Black Swan Events And Unicorn Companies

Definition and Significance

Question:

Discuss about the Economic Environment of Black Swan.

A black swan may be referred as an even or a situation that negates beyond what was normally anticipated of a particular situation and is extremely hard to forecast. The term became famous as a result of Nassim Nicholas, a professor of finance and once a trader in the Wall Street. According to the professor, Black swan events occur randomly and are sudden.

The conception of black swan came into place after the financial crisis in 2008 and was pioneered by Nassim Taleb, a professor in financial matters (Lebret). According to professor Taleb, Black Swan events are unpredictable, yet they have ramifications that are catastrophic. It is thus crucial for people to consider and assume Black swan events as real and in whatever form it may suffice it is always good to plan in the event it occurs. Taleb also went further elaborating that the financial crisis in 2008 and the black swan idea was as the result of a broken system that had failed. It is such events that create future Black swan situations.

Taleb had an accumulated experience of 21 years in the Wall Street as a quant trader, and his primary task was developing models for financial enterprises using the computers. It is from that time that the professor engaged in writing long essays that were later broken into three books. Apart from writing books, Taleb serves as a distinguished professor at New York University majoring in risk engineering and has seen more than 45 reviewed papers written.    

A unicorn refers to a company that was started and does not have an established record that reveals its performance (Barnet). In most cases are companies that have a market valuation of the stock market that is estimated at the cost of more than $ 1 billion.

Unicorn came first to be known after it was revealed and disclosed by one capitalist by the name Aileen Lee who was also the founder of CowboyVC, that was the platform for launching a capital fund that was stationed at California. In one of the articles that were written, Aileen looked and analyzed software startups that had been founded in the year 2000 and stated that only 0.07% were valued over $ 1billion. However, there are those that do not reach the $ 1 billion level and are rare just like finding a unicorn (Capital, 2016). According to Lee, the first unicorn was formed in the 1990s, for instance, Google inc. was a clear definition of a unicorn that later became a super unicorn with a valuation estimated at over $100 billion. However, many unicorns are said to be formed in the epoch 2000 and Facebook is the only super-unicorn over the decades (Friend, 2015). After the publication of Lee’s article, the term has been used in referring to startups in sectors in technology such as the mobile technology and the information technology and such sectors usually high valuations that raise questions of the sustainability of their financial sources.

Nassim Taleb and Black Swan Events

In one of the blogs by an investment Guru, Gurley, who is also a partner at Benchmark capital. Gurley stated that the difference between the initial Public offers and the late-stage raising of capital for the private investors is the fact that more than 80 companies from the public sector have raised their finances estimated over $ 1 billion (Lunn, 2015). Since 2010 and that investors fear missing buying shares in possible upcoming unicorn companies and thus abandoned their risk analysis that was traditional. Continuous debate continues to stir as to whether any of the unicorns in sectors such as technology constitute the dot-com bubble that was experienced in the late 1990s (Garth, 2015).Other individuals are of the argument that a large number of companies that are estimated at a value of above $1 billion is as a result of markets experiencing froth (Capital, 2016). Another case that seems to have stirred a debate across business people is that a large number of enterprises that have valuations that high reflect productivity that is technologically oriented that is almost the same as the printing press that was innovated more than 600 years ago (Carter, 2015). It is also the argument of others that with the onset of globalization and the monetary policies created by the central bank after the Great Recession has generated capital waves that slosh universally hunting for unicorns.

Industry incumbents that are well-established face the risk of disruption from new entrants that employ new technologies, enterprise models, and approaches that encompass leadership in the markets. Most persons wonder how they can counter the unforeseen threats that could destroy their businesses. The contemporary management entails managing events that are anticipated and the things that can be controlled and entails tapping the best talent and developing relevant capabilities.

However, the question that baffles most business intellects is how to manage the unexpected disruptions in the business environment (Mulholland). A disruptive strategy in most cases tends to arise from threats that are disruptive and unexpected and in most cases is based on a new approach. It has also been reported that disruptive strategies may not have been viable or feasible in a certain market but then becomes relevant in a certain environment and at certain times (Hagel, Patterns of Disruption, 2015). The changes in the wider environment characterized by technology and infrastructure make it possible for a new approach that may be profitable. The incumbent, on the other hand, fails to understand and recognize the fact that the status quo is shifting and changing.

Aileen Lee and Unicorn Companies

The incumbent gets hampered by the modifications of the existing business and thus struggles in responding to the needs of the market whereas the new entrant pushes forward in grabbing a large share of the market (Harrison). According to this context, the incumbent tries to understand how the changes in technology and new approaches may bring a cataclysmic effect in the marketplace and also to businesses belonging to the incumbent. According to research conducted by Deloitte for more than 20 years, it encompassed the direction of the next phase of exponentials such as 3D printing and how they may be dynamic (Hagel, Brown, Wooll, & Maar, 2015). The research also included cases where the incumbent had been had been thrown out of the market as a result of a reduced share of the market and revealed the facts that the incumbent would have seen and how they would have mitigated the situation if they had known.

The year 2008 saw the United States housing market experience what was referred to as financial crash and is one of the most recent and acknowledged black swan events. Only a small number of outliers were in a position to forecast the crash as its effects were catastrophic leading to a global crisis (Capital, 2016). In the same year, that is 2008, Zimbabwe became a victim of the worst inflation in the 21st century, a hyperinflation for that matter. The hyperinflation reached a peak and had 79.6 billion percent. The inflation experienced in Zimbabwe was unpredictable, and nobody saw it coming, and such kind of hyperinflation could cripple a country financially bringing it to its knees.

In 2001, there was the dot-com bubble another black swan scenario that was witnessed in America and was very similar to the financial crisis in 2008.America was boasting of rapid economic growth, and there was a robust growth of wealth in the private sector before the economy collapsed bringing in devastating effects (Lebret). It is at this period that the internet was being launched for commercial purposes and thus many investment schemes were investing in building up technologies that had valuations that were inflated and lack of market tractions. It is after the folding of these companies that the funds were shaken and hit hard, and the risk was transferred to the investors. In such above circumstances it is evident that there is nothing that could be done to insulate the companies in Zimbabwe, Russia and the US. If black swans and unicorns occur, there is little that can be done by firms to insulate the companies. For instance, hyperinflation weakens the whole economy, and the only thing that can save a company is if it has other branches in other countries. As such it would be in a position to enjoy profits in one of the countries while at the same time experiencing great losses in another country invaded by the black swans and the unicorns.

Debate Surrounding Unicorn Companies

A company can be insulated against the unicorns and black swans by understanding the emerging technologies and develop strategies to cope with such trends in technology. The executives manning institutions where such changes are occurring have the responsibility of ensuring that they remain relevant by coping with the new changes in the market

A good example is when technology in a way is disruptive, and this was witnessed back in 2012 when Kodak Co was declared bankrupt after it lost its relevance as the consumers shifted from film to digital photography. The company started losing its track when it lost money for more than twelve quarters and slashed the number of employees employed from 145000 in the 1980s to less than 20000 in 2012.The Kodak downfall is well known by much more so in the epoch where a majority of the people have access to the digital technologies (Hagel, Brown, Wooll, & Maar, 2015). The big question is how Kodak missed the opportunity to recognize the rise of digital photography.

It is important for the executives to learn from Kodak’s experience to avoid losing the market share or even having their businesses become extinct in the market. Many questions are raised regarding the nature of technology that disrupts the already established businesses and why the company fails to react in the event of disruptive strategies (Harrison). One way of averting disaster is to understand the form of new threats that are likely to emerge and identify the disruptive strategies that the company is vulnerable to, and also formulate the catalysts for threats.

References

Barnet, B. (n.d.). Retrieved October 11, 2017, from https://www.barnettalks.com

Capital, V. (2016). About Unicorns and Black Swans. Retrieved October 11, 2017, from Capital Venture: https://www.venionaire.com

Carter, J. (2015). Are Market Black Swans Like Startup Unicorns? | Points and Figures. Retrieved October 11, 2017, from Points and figures: https://pointsandfigures.com

Friend, T. (2015, May 18). Who Funds the Future? Retrieved October 11, 2017, from The New Yorker: https://www.newyorker.com

Garth, D. (2015). The Black Swans and Unicorns of Insurance IT. Retrieved October 11, 2017, from emagazine: https://emagazine.itapro.org

Hagel, J. (2015, May 12). Patterns of Disruption. Retrieved October 11, 2017, from Wall Street Journal: https://deloitte.wsj.com

Hagel, J., Brown, J., Wooll, M., & Maar, A. (2015). Patterns of disruption. Retrieved October 11, 2017, from Deloitte: https://dupress.deloitte.com

Harrison, A. (n.d.). Business environment in a global context.management

Lebret, H. (n.d.). Black Swan | Start-Up. Retrieved October 11, 2017, from startup-book: https://www.startup-book.com

Lunn, B. (2015). Crash of the 'Faux Unicorns' & Birth of the Anti-Fragile Unicorns. Retrieved October 11, 2017, from Bankinginnovation.net: https://bankinginnovation.net

Mulholland, A. (n.d.). IOT; Introducing a Market Disruption A strategy for Market Leaders based on IoT Platform Collaboration. Retrieved October 11, 2017, from Constellation Research Inc: https://www.constellationr.com