
The wave of unicorn IPOs - wskinner
https://www.economist.com/briefing/2019/04/17/the-wave-of-unicorn-ipos-reveals-silicon-valleys-groupthink
======
olivermarks
As Reid Hoffman of Greylock Partners, a venture-capital firm, and the co-
author of a book about blitzscaling, puts it: “In a connected world, someone
will build an Amazon. The only question is who and how.”

'...what they also lack, in 11 cases out of 12, are profits. Today, according
to Jay Ritter of the University of Florida, 84% of companies pursuing ipos
have no profits. That is remarkably high. Ten years ago, the proportion was
just 33%. To see profitlessness as rampant as today’s you have to go back to
the peak of the dotcom boom in 2000.'

I'm in the Bay Area and this late stage of the tech business cycle reminds me
a lot of the build up to the dot com bust. for Enron see Theranos (and
possibly even Tesla), along with lots of mega deals over basically profitless
platform companies posturing around dominance of future markets...

~~~
romanhn
I see the profit angle brought out often in these discussions, and as someone
that has worked at one of these unicorns with a recent IPO, I'd like to point
out that profitability is not a black-and-white consideration. A company has
many financial dials and switches, and ours specifically could have easily
been profitable if they had chosen to do so. It was a very intentional
decision to funnel money towards further growth, which frankly I had/have no
issues with. I suspect that is the case with many B2B unicorns; not sure the
B2C ones could make a similar transition as easily if circumstances called for
it.

Not sure the dotcom crash is comparable - those were the days of companies
getting millions without so much as a business plan, and going public months
after being born. Sure, the companies without solid fundamentals are not going
to survive in the long run, but as an industry, I don't think we're anywhere
close to the crazy old days.

~~~
thisisit
> I'd like to point out that profitability is not a _black-and-white
> consideration_. A company has many financial dials and switches, and ours
> specifically could have easily been profitable if they had chosen to do so.
> It was a very intentional decision to funnel money towards further growth,
> which frankly I had/have no issues with.

I am unsure what you mean exactly but if the company is making a choice
between being profitable and growth it is a black-and-white (or a binary)
consideration.

> A company has many financial dials and switches

What are these financial dial and switches?

It is one thing to opine whether a company might be profitable if they chose
to and other to look at practical implications of this choice. An example,
Uber might be chose to be profitable by raising ride prices or charging higher
commissions to drivers or other means but it might lead to many drivers
jumping ship or users booking less rides etc.

~~~
stanfordkid
It's really not. You gamble with your margins -- it's a continuous variable.
You could be profitable by a cent or millions of dollars, or not at all. Each
of these decisions yields a very different growth and risk trajectory.

The label of "profitable" itself is pretty meaningless, given that you are at
battle over many many years against competitors. One quarter of profitability
might yield doom 3 quarters down the line due to lack of investment.

~~~
nickelcitymario
> The label of "profitable" itself is pretty meaningless, given that you are
> at battle over many many years against competitors.

Good God, that's a terrifying statement.

When business stops being about "making money", I don't know what we're doing
anymore.

The point of battling the competition is to make money. It's not about
crushing them, beating them, or even being more profitable than them. It's
about making money.

Yes, it's absolutely valid to choose to sacrifice a period of profitability in
order to strategically set yourself up for better profits later. And if
crushing the competition is how we do that, great.

But this game of never making profits is a fools game. If I invest my money in
your company, it's because I expect you to make me money.

If the only way you make me money is by raising the value of the stock, then
we're in a game of Dutch tulips, and the only question is whether I can time
selling my stock properly to not be the greater fool.

But if you make me money by running a profitable company and disbursing the
dividends, I'll hold onto that stock forever.

One of those approaches is ethical. The other is a scam.

------
quickben
I read this analysis that before the Dotcom bubble burst, unicorns cashed out
in a similar fashion. The authors were proposing to watch for the next wave as
an indicator, as VCs would be trying to cash at the best time (or at all)
before a recession.

~~~
hkmurakami
This hopefully shouldn't be a surprise for those looking to invest in the
public stock market, given the ample amount of caution many participants have
been expressing over the last 12+ months regarding our current status of being
in the late stages of economic expansion.

~~~
pascalxus
This will be known as the everything bubble, everyone saw coming. I don't
think anyone's going to be surprised when this melt down arrives. Though the
length of recovery needed to bounce back will surprise people who haven't been
watching the public/private US/Global deficits over the last 20 years.

~~~
dehrmann
> This will be known as the everything bubble

Not really; there isn't the irrational exuberance that the dot com, housing,
or bitcoin bubbles had. There aren't stories about people getting rich quick,
new normals, etc.

> ...deficits over the last 20 years.

You're onto something here. There's definitely been an increase in government
spending. The other thing going on is that there was a lot of quantitative
easing following 2000 and 2008. There's another word for everything going up:
inflation. Maybe that's what we're seeing, but government inflation metrics
are missing it for some reason.

~~~
ralph84
> but government inflation metrics are missing it for some reason

They're missing it because they're designed to miss it. If inflation was still
calculated like it was in 1980 it'd be around 10%.

[http://www.shadowstats.com/alternate_data/inflation-
charts](http://www.shadowstats.com/alternate_data/inflation-charts)

~~~
pas
Citing shadowstats is not really a good sign in any argument. Even if they
might have a point, the whole site is not about that point.

The changes in CPI calculation (continuous consumer basket adjustment, etc.)
are well documented, well known in econometrics, and is considered a sane
thing. (After all you can't really equivocate a TV from the 50s and a TV now.)

And while it's always possible to make better adjustments, shadowstats does
not argue for this, it just argues against a strawman conspiracy.

[https://moneymaven.io/economonitor/emerging-
markets/deconstr...](https://moneymaven.io/economonitor/emerging-
markets/deconstructing-shadowstats-why-is-it-so-loved-by-its-followers-but-
scorned-by-economists-DWhA0PwhhkOHkzTLLeCvpQ/)

"For example, a can of tomato sauce that cost $.25 at Piggly Wiggly in 1982
cost $.79 at my local market in early 2015. Starting from the 1982 price, the
CPI predicts that it should cost $.61 in 2015 while ShadowStats predicts that
it should cost $2.64. Starting from the 2015 price and working backwards, the
CPI predicts that it should have cost $.32 in 1982 while ShadowStats predicts
that is should have cost $.08. Based on these calculations, we see that the
CPI underestimates inflation, as measured by the Tomato Sauce Index: The ratio
of the 2015 predicted price of $.61 to the 2015 actual price, $.79, is .77, an
underestimate of 23 percent. The ratio of the ShadowStats prediction to the
actual price is 3.32, an overstatement of 223 percent. For tuna, both indexes
overestimate inflation, the CPI by 34 percent and ShadowStats by 478 percent,
and so on."

also: [http://blog.jparsons.net/2011/03/shadow-stats-debunked-
part-...](http://blog.jparsons.net/2011/03/shadow-stats-debunked-part-i.html)

And to address the "they miss it part". Well, probably most people don't buy
stocks, and most people don't buy private equity limited partnership chunks,
so ... CPI-U does not measure "asset bubbles".

~~~
hopler
Over half of USAmericans buy stock via 401k/403b or pension

------
sytelus
One of the question I'd was why so many unicorns are suddenly taking plunge in
to IPO in such a short window. A frequent theory I'd heard was that there is
huge expectation of market downturn that can possibly last for years during
which unicorns won't have enough cash to survive. This article presents reason
that many VC funds were born in 2010 and their fund terms are ending now which
is causing this rush.

------
jedberg
Another article about tech IPOs pointed out that this year the number of
public companies headquartered in San Francisco will double. Apparently there
are only four now, and at year's end they expect nine.

~~~
harryh
Existing Public Companies with SF HQs:

    
    
      - DocuSign
      - Dropbox
      - Eventbrite
      - Fitbit
      - LendingClub
      - LiveRamp
      - New Relic
      - Okta
      - Salesforce
      - Splunk
      - Square
      - Twilio
      - Twitter
      - Yelp
      - Zendesk
      - Zynga
      - Wells Fargo
      - Charles Schwab
      - First Republic
      - Pacific Gas & Electric
      - Gap
      - Williams-Sonoma
      - Dolby
      - McKesson (thx khuey; though apparently moving to Dallas soon)
      - Castlight Health
    

IPOed This Year:

    
    
      - Stitch Fix
      - PagerDuty
      - Lyft
      - Pinterest
      - Levi Strauss (thx mykowebhn)
    

Expected to IPO This Year:

    
    
      - Slack
      - Uber
      - AirBnB
      - DoorDash (maybe?)
      - Postmates (maybe?)
      - Instacart (maybe?)
      - Asana (maybe?)
    

I'm sure I'm missing some....

EDIT: adding new ones as I/others think of them

~~~
cubecul
DoorDash may also go this year

aside: anyone else think Uber should buy DoorDash?

~~~
ackbar03
I think they're too expensive to buy now, DoorDash will just have to dump on
the unexpecting retail investors to cashout

------
monocasa
So what, does capital think there's a recession coming? Cashing out to become
more liquid and becoming ready to gobble up foreclosures is what I'd be doing
if that were the case.

~~~
pas
Yet at the same time a lot of people invest in these very late stage startups.
Why? Are they the fools of the stock market? Who usually buys at IPO time
(besides the speculators that want to ride the early fluctuations)? There's an
underwriter that does the whole IPO, sure, they are probably in the same
bucket as those speculators, but to whom they unload all these new stocks?
Individuals? A lot of big institutions that have some risk appetite? (But
those are probably already limited partners in VCs, no?)

~~~
linuxftw
Fund managers buy this crap to cash out the VC friends. See SNAP for an
example: [1].

Few actual people are stupid enough to fall for this shell game, but the
limited 401k options most companies offer all but guarantee some of your
savings is going into these deadbeat companies.

1:
[https://finance.yahoo.com/quote/SNAP/holders/](https://finance.yahoo.com/quote/SNAP/holders/)

------
raiyu
"In 2013 Ms Lee found just 38 unicorns in America.

Today there are 156"

I wonder what could have happened in that time frame? Perhaps the ubiquity of
iPhones and Android devices which have opened up old business to new
competition?

Hotels > Airbnb Taxis > Uber, Lyft FB > Snapchat PayPal > Stripe

And with the surge in new tech companies come more companies to service the
tech

Pager duty, New relic, cloudera, zoom, mongo DB

And also how much has the internet population and usage grown between 2013 and
present.

I'm not saying that the market isn't over heated, or that there won't be some
companies that will face tough times in a liquidity crunch, but a bit less
biased reporting would be nice.

But with media these days it's all about eyeballs and impressions so balanced
reporting is for the 2000s.

~~~
govg
Multiple things combined to give this explosion. Off the top of my head :

\- 4G / 3G internet access became widespread, meaning you could suddenly have
access to a lot of internet bandwidth in each phone user's hands.

\- Android and iOS made it easy to make applications that are almost as
powerful as what a desktop application can do, which lead to many app driven
ideas.

\- Countries like India and China rapidly embraced the internet and have huge
populations on the internet now / on the way to the internet.

\- Machine learning really kicked off once GPUs made deep learning viable,
this allows a lot of data to be processed and insights to be obtained.

------
feniv
I've been curious about the recent wave of IPOs as well and did some data
analysis here
[https://thequarterly.org/S-1.html](https://thequarterly.org/S-1.html)

Despite several notable IPOs, the overall rate of S-1 filings doesn't seem
higher this year.

~~~
iscrewyou
I don't think it's much about the number of IPOs but the amount debt and
losses these companies hold behind those IPOs.

Don't get me wrong, people who invest in these should be doing their due
diligence and investing accordingly but I also think that the companies are
doing their best to put up a front to cash out now so the executives can get
paid.

------
wskinner
The article is behind a paywall. By reloading the page and hitting escape
before it fully reloads, you can still access the full text.

~~~
YjSe2GMQ
Off topic, but I recommend getting a subscription of The Economist. Totally
worth the money, and the weekly format combined with an almost complete lack
of bias gives a nice leisurely pace to catch up with world's events.

~~~
rorykoehler
The Economist has hardcore bias. Very neoliberal.

~~~
YjSe2GMQ
Not according to those guys:

[https://mediabiasfactcheck.com/the-
economist/](https://mediabiasfactcheck.com/the-economist/)

For example, they endorsed both Democratic and Republican candidates for
president in the past.

~~~
rorykoehler
I'm just going by what I have read. My ex cofounder was subscribed so I read
it quite a bit. Found it to be very biased neoliberal but then again I'm
interested in ideas that fall way outside the Overton window of the democrat
and republican political sphere. Democrat and Republican are essentially
siblings. They're not that different in that they both aim to use capitalism
and the power of the nation state military to exert influence and assert
dominance.

