This article is the tenth in my series on startups and technology; previous articles have shown that most Unicorns, startups that were valued at $1 Billion or more, are unprofitable. Focusing just on American Unicorns who have done IPOs (which I call ex-Unicorns), the third article in the series showed that 6 of 45 ex-Unicorns were profitable in 2019 and the second article showed that only 14 of 45 had share price increases greater than the Nasdaq. Subsequent articles focused on specific industries finding that payments is the only profitable segment for ex-Unicorns (see fourth article), with other segments unprofitable, including insuretech and business software, which were addressed in the eighth and ninth articles.
This article focuses on consumer Internet Unicorns and ex-Unicorns, startups that offer e-commerce, various Internet services, and digital hardware and services. Focusing on U.S. and Canadian startups, Tables 1 and 2 show that only Etsy, an e-commerce startup was profitable in 2019 while another six had losses less than 10% of revenues among a total of 21 Unicorns and ex-Unicorns. Nine and six of the 20 had losses greater than 20% and 30% of revenues respectively. On the average, the losses for the 21 startups were equal to 16% of revenues despite being founded on the average in 2007, 13 years ago. Can we expect profitability to improve after 12 years? Ironically, only one Unicorn (Purple Innovation) was founded in the last five years, and it has the second highest ratio of income to revenue, with losses equal to 1% of revenues.
The small percentage of profitable startups (1 of 21 or about 5%) is lower than the percentage of all ex-Unicorns that were profitable (6/45=13%) in 2019. Part of the lower percentage comes from Unicorns that have not yet done IPOs, none of which were profitable in 2019 for any industry. But even excluding Unicorns that have not done IPOs, the percentage is still smaller (<10%). This figure is also smaller than the percent profitable of all startups doing IPOs in 2019 (about 20%), which is also much smaller than this percentage in 1980 (about 80%).
Because the startups are organized by categories in Tables 1 and 2, we can see that none of the categories are profitable. The e-commerce category has losses equal to 8% of revenues, news media has a ratio of 11%, digital hardware and services has a ratio of 15%, and social media has a ratio of 83%. Focusing on e-commerce, foreign Unicorns such as India’s Flipkart and Singapore’s Shopee, Lazada. and Carousell are also reportedly unprofitable and have yet to do IPOs. Nevertheless, some of the e-commerce startups with small losses probably have the largest chance of becoming profitable with one profitable startup (Etsy) and several with losses less than 10%. Two of these, Purple Innovation and Shopify, have also done well during the lockdown with higher revenues than in previous years but still with losses.
However, competition will make it hard for any of them to make profits. In the background is Amazon, which continues to spread its e-commerce domination to new product segments. It already competes with Wayfair in furniture, Peloton in exercise bikes, and Purple and Casper in mattresses, along with 175 other online mattress companies. Amazon is also expanding into new cars and likely used cars so competition will likely rise there. Nevertheless, the lockdown has expanded used car sales, just as all economic contractions do. This may provide CarVana and Vroom with higher chances of success than the other startups.
The news media startups have slightly greater losses as a percentage of revenues than do e-commerce, but Quartz has a much higher ratio of losses to revenues than does Vice, and another Unicorn, BuzzFeed has also done poorly. All three have suffered growing losses and layoffs in 2020 due to the fall in advertising revenues during the lockdown. Moreover, their share prices have been falling for years and there is growing pessimism about their underlying business model, native advertising. Native advertising provides articles with the look and feel of real articles but are basically sponsored articles. As the news business moves in this direction, the advantages of Vice, BuzzFeed, and Quartz decline. Another once high-flying Unicorn, Tumblr, was recently sold by Yahoo to Automattic, owner of Word Press, for 2% of the price Yahoo paid.
The differences between the Unicorns and ex-Unicorns targeting digital hardware and services are also large. Four have a ratio of losses to revenues greater than 0.20 and two of them have had steep share price declines (Eventbrite and Fitbit) despite being founded more than 10 years ago. On the other hand, Roku, GoPro, Razer, and Airbnb have much smaller losses. Roku sells digital media players and services, and its share price is up about three times since its IPO three years earlier.
The stock market is less optimistic about the other three. GoPro’s and Roku’s share price have fallen about 90% and 60% respectively (as of March) since theirs IPOs many years ago due to disappointing sales growth. For instance, GoPro’s once unique capabilities (rugged wearable cameras) are gradually being incorporated into smart phones. And Airbnb is one of the most impacted startups by the lockdowns, with revenues 67% lower in Q2 2020 than a year earlier. It also expects its 2020 revenues to be less than half those of 2019 and it has already laid off 25% of its workforce. These losses have caused Airbnb’s valuation to fall by almost half from $31b at its peak in 2017 to a recent valuation of $18 billion. Without air travel Airbnb’s revenues will not return to pre-pandemic levels, and even when they do, it may be years before profits return.
Plural Insight and online education deserve additional comments. Plural’s losses were equal to 36% of revenues in 2019 and Unicorns that have not yet done IPOs probably have even bigger losses. Udacity was founded in 2011 and both edX and Coursera were founded in 2012. These Unicorns should have done IPOs by now but have not done so likely because they are unprofitable, a reasonable assumption when income figures have not been released (layoffs are a good indicator of losses). Even in the midst of the lockdowns, it is difficult to find optimistic articles about these startups and in fact the opposite story is emerging: online classes aren’t very good for kids.
Online education for university students and graduates were hyped heavily in the early 2010s. Some expected up to 90% of universities to disappear as the best ones offered online services to millions. But since then the basic value proposition has been called into question, with many pointing out that the credentials provided by universities are much more important than the teaching insights. The most successful segment is for continuing education for university graduates, but even here the startups are not able to make money, a surprising result given the high incomes that many of these graduates have.
Other Unicorns offering digital hardware and services have also not done well and thus have not done IPOs. These include Magic Leap, Beats Electronic, and Nest. On the surface Beats and Nest are the most successful of these Unicorns because they were acquired by Apple in 2014 and Alphabet in 2015, long before interest in Unicorns began to fall. Because Alphabet releases income data for Nest, we know that its losses far exceed its revenues and Magic Leap is barely surviving.
The most unprofitable segments are telehealth and social media. Amwell, Pinterest, and Snapchat have the biggest losses, but the latter two perhaps the largest chances of survival. As advertising/social media firms such as Google and Facebook continue to experience rising share prices, it is possible that investors will continue to bet that Pinterest and Snapchat can emulate Google and Facebook.
In summary, consumer Internet startups are largely unprofitable, with only one of 20 having profits in 2019. A big reason for this unprofitability is the lack of breakthrough technologies, something that enabled many startups in the late 20th century to become the most valuable companies of today (e.g., so-called FAANMG). As I describe in the fifth article of this series, those past startups exploited breakthrough technologies that were initially ignored by incumbents of decades past. Today’s startups, however, are mostly copying incumbents in e-commerce and social media, or commercializing technologies that are easily copied by incumbents in the other categories. Startups with somewhat reasonably innovative products include Etsy, Roku, Airbnb, and Carvana, with Airbnb heavily impacted by the lockdown. The chances that any startups shown in Tables 1 or 2 will become members of the top 100 most valuable companies are very small.
 https://www.mediapost.com/publications/article/345232/buzzfeed-global-operations-report-12-million-lo.html https://digiday.com/media/caught-in-the-mushy-middle-how-quartz-fell-to-earth/#:~:text=In%202019%2C%20Quartz%20reported%20a,on%20%2426.9%20million%20in%20revenue https://www.washingtonpost.com/lifestyle/media/with-cuts-at-vice-quartz-buzzfeed-even-medias-savviest-digital-players-are-hurting/2020/05/19/f15d3dde-96e9-11ea-91d7-cf4423d47683_story.html