The Epic Story of Unicorns and Dragons

Unicorns are everywhere in SF Bay Area! It seems like we read about new “Unicorns” being created every week. The mythical Unicorn is described as a beast with a large, pointed, spiraling horn projecting from its forehead. Ancient Greeks and other European folklore reference the unicorn throughout history. I even have a first cousin who built a hugely popular Unicorn propelled vehicle where he rides around at Burning Man, the Maker Faire and parks around Davis, CA drawing hoards of attention. We all love unicorns. But alas, I don’t speak of the legendary beast. I reference those privately held technology companies with private valuations of over $1 billion dollars labeled as a “Unicorn”. As tracked by the Wall Street Journal and Dow Jones Venture Source study, there are now approximately 116 Unicorn companies, including Uber, Snapchat, Airbnb, and Dropbox with a large percentage of them based on the SF Bay Area. Are Unicorns real or mythology? Does working for a Unicorn equate to wealth and happiness in life? And how does the Unicorn SF Bay Area economy translate to the local real estate market?

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But have you heard of the growing “Dragons” within the mid-Peninsula? It used to be that there was only one Dragon in the mid-Peninsula, but now the Dragon community has grown to several more just the past year or two. Confused? Yes, the creatures with the serpentine and reptilian traits that may even spit fire and fly! Dragons are in Greek Mythology and prevalent in Chinese culture – sometimes in fierce settings and other times symbolizing wealth and power. Well, Dragons in this untold story are mid-Peninsula cities with houses that now command a minimum of $1 million for a small 1,000 sq. ft. or larger house (as defined as single family residence). Although these 1,000 sq. ft. houses are not large, they are highly appealing due to a great convenient location to SF and Silicon Valley in the mid-Peninsula, and have strong school districts. There is a small, but growing list of cities that I now call a “Dragon” city. Just 2 years ago, the only city that may be labeled a Dragon was Hillsborough. You can now add Belmont, Foster City, Burlingame and Redwood Shores to the list. Do note this categorization includes on SFR and not condo/townhouses that may be had for less than $1 million. By the way, I believe I just invented this new terminology, “Dragon”, which is probably why you have not heard of it before.

In Belmont and Redwood Shores, often linked together given the same highly ranked Belmont-Redwood Shores school district, a year ago had one last neighborhood of Sterling Downs/Homeview where fixer-upper small houses could be had for $850-900k. However, in 2015, the same small 2/1 or 3/1 1000 sq. ft. with 5,000 sq. ft. lot houses in the neighborhood were selling for between $1.0-1.2 million. The top ranked school district certainly has propelled Belmont prices in past few years. See my earlier post on Belmont at this link. https://taosiliconvalley.com/2014/06/17/why-belmont-housing-is-hot/

Up until a year ago, there were some pockets of homes in mid-Peninsula where there may have been a few under $1 million fixer upper houses, particularly in Lyon-Hoag, Burlingame Gardens and the neighborhoods between 101 and Caltrain tracks. However, Burlingame is firmly a Dragon now. In the past 180 days, there were 112 SFR properties sold in Burlingame and only 2 of them sold under $1.2 million ($1.06 and 1.198mm). Yes, the Burlingame Dragon is fire-spitting fierce.

Those who are familiar with mid-Peninsula might be asking why isn’t San Carlos or Menlo Park included as a Dragon? In San Carlos, there is one last bastion of houses that can still be had for between $900k to $1 million in the Clearfield Park neighborhood walking distance to Laureola Park. That is the neighborhood located between El Camino Real and 101 on either side of Holly street. Make no mistake, houses that are upgraded goes above $1 million, including a recent sale on very busy Holly street that went above that threshold. However, there have been some recent sales below $1 million for fixer upper 2 bedroom 1 bath around 1000 sq. ft. houses. So if you want to get into the San Carlos school district living in a house, you may consider this neighborhood. And in Menlo Park, right next to the Facebook headquarter campus, there is a neighborhood called Bellehaven that may have houses just below $1 million. Both of these cities may very well be a Dragon within the next year if the real estate market continues to appreciate.

There have been recent articles in the Economist discussing the Unicorn valuations and the difference between private company valuations vs. realities that many/most of these private companies never see true liquidity events for the non-executive employees to truly cash out, as well as the inflated private valuations that provide preferential structures to VC and PE firms as well as founders that ultimately dilute the common shareholder should there be a acquisition or future funding round or IPO.

http://www.economist.com/news/leaders/21679194-correction-startup-valuations-would-be-good-news-technology-sector-gored

http://www.economist.com/news/business/21677192-fable-unicorn-theranos-much-hyped-medical-startup-plagued-doubts

I have been lucky to be part of two great start-up companies back in my former start-up corporate life. I had been a VP-level executive at a high profile Internet company that went public in 1999 during the first dot com bubble and reached over a $1 billion market cap – this is 16 years ago when $1 billion was a really, really big number and impressive. Then, I held a senior position in 2007 for another high profile Internet company that sold to a private equity firm for $1.2 billion valuation which was one of the 1st companies to achieve a huge return for VC investors post bubble.

Although there was a nice financial gain in aggregate, in both instances the upside was severely capped due to stock being illiquid. One had a 6-month post IPO lockout, and the second had been bought by a PE firm who bought majority stake, with the minority stake and unvested portion remaining privately held. Eventually I found out the second Unicorn went through difficulties and company recapitalized with the value of my share holding down to zero; thus, I will now have a $3k capital loss write off for the remainder of my life recouping the AMT tax I paid to Uncle Sam over 7 years ago. Thus, as you read about all these Unicorns being created, just note that majority of non-executive/founder employees at these companies have not yet profited from their stock options.

uncle-sam

Why do I say I was “lucky” even though my private stock options never yielded the financial homerun that I held on paper? Three reasons. First, to this day, I am really good friends and business confidants with many of my former colleagues that I value more that money. Second, those were really fun formative years where I grew professionally and personally and felt I was part of something revolutionary. And third, those experiences in the high tech start-up world has allowed me a very unique perspective to the SF Bay Area real estate in a in strongly technology driven marketplace where I’ve “did it and done it” that allow me to adeptly navigate the competitive landscape of real estate.

On the real estate side, I have owned real estate located in the mid-Peninsula since 1999, and have seen huge returns. My clients who purchased properties in the past 5 years are obviously all extremely happy they are “in the market” now. I get asked nearly every week what I think the real estate markets will do in the near term. I have inclinations and my thoughts. However, no one can truly predict and time the market perfectly. Two considerations I like to provide is a) that if SF Bay Area real estate is a medium-to-long term hold (similar to the US stock market), over the course of time, the SF Bay real estate market has proven it’s ability to appreciate over the course of a 7-10 year economic cycle and b) particularly for 1st time buyers that unlike other financial investments, even in a downturn, at least the investment in a property can be enjoyed through day-to-day living and that provides some immeasurable intrinsic value.

So to my 1st question of whether Unicorns provide wealth and happiness – it can possibly create wealth, but it is not guaranteed and it can possibly provide some happiness but that is also not guaranteed. And I think most would agree that monetary wealth doesn’t automatically guarantee happiness.

Certainly, the technology industry creating Unicorns does have a direct impact to the creation of Dragons. Regardless, as they say, home is where the heart is; purchasing real estate in expensive SF Bay area is both a decision on financial investment considerations and creating a home to settle in. I suppose housing prices in this area is still lower than the cities in NYC, London, Hong Kong and Toyko; we may need to create a different terminology for those cities, but alas, I’ve used up all my creative writing juices.

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