Are There Any Industries in Which Ex-Unicorns Are Profitable?

This is the fourth article in a multi-part series on today’s most valuable startups, Unicorns, which are valued at $1 Billion or more. The first article in this series shows that 24 startups founded between 1975 and 2004 became members of the top 100 most valuable firms for at least one year, nine of the 24 did this within 15 years of their founding, and 22 had achieved profits by year 10. Six of these startups, sometimes called FAAMNG (Facebook, Amazon, Apple, Microsoft, Netflix, Google), now represent 20% of today’s record high stock market capitalization in the S&P 500.

But things have changed. Mounting startup losses, disappointing IPOs, and no large IPOs for at least six months are causing many to question their efficacy. The third article in this series analysed 45 ex-Unicorns that have subsequently done IPOs. Of this 45, only six had profits in 2019 despite most of them being founded before 2010, or more than 10 years ago. This percentage of profitable ex-Unicorns (16%) is far smaller than the 22 of 24 startups mentioned above that achieved profitability by year 10 and eventual membership in the top 100 most valuable firms. But none of America’s recent Unicorns are even close to being ranked in the top 100, as shown in the second article in this series. Being in the top 100 required a market capitalization of $98 billion in 2019 and the highest market cap in 2019 among profitable unicorns was Square with a market cap of about $20 billion.

Can we find industries with profitable ex-Unicorns in 2019 before the lockdowns further supressed profits? The below tables organize ex-Unicorns into industries and ranks them within an industry by their ratios of profits to revenues. Only fintech is profitable with profits equal to 6% of revenues and this is only because of Square’s profits. Losses are equal to 10% of revenues for e-commerce, 24% for business software, 46% for other, 57% for ridesharing/food delivery, and 250% for biotech. Although biotech losses are huge compared to revenues, this is mostly because revenues must wait for product approvals from regulatory agencies, and this can take many years.

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Anecdotal evidence from foreign startups is consistent with the organization of industries in both tables. China’s Ant Financial and Tencent are the global leaders in payments with Alipay and WeChat Pay respectively, thus suggesting the payment portion of fintech may be potentially profitable. Ant is privately owned by Alibaba while Tencent is a publicly traded company. Although these startups do not report profits for their payment services, both companies are highly profitable overall[1] of which Ant will soon be doing an IPO.

One caveat is their profitability may be because they were founded more than 20 years ago during the early years of China’s move to capitalism, an argument consistent with the lack of profitability in more recently founded startups in many countries. South Korea’s Viva Republica had losses almost equal to revenues[2] and India’s Paytm has losses larger than revenues, both in 2019[3]. Germany’s Wirecard went bankrupt in June and UK’s Monzo had a big devaluation in the Spring of 2020. Other parts of fintech are even less profitable with China’s peer-to peer lending bubble bursting in 2019[4]. America’s P2P lending is also largely unprofitable with Green Sky an exception.

E-commerce had a slightly higher loss to revenue ratio in 2019, with one ex-Unicorn, Etsy, profitable. And Alibaba is hugely profitable, but again it was founded more than 20 years ago. The three largest e-commerce startups in South Korea are unprofitable[5], including Coupang, valued at more than $10 billion, as are Shopee[6], Lazada[7] and Carousell[8] in Singapore, all Unicorns. Flipkart, acquired by Walmart, is also reportedly unprofitable if unconfirmed sources are believed. Ironically, Flipkart is a role model for Indian startups because it was acquired for a large sum.

Business software has a higher ratio of losses to revenues than do e-commerce and fintech, but there are several profitable startups in this industry. Dropbox, Opportun, Zoom, and Quotient Technologies were profitable in 2019 and will likely continue to be profitable. Others may also become profitable if remote work continues to be popular. This continues to be an industry for which American startups continue to dominate, with few if any successful foreign startups.

The worst performing industry is ride sharing/food delivery with a ratio of losses to revenues of 51%, and this ratio is even higher when the food delivery startup, Grubhub and Blue Apron, are excluded. Unconfirmed reports from insiders and recent funding rounds suggest that foreign Unicorns, ones still privately held, are also losing vast amounts of money making this one of the least profitable industries of all time. Didi Chuxing had losses of $1.6 billion in 2018[9], it has raised more than $21 billion, and most recently it raised $500 million for its self-driving unit in May 2020[10], all suggesting its losses continue to be large, perhaps as large as those for Uber. China’s food delivery business is also unprofitable[11]. India’s ride sharing starutp, Ola, had losses almost as large as revenues in 2019[12], and its food delivery startups, Zomato and Swiggy are also losing money[13]. Singapore’s Grab is still unprofitable[14] after raising about $6.5 billion in late 2019[15] and additional funds in early 2020. South Korea’s car-sharing startup SoCar and food delivery startup, Woowa Brothers, also had losses in 2019[16]. Germany’s Hello Fresh has losses equal to about 10% of its revenues.

The bottom line is that none of these industries are doing well. Only one of them have profits on the average and this is because of one ex-Unicorn, Square. Moreover, the number of profitable startups in each of them is small, suggesting that something is terribly wrong with the global startup system, including America’s system. Is America’s R&D system, or the global one, no longer creating great opportunities? Or are VCs and entrepreneurs not noticing the good ones, or perhaps commercializing them in the right way? Whatever the case, making the global startup system work better is an important task for policy makers as countries move beyond the lockdowns.

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