What Will Happen to Today’s Privately Held Unicorns, Valued at $1.4 trillion?

Amidst the mounting startup losses and disappointing IPOs of 2019, and the economic contractions from the coronavirus lockdowns in 2020, concerns about privately held startups are rising. Of big concern are those valued at $1 Billion or more, often called Unicorns. As of June 2020, there were 479 global Unicorns, valued at $1.44 trillion[1] of which many were defined as Unicorns several years ago and thus should have already gone public (see below). In America, there are 51 of these old Unicorns, ones that were defined as Unicorns by the end of 2016 but are still privately held and 10 more if we push the deadline to the end of 2017.

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There are even bigger concerns for Asian Unicorns. They have done few IPOs over the last few years, China’s P2P loan bubble burst two years ago[2], its electric vehicle bubble appears to be bursting now[3], and now there is rising pressure for Chinese Unicorns to do IPOs. For instance, the famous “Jack Ma is telling China startup founders it’s time to go public[4], despite vast uncertainties about their profitability.” India’s[5] and Singapore’s[6] Unicorns are also unprofitable, particularly India’s.

One reason for the concern is that the world’s most successful startup system, America’s, the only system to have repeatedly created successful hi-tech startups over the last 75 years appears to have lost its way. Amongst the American Unicorns that have gone public, which I call ex-Unicorns, previous articles in this series found they are doing worse than startups 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 despite the fact that most of these 24 achieved top 100 status very quickly; three achieved this status within 10 years of founding, six more by 15 years, and seven more by 20 years of their founding.

Moreover, as analyzed in the third and fourth articles in this series, few of America’s ex-Unicorns or foreign Unicorns are profitable. Only six (13%) of the 45 ex-Unicorns were profitable in 2019 and as analyzed in the fourth article in this series, only payments, one part of fintech, were found to be profitable on the average. The fourth article also considered foreign Unicorns, finding that outside of China, few are profitable.

A second reason for concern is that amongst the privately held American Unicorns that have released income statements usually when filing for IPOs, most of them are reporting losses, losses that are often larger than those of ex-Unicorns who have done IPOs. For instance, WeWork reported cumulative losses of $4.2 billion in its IPO filing, or about 89% of its revenues over those years[7]. In comparisons, Uber’s and Lyft’s losses were equal to about 52% and 72% of their revenues in 2019, large, but not as large of ratios as for WeWork.

In some cases, the Unicorns have more losses per revenues than do ex-Unicorns in the same industry. For instance, among food delivery startups in 2019, DoorDash[8] and Instacart (groceries)[9] lost $450 and $300 million on revenues of $900 million and several $billion respectively while ex-Unicorn GrubHub turned a small profit. Postmates, a Unicorn with an even smaller share (8%) than DoorDash, GrubHub, and Uber Eats[10], probably has even higher losses, thus preventing it from doing an IPO. Thus, it is being forced into a merger with Uber, just as GrubHub was forced into a merger with a European food delivery company, Takeaway.

Similarly, losses for fintech Unicorns Lemonade[11] (it went public in early July), Prosper Marketplace [12], and nCino[13] were equal to 160% 24%, and 22% of their revenues respectively in 2019. Lemonade’s ratio of losses to revenues were higher in 2019 than the ratio for three fintech ex-Unicorns; Green Sky, Lending Club, and Sprout Social. Prosper Marketplace’s and nCino’s ratio of losses to revenues were higher than one of these ex-Unicorns, Green Sky. SoFi has also reported losses for 2019[14], Kabbage has recently furloughed hundreds of employees and cut back on loans[15], and OnDeck Capital was acquired for less than 10% its once sky-high valuation.

Health care insurance Unicorns have also released income statements. Clove, Oscar, and One Medical lost $67, $110, and $45 million respectively on revenues of $452 and $494, and $212 million respectively, giving them ratios of 15%, 22% and 21%. These ratios are higher than those for 24 of the 45 ex-Unicorns reported in the third article of this series. Bright Health and Devoted Health also reported losses of $42, and $27 million respectively, although they did not report revenues. The best performer in health care insurance may have been Alignment with losses of $3.6 million on revenues of $676 million[16].

Other privately held Unicorns have also released income statements. Construction Unicorn Procore lost $83 million on losses of $280 million in 2019[17]. Airbnb lost $276.4 on revenues of $1.1 Billion[18]. Online car seller Vroom lost $143 million on revenues of $1.2 billion[19]. Scooter rental operators Lime and Bird reported losses of $300 Million in 2019 and $100 Million in the first quarter 2019 respectively.

While much of this data is anecdotal, I could find few reports of profits for privately held Unicorns outside of China, either American, South Korean, Singaporean, or European[20]. This is probably because those with profits would have done IPOs many years ago, or at least before the coronavirus appeared. Thus, the combination of reported losses for privately held Unicorns and the low percent profitability of ex-Unicorns suggest that these anecdotes might be representative of the remaining Unicorns.

China’s Unicorns are also in trouble, as noted above. Unfortunately, the media has unwittingly framed the Chinese Unicorns in terms of U.S.-China tensions and thus are not asking the right questions. It is not whether the IPOs are done in the U.S. or China, it is whether the Chinese Unicorns (or any Unicorns) have the financial soundness to do IPOs. Lost in the hype about competition between the U.S. and China in startups (similar arguments could be made for AI), the real issues are ignored.

For America’s Unicorns, other insights into their financial status can be found in reported “down rounds,” funding rounds that involve reductions in valuations, either because losses are too large or revenue growth is too small, or both. Pre-coronavirus down rounds were reported by Palantir (from $20 to $12 billion) and Wish (formerly Context Logic) from $11.2 billion to $4.3 billion while Airbnb’s down round from $31 to $18 billion came after lockdowns had begun impacting on its financials. Almost 70,000 in layoffs for 519 startups between March 11 and June 30 also suggest financial problems, but these were also after the lockdowns started.

Even if we exclude the economic contraction from the lockdowns, America’s Unicorns are in deep trouble, as are most global Unicorns. Although there may be some profitable or soon to be profitable ones, particularly payments or small cloud-based software companies, these are probably rare cases. Alternatively, some might also see a silver lining in the improved financials of food delivery and other Unicorns who have benefited from the lockdowns, but aren’t these improvements likely to be temporary?

What will happen to the world’s Unicorns? Some will become profitable without additional funding, others may merge or be acquired, and some will do IPOs before the bubble bursts, but many will not be able to do these things or obtain the funds needed to survive. Funding will likely become harder to obtain as VC funding has fallen by 90% in China since 2016, 75% in South-East Asia in 2020[21], and about 20% in America since 2018[22]. Moreover, some of the VCs are probably over exposed to their biggest Unicorns and thus will be forced to take losses, something that is already happening with fintech Unicorns [23].

What should be done? Some have called for government assistance for startups because of the lockdowns. But many of these Unicorns have losses even after more than 10 years of operation. Seen from this angle, many of them should have stopped receiving venture capital funding many years ago and either gone out of business or focused on a profitable niche. Government assistance would only prolong their agony and those of taxpayers.

[1] https://www.cbinsights.com/research-unicorn-companies

[2] https://technode.com/2019/02/21/chinas-online-p2p-lending-industry-is-undergoing-of-a-massive-shake-out/

[3] https://www.theverge.com/2020/7/30/21348057/chinese-ev-startup-li-auto-public-stock-nasdaq-trading

[4] https://www.bloomberg.com/news/articles/2020-07-22/jack-ma-is-telling-china-startup-founders-it-s-time-to-go-public?srnd=next-china

[5] https://www.economist.com/business/2020/03/12/indias-booming-startup-scene-is-showing-signs-of-trouble

[6] https://vulcanpost.com/686242/why-do-investors-fund-unprofitable-startups/ https://www.businesstimes.com.sg/brunch/lights-out-for-struggling-startups

[7] https://qz.com/1687281/weworks-ipo-filing-reveals-how-it-spends-its-money/#:~:text=The%20headline%20number%20is%20that,in%20revenue%20over%20that%20time.

[8] https://themargins.substack.com/p/doordash-and-pizza-arbitrage

[9] https://www.forbes.com/sites/krisholt/2020/04/27/coronavirus-grocery-delivery-instacart-profitable/#6331238b71e2

[10] https://www.bloomberg.com/news/newsletters/2020-07-01/uber-postmates-deal-might-not-do-much-for-profits

[11] https://news.crunchbase.com/news/insurtech-startup-lemonade-drops-s-1-revealing-sharply-rising-revenue-and-net-losses/

[12] https://www.smartkarma.com/home/daily-briefs/brief-growth-ideas-sprout-social-valuation-analysis-and-more/

[13] https://www.sec.gov/Archives/edgar/data/1566895/000119312520187868/d828449ds1a.htm#fin828449_7

[14] https://fortune.com/2020/01/28/sofi-new-growth-strategy/

[15] https://www.forbes.com/sites/jeffkauflin/2020/05/11/fintechs-for-sale-post-covid-its-partner-or-perish-for-many-startups-heres-a-buy-list/#1f2cd8206b3b

[16] https://www.businessinsider.com/health-insurers-oscar-clover-bright-devoted-alignment-annual-results-2019-2020-5?IR=T#devoted-health-had-a-net-loss-of-274-million-in-its-first-year-offering-health-plans-5 https://www.healthleadersmedia.com/finance/one-medical-lays-out-potential-risks-ahead-ipo

[17] Other privately held Unicorns have disclosed losses for 2019, beginning with health care insurance Unicorns.

[18] https://www.businesstimes.com.sg/garage/airbnb-q4-loss-deepens-even-before-travel-disruption-from-virus

[19] https://www.marketwatch.com/story/vroom-ipo-five-things-to-know-about-the-online-used-car-seller-2020-06-03

[20] Exceptions include TransferWise and Klarna.

[21] https://asia.nikkei.com/Spotlight/The-Big-Story/Coronavirus-stalks-Southeast-Asia-s-once-thriving-unicorns

[22] https://news.crunchbase.com/news/north-america-q2-venture-report-funding-down-as-expected/

[23] https://www.forbes.com/sites/jeffkauflin/2020/05/11/fintechs-for-sale-post-covid-its-partner-or-perish-for-many-startups-heres-a-buy-list/#1f2cd8206b3b

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