Last week, the Oxford-based security company Sophos, founded in 1985, launched its more modest £1 billion IPO.
Although the UK might be in awe of the US and China's rapid production of unicorns, the sentiment in the US is filled with sceptics, and growing concerns over a tech bubble hover over the seemingly sunny and status-driven skies of Silicon Valley, and one wonders if perhaps the continual launch of these "fat skinny" startups into unicorn status could be a sign that danger looms ahead?
By Sierra Choi, Director of Marketing