One billion dollars!
No, it isn’t a ransom demand from Dr Evil, but the magic valuation number of startup tech companies over the last decade.
A “unicorn”, when used in the venture capital industry, is a word to describe a startup company with a value of over US$1 billion. More and more tech startups have been reaching that magical unicorn status in the last couple of years, making unicorns much more than a mythical creature. Where it once took companies like Starbucks and Nike 24 years to reach a valuation of US$1 billion, modern tech companies have done it a lot faster. YouTube for example, only took a year while Evernote took it slow at six years.
But, scarily, many companies like Uber, Lyft, and Grab reached this status without actually making a profit. So what has gone wrong with market fundamentals to have caused this?
BEWARE THE TECH UNICORN
It seems like we’ve never learnt.
The dotcom bust from 2000 to 2002 saw many online companies disappear when the boom times of 1994 to 2000 saw investors only too eager to throw funds at any company who seemed to have an idea for a service online. According to Investopedia, “By the end of 2001, most dotcom stocks had gone bust. Even the share prices of blue-chip technology stocks like Cisco, Intel and Oracle lost more than 80% of their value. It would take 15 years for the Nasdaq to regain its dotcom peak, which it did on April 23, 2015.”
But, is lightning striking twice in the same place?
2019 saw the launch of IPOs from Uber and Lyft, and pretty much straight away, they have shed more than US$40 billion in value. WeWork, once the darling of SoftBank, saw its IPO pulled and then lost its CEO due to concerns from investors over potential returns and profitability from its prospectus.
Reports from Tech Crunch in 2019 said that investors don’t care if startups are profitable, what they want is market opportunity.
Reports from Tech Crunch in 2019 said that investors don’t care if startups are profitable, what they want is market opportunity. But the fall of one-time darling WeWork has soured this sentiment to a degree and investors are changing their tune to wanting to see a pathway to profitability for new startups.
South East Asia is not without our own unicorns.
Gojek and Tokopedia are from Indonesia, VNG in Vietnam, and even Singapore has its own share of Unicorns with companies like Grab, SEA, Lazada and Razer leading the way as guiding lights.
But the Sword of Damocles still hangs over many of them with profitability seemingly out of reach.
Grab was valued at $14 billion in March last year with the CEO saying that it could go public once the whole company became profitable rather than having only some units in the black. But overall, the company has not yet made a profit.
Even Razer is still operating at a loss despite its losses narrowing and the company reporting its best half-year revenue as a listed company this week, with revenue hitting $357.2 million, up 30% from a year earlier.
But what should investors do?
FALLING IN LOVE WITH TECHNOLOGY
Synergy Research Group’s detailed review of enterprise IT markets over the last ten years has thrown up some interesting findings.
Synergy identified twelve vendors with billion-dollar annual revenues where the companies started up during the decade or had only minimal revenues ten years ago.
By the end of 2001, most dotcom stocks had gone bust. Even the share prices of blue-chip technology stocks like Cisco, Intel and Oracle lost more than 80% of their value.
The leaders of this elite pack are Workday, ServiceNow and Palo Alto Networks, who in 2009, had aggregate revenues of substantially less than $100 million, but now claim a combined revenue in excess of $10 billion.
Arista Networks has passed the $2 billion mark and eight others have achieved a billion dollars or more – Pure Storage, Dropbox, Shopify, Atlassian, Nutanix, Twilio, Veeva and DocuSign. In total these twelve vendors had 2009 revenues of only around $200 million, but now have aggregate revenue run rates over $23 billion.
And what is important to note again here is that all of these companies actually have products and solutions that are helping them to make profits. Buzzwords like Artificial Intelligence (AI), Machine Learning (ML), and Blockchain, can only be bandied about so much before the market actually ask to see a product.
TIME TO SLAY THE BEAST
Concerns over profitability and the overhyped-status of some startups are beginning to be felt within the startup community.
According to a Forbes report the era of venture capitalists funding a startup’s losses, ignoring sound governance practices, and giving them increasingly absurd valuations is over. At some point, this party ends because no one has limitless capital and can afford to fund a perpetually money-losing business with highly conflicted corporate governance.
And this is reaching into startups themselves with a survey from VC firm First Round who polled some 900 founders and employees of startups and found that the world of startups may be running out of patience for heavily-hyped trends like cryptocurrency, virtual reality, and autonomous vehicles.
Investing in a startup is like a cross between gambling and a pyramid scheme. If you can’t get in early enough, you need to be able to grin and bear the burden of loss should it fail. Just remember that the odds are against you from the start with most estimates saying that 90% of startups will fail.
If you can accepts those odds, I have an idea for a next-generation cryptocurrency product using blockchain, that users need to run an AI agent to install a chatbot to carry out deep learning mining actionable insights from big data powered by the Internet of Things, that I’d like to interest you in investing.
DIGITAL IMAGING JASON TAN