Five years ago Aileen Lee, founder of Silicon Valley investor Cowboy Ventures, coined the term “unicorn” for a private company valued at more than $1bn. Back then unicorns were almost as rare as their mythical namesakes – just 39 existed, according to Lee. Now there are 334 around the world, worth more than $1tn. And this week some of the very biggest beasts started stampeding towards the public markets.
On Friday Lyft, the ridesharing company, went public on the US stock markets, soaring 21% before ending the day up a more modest 8.7%. The company is now valued at $22bn, creating many new millionaires among the Lyft staff and generating big profits for investors who have backed the business as it has developed.
Soon it is expected to be joined soon by Airbnb, Palantir, Pinterest, Slack, Uber, WeWork and more than 200 other companies, largely in tech, that could raise over $1oobn between them – more money than was raised by the dotcom bubble at the turn of the millennium.
For some that’s a worrying sign. And if there was ever an animal born to burst a bubble, it’s the unicorn.
There is no doubting that the big names coming to market have built impressive profiles and are growing rapidly. More than 30 million people took a Lyft last year and 1.9 million drivers are using its app. Not bad for a six-year-old company.
Many of the names coming to market, notably Lyft, Uber and Airbnb, were part of what was once called “the sharing economy” – a phrase meant to describe a community-based, tech-enabled system for sharing goods and services. It’s a phrase that has gone out of fashion as these increasingly massive companies have come to dominate their sectors.
Douglas Rushkoff, author of Team Human and Throwing Rocks at the Google Bus, sees close parallels to the first wave of tech companies to go to public at the turn of the millennium. “What we are looking at is the reaction of traditional corporate capitalism against the sharing economy,” said Rushkoff.
Just as Amazon became the online retailer and Facebook came to dominate social media, “couch-surfing became Airbnb, ridesharing became Uber. It’s capital coming in, establishing monopolies and changing the laws in order to establish a monopolistic foothold,” he said. With all this initial public offering (IPO) cash, competition will once again be killed, he warns.
But Wall Street seems excited. At least for now.
“Investors are familiar with these names, there is a lot of buzz about them and they see the rapid growth. They are doing many of the things that investors like,” said Kathleen Smith, principal at Renaissance Capital, a research firm that specialises in IPOs.
Renaissance reckons there are some 235 IPOs in the wings this year – many of them unicorns – that could raise $100bn between them, eclipsing the $97bn raised by IPOs in 2000.
Back then, when the internet was new, investors also lined up for a piece of the action and then an economic downturn, the 9/11 terrorist attacks and broken business models triggered a huge sell-off. By the time the silicon had settled in October 2002 the Nasdaq-100, home to many of the largest tech companies, had fallen 78% from its peak in March 2000.
Many of today’s biggest tech companies, including Google, eBay and Amazon, can trace their roots back to the dotcom boom. But beside those market-dominating behemoths lie the bones of much-hyped disasters such as Pets.com and Webvan.
This time, too, there are signs that things may be too good to be true for some companies. These companies “are just not making any money”, said Smith. And that is a problem.
Lyft, like nearly all the other big companies preparing to come to market, is burning through cash. Last year it lost $911m as it bumped up its marketing budget to compete with Uber and cut its prices, to the anger of drivers. Those losses set a record for the amount of money a company has lost in the 12 months before going public. But it’s a record that looks sure to be broken – and soon.
Uber lost $1.8bn last year. WeWork, the office rental company and would-be lifestyle brand, lost $1.9bn in 2018.
Recent history suggests Smith is right. Stock market investors may get excited by the hot new IPO but they have little patience for companies that continue to bleed cash like a drunk in a casino. Two years ago, investors rushed to snap up Snap Inc, parent company of the Snapchat app, for $17 a share. The company has lost money since 2011 and lost $1.3bn last year.
Now investors are sharing those losses. Snap Inc shares are worth about $11 today.
Nio – “the Tesla of China” – went public last September and opened with a sell-off. It raised $1bn, $800,000 less than the $1.8bn it was targeting. Moderna, which became the largest ever biotech IPO last December, also fell below its opening price on the first day of trading. Both are burning through cash.
But those stumbles have yet to stop private investors creating new unicorns – 32 new ones last year alone. Huge sums have been poured into these companies. The private investment poured into Uber totals $24.2bn. Eventually, and sooner rather than later, investors will want that money back, with gains on top.
Alan Patrick, co-founder of analytics company Dataswarm, says the hangover from the last recession has fuelled the rise of the unicorn. With interest rates still low, lending is cheap and decent returns are hard to come. “I think there is a desperation to invest because the returns elsewhere are just crap,” he said.
Then there is the huge amount of money still washing through the financial system, thanks to quantitative easing, where central banks injected cash into the economy to ease the way out of recession. “That money had to go somewhere,” he said.
In the meantime many of the companies coming to market are entering a tougher market for tech. The public and politicians have become more wary of tech’s influence. It has caused an affordable housing crisis in cities such as San Francisco, that will only worsen as a new wave of IPO millionaires come online.
And at the same time the non-tech class is seeing its wages threatened by the drive to cut costs and a future threatened by automation. Both Uber and Lyft hope eventually to replace the drivers who built their companies with autonomous vehicles.
With Silicon Valley still awash with cash – and some clear lessons from peers that going public is never easy – why have all these companies chosen 2019 to go public?
“I think there is a lot of worry that this is the top of the market,” said Patrick. “If a bear market happens, these companies are not going to be very popular. They are still losing a huge amount of money, they need a lot of other people’s money.”
If stock market investors lose their appetite for any of the loss-making unicorns coming to market soon “it will cast a long shadow over the ones that are coming after”, he warned.