Can Unicorns Overcome Their Big Losses? It Depends
Cumulative income vs. Annual Revenues of an indicator for Startups Survival Chances
The best possibilities for survival are the unicorn startups with ratios of cumulative income to annual revenues that are less than negative one. The figure shows that only 40% of the startups have this high of ratio.
Unicorns have been at the media forefront for almost 10 years now. Valued at $1 billion or more before they go public, there are now 1,207 of them globally, valued privately at $3.86 trillion. Then there are the more than 200 that are currently publicly traded, including 120 that went public in 2021, and a significant number that have been acquired or been liquidated.
On the surface and below the surface of Startups
On the surface, the biggest challenge for Unicorns right now is their plunging share prices and the rising interest rates that are purportedly driving them down, thus popping the Unicorn bubble. I cannot find a single publicly traded Unicorn whose share price fell less than 50% from their peaks. Most of their share prices have fallen more than 80%. Exceptions include Moderna, Airbnb, and Uber, whose market capitalizations put them in the top 300 companies worldwide, but still their shares are down more than 50% from their peaks.
But below the surface are the huge losses that Unicorns have, losses that are unprecedented in America’s history of startups. Although most of today’s most successful startups founded between 1975 and 2003 (e.g., Microsoft, Oracle, Home Depot) became profitable in less than 10 years and often in less than 5 years and became members of the top 100 market capitalized firms within 15 years, profitable Unicorns are very rare today, almost as rare as the mythical Unicorns themselves.
Just looking at American Unicorns, only 12 of 140 publicly traded ones had a profit for the first three quarters of 2022 or less than 10% of them. And this was down from 19 in 2021, thus suggesting the trend is going in the wrong direction. Some observers became optimistic during the pandemic because the number of profitable American ex-Unicorns had risen from 12 in 2019 to 16 in 2020 and 19 in 2021, before falling in 2022. It is hard to believe that there is trend toward profitability among American or any publicly traded Unicorns.
Perhaps a better measure is the ratio of cumulative losses (i.e., negative cumulative income) to annual revenues. If the ratio is small, it means that the cumulative losses will probably not be difficult to overcome, but if they are big, then they will be difficult. Amazon, again a useful example; it had cumulative losses about equal to annual revenues in its tenth year.
Sixteen startups have at least $3 billion in cumulative losses, which is the amount that Amazon had before it began making profits in its 10th year of existence. The largest cumulative losses are for Uber at $33 billion, WeWork at $16 billion, Rivian at $14.4 billion, Teledoc Health at $11 billion, and Lyft at $9.3 billion. Other members of this exclusive club are Robinhood, Coinbase, Palantir, Peloton, Wayfair, Twilio, Nutanix, DoorDash, Gingko Bioworks, Bloom Energy, and Faraday Future.
Different ration for measuring startup success
Perhaps a better measure is the ratio of cumulative losses to annual revenues. If the ratio is small, it means that the cumulative losses will probably not be difficult to overcome, but if they are big, then they will be difficult. Amazon, again a useful example; it had cumulative losses about equal to annual revenues in its tenth year.
The below figure plots the ratio of cumulative income to 2021 revenues in descending order. The ratios on the left are the most positive while the ones on the right are the most negative. Beginning with Moderna, six publicly traded Unicorn startups (Zoom, Etsy, Coinbase, Bumble) have positive cumulative income meaning the sums of their annual income since founding is greater than zero.
On the other side, there are 29 startups with ratios less than negative five, including 10 with a ratio of negative infinity. Negative infinity means they didn’t have revenues in 2021, a not uncommon fact among startups that went public using special purpose acquisition companies (SPACs). There are three biotech (Better Therapeutics, Iovance Biotherapeutics, Vicarious Surgical), two electric vertical and takeoff (Joby Aviation, Archer Aviation), and five electric vehicle or battery (Lordstown Motors, Nikola, Rivian, Canoo, Faraday Future) startups. Eight of the 10 startups with no revenues in 2021 still had no revenues in the first three quarters of 2022.
Conclusion on survivability
Assigning probabilities of success to these startups is obviously very difficult. All startups have zero revenues at some point in their lives so even the ones with low revenues in the figure may end up succeeding, just as Amazon did.
However, it would be a mistake to say that the exception proves the rule. Amazon was commercializing a great technology, e-commerce, one that has revolutionized the world of retailing. We don’t know yet if eVTOLs is a great technology and the same holds true with Tesla copycats and the bio-tech startups. As for other startups, ride sharing, food delivery, and even the current crop of business software cannot compare to e-commerce.
There is also the fact that the fraction of profitable startups fell in 2022. This suggests that there will be few changes towards profitability in the coming years. The startups with losses, particularly with big losses, will likely continue to have big losses.
Thus, most of the startups on the right side of the figure with big negative ratios are unlikely to survive. One exception is Airbnb who had big losses during the pandemic but who has become profitable in 2022.
Outside of Airbnb, however, it is difficult to be optimistic. The other startups with a ratio less than negative five likely have low chances of survival. Even those between negative two and negative five are questionable.
The best possibilities for survival are the startups with ratios of cumulative income to annual revenues that are less than negative one. The figure shows that only 40% of the startups have this high of ratio. These startups may succeed, but any increase in interest rates will reduce their chances of survival.
Even the startups with ratios of less than negative 0.5 are questionable because there is no positive trend towards profitability. Any increase in interest rates will raise the cost of servicing their debt and thus make it difficult for them to succeed. In conclusion, the only startups with very high chance of success are the top 30 in the figure, ones with ratios greater than negative 0.5.