Can Business Software Unicorns Become Profitable?

Only one of 27 ex-Unicorns providing business software reported profits in 2019, and 17 of them had losses greater than 30% of revenues. This article, the ninth in my series on startups and technology, builds from previous analyses that demonstrated the poor performance of today’s startups compared to those founded 20 to 50 years ago. Only one startup founded since 2000 has achieved top 100 market capitalization versus six in the 1970s, nine in the 1980s, and eight in the 1990s[i] and none of America’s ex-Unicorns are even close to being ranked in the top 100, as shown in the second article in this series[ii]. Ex-Unicorns are also much less profitable than the most successful startups founded 20 to 50 years ago. The third and fourth articles[iii] in this series showed that only six of 45 ex-Unicorns had profits in 2019 despite most of them being founded before 2010, or more than 10 years ago, and the subsequent articles provided explanations for these low profits[iv].

This article addresses the lack of profits for business software Unicorns, and more specifically ex-Unicorns that have done IPOs. All their offerings can be categorized as software-as-a-service, residing in the cloud and delivered over the Internet to company computers, be they mainframes, personal computers, or hand-held devices. Software-as-a service is technologically different from the previous method of installing software on company’s mainframe or personal computers.

Tables 1 and 2 show that only one of 27 ex-Unicorns had profits in 2019. Three of 27 have losses less than 10% of revenues and 9 have losses between 10% and 30% so some are close to profitability. On the other hand, 7 have losses between 30% and 50% and 7 have losses greater than 50% of revenues; clearly the chances of becoming profitable are very low for many of these startups. These chances are particularly low when one considers the average founding date was 2006 or 14 years ago. After 14 years in business, it is hard to imagine that profits will change in the future.

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Zoom is the one profitable ex-Unicorn with profits equal to 4% of its revenues in 2019. Zoom provides video conferencing software that was popular even before the pandemic started. With the lockdowns, its popularity and thus its revenues, profits and share price have risen in 2020. Unlike many other Unicorn startups (e.g., ride hailing, food delivery), volumes have a large impact on business software profits.

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These results are largely independent of business software types. Table 1 focuses on enterprise and general software while Table 2 focuses on database/storage, security, AI/Big Data, and communications software, categories with overlap but categories are needed to understand the context of the business software startups. Most of the categories have average losses per revenues of about 20% to 30% with a small number of ex-Unicorns experiencing higher losses per revenues. Because the sample sizes are small, three for AI/Big Data and two for Communications (although other ex-Unicorns are also pursuing AI), we cannot conclude that these categories have lower profits than do the others. Zoom for example is paired with Slack, a big money loser, and thus the category of communications has the highest losses per revenues.

Why are the losses so big for all types of business software? The biggest reason is that few of these software products and services would qualify as breakthroughs. While startups founded 20 to 50 years ago commercialized semiconductors, computers, networking equipment, enterprise software, e-commerce, video-on demand, and social networking, current business software being offered by ex-Unicorns is not revolutionary. The first enterprise software, introduced in the early 1990s, provided a dramatic improvement over the previously manual processes that began to be automated in the late 1980s. Enterprise resource planning and later sales force automation, customer relationship management, and others had a large impact on productivity as documented in the work of MIT”s Erik Brynjolffson.

The more recent software, however, adds much less than did past software. To start with, the most recent innovation in enterprise software, cloud computing, was initially pursued by Oracle and other large incumbents and is now dominated by other incumbents such as Amazon, Google, Microsoft, and Facebook. Thus, startups have no advantage in cloud computing.

Second, the specific products and services are also not revolutionary. Enterprise software has existed for decades and the most recent versions offered by the ex-Unicorns are not significantly different or better than the old software offered by Microsoft, SAP, Salesforce.com, JD Edwards, Symantec, Oracle. Exceptions might exist in AI and Big Data, but their success will take year, and big incumbents such as Amazon, Google, Microsoft, and Facebook are also going down this road perhaps as fast or faster than the incumbents.

Third, the lack of revolutionary products and services has made it easy for incumbents to acquire Unicorns and integrate them with their own services. If the technology was truly revolutionary, acquisitions would not have been considered and even if they were, they would have been difficult to integrate with existing businesses because the acquired startups would have been pursuing much different businesses. Acquired Unicorns and their acquirers (in parentheses) include Qualtrics (SAP), Git Hub (Microsoft), Hortonworks (Cloudera), Jasper, AppDynamics (Cisco), and MuleSoft (Salesforce). Whether these Unicorns would be highly valuable startups if they had not been acquired is hard to say. What we can say is that they weren’t sufficiently revolutionary to be overlooked and ignored by the big incumbents, something that occurred many decades in the past.

A final issue concerns Unicorns that have not yet done IPOs (see Table 3). Because they have not yet done or announced IPOs, it is likely that their losses are bigger than those of the ex-Unicorns who have already done IPOs. My sixth articles in this series considered current Unicorns for all industries, not just business software, and found that current Unicorns that have announced income figures are much less profitable than are ex-Unicorns[v], a dangerous trend for Unicorns because so few ex-Unicorns are profitable. The ending for these Unicorns is probably not happy. At the best, they can hope to be acquired at reduced valuations.

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In summary, business software Unicorns and ex-Unicorns are highly unprofitable. Only one of 27 ex-Unicorns reported profits in 2019, only five had losses less than 20% of revenues, and it is also likely that privately-held Unicorns have even higher losses. Similar results were found for fintech and insuretech[vi]. Be prepared for falling share prices, fire sales, and bankruptcies, even as new Unicorns are made in 2020[vii].

[i] https://medium.com/@jeffreyleefunk/the-most-valuable-startups-founded-since-1975-none-have-been-founded-since-2004-8bc142b67051

[ii] https://medium.com/@jeffreyleefunk/unicorn-ipos-continue-to-disappoint-investors-37c2007e7b73

[iii] https://medium.com/@jeffreyleefunk/are-there-any-industries-in-which-ex-unicorns-are-profitable-747eca652170 https://medium.com/@jeffreyleefunk/how-successful-are-todays-startup-unicorns-893043f32d24

[iv] https://medium.com/@jeffreyleefunk/why-are-todays-startup-unicorns-doing-worse-than-those-of-the-past-1c8ece718ab0 https://medium.com/@jeffreyleefunk/should-we-fail-fast-hard-and-often-or-think-carefully-about-investments-de7bccc21a69

[v] https://medium.com/@jeffreyleefunk/what-will-happen-to-todays-privately-held-unicorns-valued-at-1-4-trillion-13f507797487

[vi] https://medium.com/@jeffreyleefunk/can-fintech-and-insuretech-unicorns-become-profitable-2b586f50f81

[vii] https://www.forbes.com/sites/amyfeldman/2020/05/28/next-billion-dollar-startups-2020/#116bb4713f9f

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