Only 6 of 73 Unicorn Startups Are Profitable, and None Did Recent IPOs

The six profitable Unicorn startups (out of 73) did IPOs many years ago and no Unicorn startup among those announcing or doing an IPO since Zoom in August 2019 were profitable in 2019 (or 2020). This suggests that the privately held Unicorns, ones that have yet to do IPOs, are mostly unprofitable and thus the record low profitability of startups is likely to get worse. With a global valuation of $1.9 trillion for privately held Unicorns, startups valued at $1 billion or more, most of their valuations will be significantly reduced or disappear, leading to significant problems for many venture capitalists.

Table 1 summarizes net income and the ratio of net income to revenues in 2019 for 73 Unicorns, before revenues and incomes were sent on a seesaw ride by the lockdown. This table shows that only six of them had profits in 2019 despite 45 of them being founded in or before 2009, or 10 years before the year 2019. Other articles in this series break these startups down by industry, showing that only fintech was profitable, but has become unprofitable in 2020 because of the lockdown[1]. A future article will show the same number of profitable startups for the first three quarters in 2020, six.

The percentage of profitable startups is very small. The 8% (6 of 73) figure for profitability is smaller than the 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[2]. 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 most successful startups of the past half century also provide evidence that the percentage of profitable startups are low, and their losses are high. Consider 24 companies founded after 1970 that were among the top 100 most valuable companies for at least one year. The first article in this series of now 20 articles[3] documented the number of years it took for these companies to become profitable. Thirteen of 24 had profits by year five and another 9 had profits by year 10. Only two took longer than 10 years and these were biotechnology startups, an industry that takes longer for startups to become profitable than others because they must wait many years for drug approvals. In other words, other than two of four biotechnology startups, none of the startups took longer than 10 years to achieve annual profits. Amazon and Qualcomm took the longest to become profitable, becoming profitable in year 10, while two investor favorites in recent years, Uber and Tesla, were unprofitable at years 10 and 17. Uber’s cumulative losses are six times[4] and Tesla’s are two times[5] bigger than those of Amazon at its peak losses[6] and the losses for the former two are still growing.

It is not just Uber that has high losses among the Unicorns; Figure 1 shows that many other Unicorns also have high losses. Twenty one of 73 had losses greater than 50% of revenues and another 13 (including Uber, Lyft, Pinterest, and Snapchat) had losses greater than 30% (not counting liquidations). Clearly the chances that these startups will ever achieve profitability are very low, and even if Uber does, it has more than $25 billion in cumulative losses that it must cover through future profits.

Will these startup Unicorns become profitable? Proponents of startups, including venture capitalists, entrepreneurs, and business school entrepreneurship programs, claim this will happen, probably because their livelihoods depend on them convincing others that they can become profitable. But Figure 2 suggests that time may not make them profitable. Other than two recent startups with huge losses and a third not shown (ratio of 8.6, founded in 2010), there seems to be little relationship between founding year and the ratio of losses to revenues. The small number of profitable startups were founded between 2005 and 2011.

What about the privately-held Unicorns? Are they profitable and will they be acquired or do successful IPOs? Of the Unicorns shown in Table 1, 28 have released net income figures since March 2020 and none of them had profits in 2019, thus suggesting that the most profitable ones have done IPOs and that few or none of the remaining privately held Unicorns are profitable. Data on foreign Unicorns are similar. I have found a few profitable European ones (e.g., Transferwise), but no Indian, South Korean, or Singaporean ones.

The biggest exception is China where almost 60% are unprofitable, a high figure, but not as high as the 90% figure for U.S. Unicorns. However, when adjusted for key differences with the U.S., the percent unprofitable is quite similar. Many Chinese Unicorns are spinoffs from large incumbents while others were founded by large incumbents, factors that likely increase the chances of profitability and that do not exist among American’s Unicorns. Most importantly, China’s rapid economic growth means that its startups were competing with much weaker incumbents at founding time than those faced by America’s startups, for the same number of years ago for founding. For instance, Chinese startups founded in 2009 existed when China’s economy was about 40% its current levels and thus, they had much weaker competitors than did American’s Unicorns during their early years. The upshot is that China’s Unicorns are not doing much better than those of the rest of the world, and overall profitability may get worse everywhere.

One reason it may get worse is because of so-called blank-check companies that make it easier for startups with not just losses, but with little or no revenues to go public, none of which are Unicorns. Blank-check companies, their formal name is special purpose acquisition companies (SPACs), are publicly traded shell companies that merge with private companies, enabling the private firms to sidestep an IPO and its reporting requirements. A big result of these blank-check companies is a record number and value of companies going public with little or no revenues in 2020, fueled by easy money and the rapid rise of Tesla’s stock. Nikola, Fisker, Hylion, Lordstown, Canoo, and Quantum-Scape, all electric vehicle or battery suppliers, were valued at more than $100 billion together at their listing. Dozens of biotech firms have also achieved billions of dollars in market capitalizations at their listings, enabling 2020 to easily eclipse the previous record in 2000 during the dotcom boom of telecom companies going public with little or no revenue[7].

In summary, only 6 of 73 Unicorns had profits in 2019 (and 2020) and most of the profitable Unicorns did IPOs many years ago. This suggests that privately-held Unicorns, ones that have yet to do IPOs, are likely unprofitable. As of June 2020, the global value of these privately-held Unicorns had reached $1.9 trillion, a figure[8] bigger than both the $600 Billion that banks lost during the subprime-mortgage crisis and the $400 Billion the U.S. government is expected to lose from the federal student loan program[9]. The majority of these Unicorns were either Chinese (227) or American ones (233), suggesting these two countries will be the biggest lowers when the Unicorn bubble bursts.

[1] https://medium.com/@jeffreyleefunk

[2] https://www.vox.com/2019/3/6/18249997/lyft-uber-ipo-public-profit

[3] https://medium.com/@jeffreyleefunk

[4] https://promarket.org/the-uber-bubble-why-is-a-company-that-lost-20-billion-claimed-to-be-successful/

[5] https://www.statista.com/statistics/272130/net-loss-of-tesla/

[6] https://qz.com/1196256/it-took-amazon-amzn-14-years-to-make-as-much-net-profit-as-it-did-in-the-fourth-quarter-of-2017/

[7] https://www.wsj.com/articles/no-revenue-no-problem-wall-street-rushes-into-electric-car-and-truck-startups-11603286077 https://www.wsj.com/articles/these-11-ev-startups-are-chasing-tesla-they-cant-all-win-11605884422

[8] http://www.hurun.net/EN/Article/Details?num=E0D67D6B2DB5

[9] https://www.wsj.com/articles/student-loan-losses-seen-costing-u-s-more-than-400-billion-11605963600