Only 6 of 45 ex-Unicorns were Profitable in 2019
Entrepreneurs, venture capitalists, business schools, and university scientists and engineers have long believed that disruption are common and that startups are the key to disruptions. This series of articles examines whether big disruptions occur as frequently as they once did by analyzing the most valuable startups of the last 50 years, measured in terms of market capitalization, net income, and share price change and the technologies they are commercializing. The first two articles in this series compared the market capitalizations of those that reached top 100 status and that were founded between 1975 and 2003 with those of ex-Unicorns that had done IPOs by early 2020.
The second article found that one ex-Unicorn is about 60%, another two are about 25%, and another 10 are about 15% of the way towards achieving top 100 status; others are a long way from the $98 billion needed for top 100 status. It also found that five of these ex-Unicorns, two with market capitalizations greater than $20 billion and three greater than $10 billion, had share prices greater than the Nasdaq between their IPOs and March 9, 2020. The second article also asked, might one of these five startups achieve top 100 market capitalization status? After all, Amazon quintupled its share price in six years after it reached profitability in 2004, achieving top 100 market capitalization in 2010.
The importance of profits to Amazon’s rise in share price is not unique to Amazon; it is common to most companies that experience share price rises. For this reason, Table 1 of this article, the third in the series, summarizes net income and the ratio of net income to revenues in 2019 for the 45 Unicorns, before the lockdowns further reduced profits for most startups. This data, “net income from continuing operations,” is from Yahoo Financial and is much more consistent with global accounting standards than is EBTIDA, which I used in a previous article.
This table shows that only six of the 45 ex-Unicorns had profits in 2019 despite 34 of them being founded in or before 2009, or 10 years before the year 2019. The 13% (6 of 45) figure for profitability is smaller than the greater than 20% of startups profitable at IPO time over the last few years, which was much smaller than the 80% for startups founded in the 1980s, according to Jay Ritter’s data[i]. Thus, not only has profitability dramatically dropped over the last 40 years among startups doing IPOs, today’s most valuable startups, those valued at $1 Billion or more before their IPOs, are less profitable than startups that did not achieved $1 Billion in valuations before their IPOs.
The 13% figure for profitability is also far lower than the percentage figures for startups founded after 1975 that have achieved top 100 market capitalization for at least a year. Described in the first article of this series, 54% (13 of 24) and 91% (22 of 24) of them achieved profits by their fifth and tenth year respectively and thus most Unicorns should have been profitable years ago. In contrast, 10 and 33 of the 45 ex-Unicorns were founded at least by 2004 and 2009 respectively thus representing 10 to 15 years to become profitable. Yet only 6 of 45 were profitable in 2019 and of the 10 ex-Unicorns founded in 2004 or earlier, none was profitable in 2019.
Moreover, many of these losses were absurdly high. Ten of 45 had losses greater than or equal to 50% of revenues and another ten had losses greater than or equal to 30%. Uber, Pinterest, Lyft and Snapchap are among the former 10 whose losses are greater than or equal to 50% of revenues. Clearly the chances that these startups will ever achieve profitability are very low. Would they still exist without the recent stimulus funding?
What about the 13 ex-Unicorns with market capitalizations greater than $10 billion (reported in second article of series). Only two of them had profits in 2019 and they were Zoom and Square. They also had share price changes larger than those of the Nasdaq, thus suggesting they might have a chance of achieving top 100 market capitalization. Will video communication become huge, as airline travel declines due to concerns about viruses and climate change? Or will digital money continue to grow and become hugely profitable for Square, or another startup?
For sake of conjecture, perhaps other Unicorns targeting more recent technologies — AI, VR, AR, driverless vehicles, or plant-based meat — will be the next Google or Amazon? For AI, Crowd Strike did an IPO in 2019, and at least five AI Unicorns exist, but all have big losses despite their many years of existence. VR/AR supplier Magic Leap is poised for bankruptcy. And few observers are optimistic about driverless vehicles over the next five years. Plant-based meat will be a favorite among vegans and environmentalists and Beyond Meat has reasonably good numbers; it had higher price increases than did the Nasdaq since its IPO, but it has a small market capitalization ($5 Billion) and had losses in 2019, albeit small ones, less than 0.1% of revenues.
Or perhaps other publicly traded companies might achieve top 100 market capitalization, most notably Tesla. Tesla had an average market capitalization of about $50 billion in 2019, or about half what it took to achieve top 100 market capitalization in 2019. Perhaps more importantly, its stock exploded in 2020 making it one of the top 50 most valuable companies for several months in the first half of 2020. On the other hand, it has yet to achieve profitability for a full year, its cumulative losses are twice those of Amazon’s peak losses, and its share of the U.S. auto market was about 1.3% in 2019. Can this be called a disruption?
In summary, the first three articles in this series conclude that today’s startups are not doing as well as those founded 20 to 50 years ago and thus big disruptions are not occurring as frequently as they once did. 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. Moreover, of the 13 ex-Unicorns with market capitalizations greater than $10 billion, only five had share price increases greater than the Nasdaq and only two had profits in 2019, making it hard to be optimistic about their eventual achievement of top 100 market capitalization.
This conclusion is consistent with other research. Productivity data demonstrates a clear and persistent growth slowdown over the last 80 years in the U.S. and more recently in Europe and Japan, and the Financial Times recently reported “that the 2010s were the worst decade for productivity growth since the early 19th century[ii]. In Are Ideas Getting Hard to Find, researchers report that research productivity has declined for microprocessors, drugs, and crop yields over the last 50 years[iii], another result consistent with the falling performance of startups reported in this article.
Why is productivity growth slowing and today’s startups doing worse than those founded 20 to 50 years ago? Before we address that question, the next article examines the profitability of startups by industry, to see whether a profitable industry exists for startups.
[iii] Nicholas Bloom, Charles I. Jones, John Van Reenen, Michael Webb, American Economic Review 110(4): 1104–1144, April 2020.