Why are Today’s Startup Unicorns Doing Worse than Those of the Past?
The first four parts of this series demonstrated that today’s startups are doing worse than 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 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. This suggests that more than one founded since 2000 should have achieved top 100 status.
Moreover, none of America’s profitable ex-Unicorns are even close to being ranked in the top 100, as shown in the second article in this series. Being in the top 100 required a market capitalization of $98 billion in 2019 and the highest market cap in 2019 among profitable unicorns was Zoom with a market cap of about $20 billion. Uber had a market capitalization of about $60 billion, but it was highly unprofitable with losses of about $7.4 billion in 2019 and cumulative losses exceeding $20 billion. Other ex-Unicorns are also much less profitable than those of 20 to 50 years ago. The third article in this series 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.
This article, the fifth part in my series on technology and startups, addresses why only one startup founded since 2000 achieved top 100 market capitalization (Facebook) and not a single ex-Unicorn. One hypothesis is that new startups have been acquired before they had a chance to achieve top 100 market capitalization status by large incumbents, perhaps members of FAAMGN. For instance, Youtube was founded in 2004 and Instagram in 2010, and some claim they would be valued at more than $150 billion each if they were independent companies. Less valuable startups founded since 2000 and subsequently acquired by FAAMNG include GitHub, Linkedin and WhatsApp, most of which are social networking companies.
However, acquisitions are nothing new to the 21st century. All startups, including the 24 referred to above, have made acquisitions and many of them have made more than 50, some of which helped them generate increases in market capitalization. For instance, Cisco pioneered this strategy in the 1990s, helping it to briefly become the most valuable company in the world during the dotcom bubble. Similarly, Microsoft obtained Power Point, which later became an important part of its Windows suite of products, through the acquisition of Forethought in 1987, and Windows is a big reason why Microsoft was not disrupted by more recently founded startups.
A bigger problem with the acquisition argument is that it assumes new startups must challenge industries dominated by strong incumbents such as FAAMNG. However, most of the startups listed in Table 1 avoided strong incumbents by initially commercializing new technologies that did not fall within the interests of strong incumbents, a tendency supported by the rapid evolution in Silicon Valley’s technologies. Silicon Valley was given its name because of the large number of semiconductor companies founded during the 1950s to 1980s, but soon diversified into disk drives, networking equipment, personal computers, work stations, a wide variety of software products prior the change to Internet companies that occurred in the 1990s. Each of these technologies were commercialized by new startups partly because they involved significantly new concepts, customers, and applications, while recent acquisitions (Instagram, Whats App, and Youtube) mostly involve a single new technology, social media.
Overall, the problem for today’s startups is that the Internet has matured making many of today’s startup Unicorns comparatively low-tech even with the advent of smart phones, perhaps the biggest breakthrough technology of the 21st century, occurring 13 years ago. For instance, ride sharing and food delivery use the same vehicles, drivers, and roads as did previous taxi services with the major change being the replacement of dispatchers with smart phones. Online sales of juicers, mattresses, and exercise bikes may have been revolutionary 20 years ago, but they are sold in the same way that Amazon currently sells almost everything. New business software enables more cloud-based work, an advantage during the lockdowns, but not a huge advantage during normal times. Fintech startups use algorithms to find low-risk borrowers or insurance subscribers, but the advantages of these algorithms are still small or non-existent. Online education may deliver content differently, but it is the same content and most critiques of education claim that the content is the issue not the delivery method. In all these cases, the technology is not revolutionary.
The lack of revolutionary technology has made it hard for the ex-Unicorns to create large amounts of value, something that is needed to capture value and thus make profits. Intel and Microsoft created value for personal computer manufacturers and the final users partly through the rapid improvements in microprocessors, memory (i.e., Moore’s Law), and hard disks that occurred over the last 60 years. Many other startups covered in the first article (24 startups founded since 1975 that achieved top 100 market cap status) directly benefited from Moore’s Law including computer manufacturers (Compaq, Dell, Sun) and integrated circuit suppliers (Nvidia, and Qualcomm), and most of the others (Internet content and services) indirectly benefited from Moore’s Law and other rapid improvements in fiber optic speeds and bandwidth.
The huge amount of value that was created by Moore’s Law, hard disk drives, and the Internet enabled many of the startups covered in the first article to eventually set high prices and thus obtain large amounts of value, something that does not exist for today’s startups. For instance, Uber’s service is only marginally more convenient than that of taxi services because it uses the same types of vehicles, drivers, and roads as taxi services, which means Uber and Lyft don’t transport more people per time than do taxi companies and without such productivity advantages and thus large amounts of value created, how can we expect them to generate profits like those generated by Google and Amazon? This problem will only get worse as cities force Uber to pay higher wages to its drivers, high wages that the startups covered in the first article were able to pay their workers because they had much higher productivities than the ones they disrupted.
Some of today’s startups have also targeted industries that have been traditionally regulated, making the challenges much larger than were opportunities targeted in previous decades. Taxi services are regulated out of concerns for congestion, an issue that continues to plague ride sharing and challenges scooters and bicycle rentals. Fintech is trying to challenge traditional banking companies, companies that have also been heavily regulated since the Great Depression. Education startups are fighting an even more highly regulated industry and the huge clash between public and private schools.
Finally, today’s startups have targeted these low-tech regulated industries with a strategy of raising capital to subsidize rapid growth by undercharging the consumer, a strategy that locked startups into early designs and customers, thus preventing the experimentation that is vital to all startups including today’s ex-Unicorns and Unicorns. It is also highly likely that without the subsidies, demand would plummet, and thus the chances of profitability would fall further. In retrospect, it would have been better economically if startups had taken more time to find good hi-tech opportunities, work with regulators to define possible opportunities, and experiment with various technologies, designs, and markets to find good opportunities and do this the old-fashioned way, making a profit along the way.
Some readers may want to understand questions related to why only one startup founded since 2000 has achieved top 100 market capitalization and why most ex-Unicorns are unprofitable and/or have had small share price increases since their IPOs. For instance, some might ask, why did today’s startups not target other industries or why did they over-emphasize growth? Why did VCs keep funding startups even as losses continued to grow? Why did some venture capitalists and founders such as Travis Kalancik and Adam Neumann make billions while subsequent investors in Uber and WeWork did not? These are good questions, questions that deserve attention.
To briefly speculate, however, I do believe that the higher losses are impacted by factors that reduced startup barriers and thus enabled more startups to be founded. These factors include low interest rates, declining regulatory requirements from Jumpstart Our Business Startups Act, and the greater venture capital funding from institutional investors seeking higher returns. This by the way is an important part of Nobel Laureate Robert Shiller’s book Irrational Exuberance, a book that addresses the booms and busts of stock, bond, and housing markets and that is relevant to today’s startups.
However, this article has focused on why more startups founded since 2000 have not achieved top 100 market capitalization, an outcome that should be helped by encouraging more startups. After all, reducing barriers to entry enables more startups to be founded, presumably increasing the range of startups that are created, some of which should have achieved top 100 status. This means other factors must be at work and we believe these include fewer technological opportunities and/or harder to find ones, factors consistent with the slowing innovation and productivity growth noted by Robert Gordon in The Rise and Fall of American Growth, Tyler Cowen in The Great Stagnation, and others in “Are Ideas Getting Harder to Find.”
In conclusion, today’s startups are doing worse than those founded 20 to 50 years ago, which also suggests that big disruptions are not occurring as frequently as they once did. The lower level of startup success than in the past is also consistent with those of slowing productivity growth and innovation raised by Robert Gordon and Tyler Cowen. Together, these data suggest that management, economic, and entrepreneurship scholars, think tanks, and industry associations should turn more of their attention to the reasons behind the declining performance of startups and slowing productivity growth.
 Economic Action Does Not Take Place in a Vacuum: Understanding Cisco’s Acquisition and Development Strategy, October 2002, Industry and Innovation 11(4):299–325
 Jeffrey Funk, Behind Technological Hype, Issues in Science & Technology, Fall 2019.
 Nicholas Bloom, Charles I. Jones, John Van Reenen, Michael Webb, American Economic Review 110(4): 1104–1144, April 2020.