Before anything else, let's acknowledge that sometimes it takes a lot of money and patience for a business to get established. FedEx is a prime example: tons of capital needed for facilities, planes, trucks, marketing, planes, logistics systems, more marketing, and ... planes. Founded in 1971, FedEx officially started carrying packages in April 1973. But it took until a few more years until the company was actually running in the black.
Back then it seemed risky -- and was. But the company pulled through. The high tech industry is betting that its largest wagers on unicorns will ultimately pay off. Just as it did during the dot com era.
Oops. Yes, that's a time period the industry would rather forget. But turning your back on lessons hard-won can be foolish. Some of today's big firms, such as Google and Amazon, were products of the period. Many more businesses, however, didn't make it. Today, there seems to be danger of a massive unicorn meltdown.
The reason that some tech venture capitalists have become increasingly concerned is the rate at which young companies are spending money. They may put money into unreasonably expensive digs, or even advertising to ramp up operations and grow, which has become a goal unto itself. Get big, push others out of the way, and you can eventually find a way to make money, so the theory has gone.
Because these companies are privately held, there is no way to know for sure what their current economic status is. However, there have been hints that have hit the press from time to time. CB Insights pulled together a collection from the likes of Gawker, Bloomberg, TechCrunch. Here are some of the highlights:
- BuzzFeed made a $2.8 million net profit on $46.2 million revenue in the first half of 2014. Not tremendous, but decent enough.
- In the first half of 2015, Lyft lost $127 million on revenue of $46.7 million. In the third quarter of this year, it lost $124 million on $26.3 million revenue. Not decent at all.
- Pinterest will see estimated revenue of $169 million this year and $2.8 billion in 2018. No insight into profitability.
- From January through November 2014, Snapchat had $3.1 million in revenue and net losses of $128.5 million.
- In 2014 Q1, Uber lost $52.3 million on $45.6 million in revenue. In the second quarter, revenue went up to $57 million and losses hit $108.8 million. And that's without the possibility of a court saying that, at least in the U.S., all those drivers are actually employees.
Sometimes it takes a long time to start making money. The question for the unicorns is whether such tech companies have an inherently different dynamic that may not lend itself to revenue down the road eventually bailing out the company's concept. What if, like Twitter, user growth doesn't continue its rapid expansion? The stock price has dropped to reprice the company's expectations -- and could drop even more. When it comes to current or former unicorns, investors pay a stiff premium for a seat on the rocket. If the engine fizzles, there are a lot of unhappy people.
And there's no guarantee that more years of operation will turn anything inherent around. Groupon was ballyhooed until it filed to go public in 2011 and everyone suddenly could see how much money it was losing and the vast sums spent on marketing to keep everything growing. The only money machine that existed was one that ate currency.
Out of curiosity, I just looked at Groupon's 2015 Q3 results. It's the first time I can remember looking at an earnings release and not seeing in the body a semblance of a balance sheet or statement of operations, although they're available separately. (According to an email from the company, the HTML version and the one delivered by news wire do contain the tables, but the PDF version does not incorporate the tables, which are available as separate PDF and spreadsheet files.)
But that was only mildly surprising in comparison to the downright ugly results in the 10-Q and separately available tables. Revenue after direct costs to get it was $328.9 million with a net loss of $24.6 million. That compared to $355.3 million in net revenue and net loss was $19 million for the same period in 2014. You have to wonder whether the bet that a company can grow its way out of a barrel of red ink is a wise one.
That's not to say the same thing will happen to some of these high-profit unicorns. It's just not to say that the same thing couldn't happen.