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...
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.
> ours specifically could have easily been profitable if they had chosen to do so
There is a big difference between e.g. Amazon, which is unit profitable and could be more profitable at any time, Uber, which is unit profitable in some markets but not so in other markets, and something like WeWork, which is not unit profitable.
> 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.
* Revenue > OPEX, but all the difference is put into expanding to new areas, maybe even topped with some debt. If needed, the expansion can be curbed, and profits will show. This is the Amazon case.
* Revenue < OPEX, and no matter what other expenses you cut, you make a loss on every sale. You cannot show a profit however you try. This is the case of WeWork and maybe Uber, AFAICT.
The amount of other expenses that you can cut to turn profitable, and the amount of profit surfaced this way, is indeed a kind of a spectrum, from near zero to a quite healthy ROI. But it does not apply for companies that are fundamentally in the red.
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.
> 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.
You could make it binary and label everything as improving profit or investing in the growth of the company but I think we should define "growth" in this case as the relatively short-term investment made to grow. That's immediately what I thought of when I read and re-read the parent comment.
Reading what was said, I imagine rolling out new markets, testing new customer acquisition methods, and hiring to focus on new features would all fit in this label as growth.
Things like R&D might not. If Uber has been investing in self-driving vehicles, it may not pay off in the short-term, and therefore wouldn't fit in this set as it's quite speculative. Technical debt might fit here too. Or marketing debt: perhaps they want to establish brand guidelines and everything that comes with it. Great investment but not what directly helps you grow. A more direct "financial dial" might be restructuring your company from a legal perspective and forming new entities.
Just sharing how I read "black-and-white consideration". Maybe the parent can clear up what they meant.
One potential issue in the B2B space is how dependent (or not) these companies are on other non-profitable companies for their revenue. If all of these yet-to-be-profitable unicorns are selling to other profit-challenged vc funded startups, than that could cause some problems if VC's pull back.
I think interest rates play a key role here. I was expecting rates to rise more, but it seems like the Fed is getting nervous and pausing rate hikes. So we may end up in a semi-permanent low interest rate environment, which should keep the VC money flowing for now. So at this point, I am not really sure what to expect.
This was exactly the problem during dot.com. I worked in optical networks and we all scoffed at Web business as vapor ware. But when dots went bust demand for bandwidth plummeted and optical networking cratered soon after.
> It was a very intentional decision to funnel money towards further growth, which frankly I had/have no issues with.
This is the nature of swelling debt. This is most immediately exemplified in ponzi schemes.
Financially this only makes sense if the greater growth unlocks revenue sufficient to pay back earlier investors without a leveraged need for further investment at the same rate/scale. Otherwise the earlier investors might be paid back for their investment, but the later investors certainly won't. There is no way to predict that without first taking on the extra debt burden. Uggghh.
In that vein this is very much like the dot com crash. The dot com crash occurred for two reasons: over speculation and the investment in question was purely financial without any regard for the end product/service.
"These companies' newly public shares are far less likely to melt down as occurred with the class of 2000. For one, companies in the class of 2019 are far older, bigger in size and more sturdy as far as finances and management skills. The median age of today's tech IPOs is 12 years, which is two to three times the age of tech IPOs in 1999 and 2000, at four to five years, according to IPO expert Jay Ritter. Meanwhile, the median sales of the latest class of IPOs is nearly $174 million, more than 14 times bigger than the median $12 million in sales for the years 1999 and 2000."
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.
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.
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.
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.
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.
"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."
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".
I'd like to think that the US government changed the what it's measured because of changes to how the economy works (this is especially important for GDP calculations) and improved understanding of inflation. Doesn't mean that's the case, but I don't buy that because a metric is what we used in the past it's inherently better.
The changes increased government revenue by pushing people into higher tax brackets and decreased government spending by reducing COLA adjustments on social security and government pensions. It's politically a lot easier to obfuscate inflation than explicitly raise taxes and/or cut spending.
> there isn't the irrational exuberance that the dot com, housing, or bitcoin bubbles had.
I would counter that by saying that throwing money at companies that literally say they may never be profitable (Lyft, Uber), and valuing them at insanely high amounts is pretty irrational.
Depends on how likely that is. Uber and Lyft choose not to be profitable. Unless demand is so elastic that cutting R&D and raising fares to cover costs never breaks even (the pets.com scenario), there are some big levers for making those companies profitable.
Granted, they could still be profitable and overvalued.
CPI does not contain investment vehicles (stocks, equity, bonds).
The problems we are seeing are very much socially driven (emptying of middle income jobs -> lower pressure in low income jobs -> increasing poverty -> no money for education and healthcare spending -> low income stressed disabled people turn to high-risk high-yield activities drugs & crime). Coupled with the current populist politics, it's no wonder the "economic outlook" is a bit gloomy.
> Not really; there isn't the irrational exuberance that the dot com, housing, or bitcoin bubbles had
> There's definitely been an increase in government spending.
Perhaps the government spending is the irrational exuberance this time.
Who says there has to be a meltdown? We could just have stagnation for a long time. The policies may allow for poor allocations of resources to persist, leading to a stagnation in total productivity and in the median standard of living. See, e.g., USSR 1964-1987, or Japan recently.
> 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.
The US gov has had large deficit spending equivalent to 3-4% of GDP per year for the last 20 years, and yet GDP per capita has only increased 1% per year. That's pretty darn bad. That's like driving your car petal to the meddle and only managing 21mph.
It might not be so bad if it was just the US. But, most of all the major countries in the world all have a similar problem with deficits: France, England, Japan, and even China. All of their debts (public + private) are about 200% of GDP and over. But, what's most striking is the difference between 1980 and today. That massive increase shows that the level of spending we're accustomed to is not sustainable.
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.
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.
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.
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?)
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.
"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?
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.
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.
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.
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.
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.
Agreed. The Economist has a bias towards free markets and free press but they are clear on those points. They do a lot of things to stay as unbiased as possible, like avoiding attaching a single name to a byline for a story.
Even Karl Marx read The Economist, for what it’s worth.
> They do a lot of things to stay as unbiased as possible, like avoiding attaching a single name to a byline for a story.
I don't actually understand this. I personally find that following specific authors whose journalism I find of high quality is a lot more efficient use of my time than following publications. Why does The Economist make this needlessly difficult, and what's the benefit of doing so?
This seems like an increasingly common modern web pattern: load the article (no one cares about that), and all of the ads and trackers (which is what really matters), then use JavaScript to throw up a popover and do whatever you can to prevent people from using readability mode or killing the popup.
I'm fine with paywalls, but if you want to charge money for what you write, then just do it. Don't waste my bandwidth for something I'm not supposed to see. Put up a login page or something.
'...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...