2019 was seen as the year of Unicorns which many start-ups which have quickly risen to prominence due to technological advantages going Public. However, in November we have seen 2019 has been rather harsh to Unicorns with the majority performing well below expectations or have even been delayed as seen with WeWork’s IPO. 2019 has been significant in which we have seen the move away from emotional feelings from investors, shifting to a more pragmatic and logical stance in looking at the actual profitability and path to profitability for most of these Unicorn firms.
The recent revaluation of WeWork’s IPO to £20bn – less than half of the £47 billion[1] raised last year in a private raising is the epitome of investor sentiment shifting away from VC backed start-ups. This follows a trend beginning at the start of the year for IPO’s which has seen over $44.7 bn[2] wiped off in market capitalization from just the 10 biggest Unicorn IPO’s to date this year. Lyft kicked it all of seeing $13.6 Billion wiped off their market capitalization and were followed by ride-sharing competitor Uber who haven’t fared well and have seen $21.2 billion wiped off in value since they’ve gone public. Recently we have seen Peloton go public and see their stock open up at 6.9%[3] lower than their opening price – the 3rd worst trading debut for a mega IPO post-financial crisis.
But why is there a shift in market sentiment to Unicorns? Well simply put, the market has had enough of emotional investing and has returned to arguably more logical and fact-based analysis. Gone are the sentiments that tech firms are always valued long term due to the rise of firms like Apple and Microsoft who in previous decades saw unprecedented growth during the tech bubble which led investors to the idea that start-up tech firms are the way forward. Investors have now focused on the fundamentals of companies, looking specifically at the Margins of these unicorns and their path to profitability. The shift in attention has been the downfall for many unicorn firms as most of them are money-losing, with no clear path to profit seen and in extreme cases have seen losses increase year on year as seen with WeWork and Lyft. As Fred Wilson nicely explained in his column[4], many companies are rebranding themselves as software/ tech-based companies but investors are now asking for software companies to start showing their margins and profitability. When we look at the margins of mentioned firms such as Uber, Lyft, and peloton who have respective gross margins of just 46, 39 and 42%, compared to those who have flourished such as Zoom video whose margins sit at 77% [5]we see how the actual financials of these firms fall apart and why unicorn companies no longer can rely on the narrative of being an exciting tech start-up.
So, what have we learned about Unicorn IPO’s this year? Well firstly, being a unicorn, especially a tech unicorn no longer comes with the God-given right of attracting investors. Unicorns and the VC firms which back them need to do a better job in improving the financials of these firms and in finding some sort of clear path to profitability in order to woo investors. Till these unicorns finally adjust to this key change in investor and Market sentiment, expect to see more of the same.
