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Banks, Lenders & Investors Finance Insolvency Uncategorized

Are Internet unicorns another bubble destined to burst?

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 Offerings (IPOs).

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 than $24bn.

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 to $41.51.

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 volatile.

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 the wayside.

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 increase.”

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.

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Business Development & Marketing Finance General Rescue, Restructuring & Recovery Turnaround

App bubble 1 or Dot-com bubble 2 (Remember Dot-com bubble 1)?

headline "bubble burst"In January 2016, approximately 5,000 new apps and games per day were listed for download, according to the most recent research published by Statista. On the App Store alone 50,750 new apps and 19,130 new games were listed during the month.
There are currently over 2,200,000 Apps listed for download from Google’s Play Store and another 2,000,000 on Apple’s App Store and the growth continues to be exponential.
The question is whether it is possible for so many app developers to survive – remember the growth before an explosion of IT/web developers publishing new websites in the period 1997-2000. They were seen as having the potential to make a fortune.  In fact, very few were able to make a living although some raised a lot of money before spectacularly collapsing when the Dot-com bubble burst 1999-2001.
In our view something similar is looming with apps and the reason is also similar with lots of competition and very few apps finding a market.
Most of them will fail due to customers not being aware of them. Those that are found and installed are often only used once before being uninstalled since the trial found them either irrelevant or not capturing the user’s imagination.
Marketing an app requires a huge investment to draw it to people’s attention and get it installed and trialled. Equally important is ensuring it stays installed because it is either really useful or great fun or users simply want it.
Without those two things an app is never going to be commercially viable.

Expert marketing and significant investment

A clear strategy is vital for marketing an app and needs to capture people’s imaginations in the same way that a good movie does – and remember a movie is only a hit if it is seen and that means it has to be marketed expertly.
It is estimated that when budgeting for marketing an app the calculation is to spend £1 for every app install.  It is also important to remember that for every install there are likely to be a percentage of uninstalls.  Of course, that does not mean people have not shared the app with other people so there is always a chance it might go viral but this needs a level of critical mass.
However, to attract attention against a field of thousands of competitors means spending real money. On average it is estimated that people have about 35 apps on their mobile phones and actually use only about 25% of them regularly.
Google has launched a Universal App Campaign that works in the same way as Google Adwords. The advertiser of the app pays per install but there is still the possibility that apps are subsequently uninstalled. However, any other app marketing strategy is difficult to deliver unless the promoter already has critical mass.
Given the difficulties of marketing an app and getting it noticed it is a reasonable prediction that there is a bubble looming and that sooner or later it will burst.
That doesn’t mean there won’t be an app equivalent of Lastminute.com that closed its funding just before the Dot-com bubble burst and used the funds to effectively buy market share.
The alternative is to exploit an existing brand like the strategy pursued by Nintendo and its Pokémon GO app.
Please tell us how you plan to get your app noticed.