Unicorn IPOs Continue to Disappoint Investors:

Small Market Capitalizations and Share Price Changes

Entrepreneurs, venture capitalists, business schools, and university scientists and engineers have long believed that disruption are common and that startups are the reason for these disruptions. But is this true? Are disruptions by startups as common as some believe? Do they deserve the attention that they get from venture capitalists, entrepreneurs, companies, media, universities, business schools, consultants, and policy makers? Or do they not? And if they are not occurring as frequently as decades before, shouldn’t we be concerned?

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 and the technologies they are commercializing. The first article in this series analyzed 24 startups founded between 1975 and 2003 that achieved top 100 market capitalization for at least one year, also presenting the years it took to achieve this status and reach profitability.

This article, the second one, analyzes the so-called Unicorns, startups that have valuations of $1 billion or more, and those that have done IPOs. It presents their average market capitalizations in 2019, and their share price changes after IPOs. The goal is to assess the chances that one or more of the ex-Unicorns will achieve top 100 market capitalization for at least one year in the future. To simplify, this article considers 45 startups that became Unicorns between 2014 and 2017.

Table 1 shows market capitalizations and share price changes for the 45 unicorns that have done IPOs. These 45 ex-unicorns represent 35% of the 135 startups that existed as a Unicorn sometime between 2013 and 2017, following an article by Aileen Lee that described this new phenomenon in 2013[1]. Newer unicorns are ignored because they will have had fewer years to achieve top 100 market capitalization and become profitable.

None of these ex-Unicorns had the $98 billion market capitalization required to be among the top 100 companies in 2019. Uber had about $60 billion, two more had greater than $20 billion, and 10 had between $10 and $20 billion. This means that Uber is about 60%, the next two are about 25%, and the subsequent 10 are about 15% of the way towards achieving top 100 status, still a long road ahead.

It is surprising that more are not closer to achieving top 100 status because many of them have existed for at least 10 years with two founded 22 years ago. Recalling the data presented in the first article, three and ten of the 24 startups achieved top 100 status by 10 and 15 years respectively from their founding, thus more ex-Unicorns should be closer to achieving top 100 status.

Nevertheless, could some of these ex-Unicorns achieve top 100 market capitalization status sometime in the future? Because their share prices must rise much faster than those of the overall public markets to achieve top 100 market capitalization status, Table 1 also compares their share price changes with those of the Nasdaq, the most relevant market for startups. Only 14 of the 45 had increases larger than those of the Nasdaq, the main public market for startups, as of March 9, 2020. We chose March 9 to avoid the later impacts from the coronavirus, which reflect unique conditions. Moreover, newer data might show smaller or larger increases but the comparison to overall Nasdaq changes means that the date is of little importance. One important issue is that while the Nasdaq almost doubled between early 2015 and early 2020, only 14 of the 45 IPOs had price increases bigger than the Nasdaq increases.

More important than the averages, however, is the share price changes for the 13 ex-Unicorns with market capitalizations greater than $10 billion that are mentioned above. As shown in Table 1, Uber did not have share price increases greater than the Nasdaq, but the two other startups with market caps greater than $20 billion (Square and Zoom) did, as did three of the 10 with market caps between $10 and $20 billion (Twilio, Okta, Roku). Might one of these five startups achieve top 100 market capitalization status? A 500% increase in share price above that of the Nasdaq is a challenge, but not an impossible one. After all, Amazon did this in the 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, the third article in this series looks at the 2019 profits/losses for these 45 ex-Unicorns, the percentage that are profitable, and then considers whether some of these ex-Unicorns might achieve top 100 market capitalization in the near future. It is likely that the chances of achieving to 100 startups are higher for ex-Unicorns with profits in 2019, large market capitalizations, and share price increases larger than the Nasdaq.

Jeff Funk

Retired Associate Professor National University of Singapore

Winner of NTT DoCoMo Mobile Science Award

Linkedin: https://www.linkedin.com/in/dr-jeffrey-funk-a979435/

Research Gate: https://www.researchgate.net/profile/Jeffrey_Funk/research

[1] Lee, Aileen (2 November 2013). “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups”. TechCrunch. AOL.