Reminiscent of the hubris leading
up to the 2000 dot com crash, the start of this year there has seen a queue of
internet unicorns lining up to launch on the stock market via Initial Public
A unicorn business is defined as
a private, venture capital-backed firm worth over $1bn. Among those that have
either launched IPOs or considering them are Lyft (launched in March), Uber
(launched in early May), Pinterest, AirBnB and possibly We Work and Slack.
So far, the results have been
distinctly underwhelming with Lyft’s shares valued at $72 each on debut, giving
the seven year-old company and rival to Uber a market value of slightly more
Uber set its launch value at $90
billion (£70 billion) and listed share prices at $45 each. However, within
hours on its first day of trading Uber’s share value had dropped by 7.6% down
Neither of the two ride-hailing
businesses has so far ever made a profit.
Last year, despite boasting
revenues of $11bn Uber made operating losses of $3bn and while its revenues
grew from $343m to $2.1bn between 2016 and 2018, its losses also soared, from
$682m to $911m.
The hubris might best be
justified by the fact that We Work was valued at ~$20bn at last fundraising,
despite last year losing ~$4bn. Contrast this with UK listed Regus that made
~€800m last year and is currently valued at ~$4bn.
There is no doubt that trading
conditions in the last two years have been challenging, with a global economic
downturn, trade wars and political populist movements all making markets more
This may be behind the incentive
for unicorns to rush into IPOs before economies find themselves in recession. Again,
readers might like to recall the market bubble ahead of the dot com crash in
2000 when Lastminute.com was the last of old “retail” internet firms to list
before the crash with many of those who missed the boat subsequently falling by
Are there more deep-seated problems with internet unicorns?
Ilya Strebulaev, professor of
finance at Stanford University, has extensively researched private venture
capital backed companies and come to the conclusion that unicorns are
overvalued by about 50%.
Prof Strebulaev argues that
typically venture capital-backed businesses make losses “because they
basically sacrifice profits to achieve very high growth or scale” but the
question is whether their business models will be sufficiently flexible to
allow them to convert losses to profits over time.
The current crop of internet
unicorns are significantly larger than the internet companies that were
involved in the mid-1990s dot com bubble and 2000 crash but a lot depends on
their plans for the future.
Lyft has plans for using the
money generated from its IPO to invest in acquisitions and technology,
including autonomous driving, for example.
Uber has already suffered from
protests by its drivers over their treatment with stories rife of drivers
earning so little that they have to sleep in their vehicles and with protests
ongoing there are concerns that it would face significantly increased costs if
forced by regulators to classify drivers as employees rather than contractors.
An item in its IPO prospectus is
particularly telling “as we aim to reduce driver incentives to improve our
financial performance, we expect driver dissatisfaction will generally
If these companies are pinning
their hopes of future profitability on driverless cars and dispensing with
drivers altogether they, and their investors may have a long wait.