How Are Unicorn Startups Dealing with the Pandemic?

The pandemic has been pretty harsh on the physical world.

Turns out, it has little sympathy for the mythical world either.

Even the unicorns are taking it on the hoof. 

See, unicorn companies are privately-held start-ups worth at least $1 billion, and they typically prioritize rapid growth over profits.

The profits, they assure us, will come later. Just don’t ask when.

Many of these companies operate as platform businesses; that is to say, they faciliate value exchanges between supply and demand. 

You see them everywhere: think WeWork, Airbnb, or Pinduoduo and you’re on the right track to spot a unicorn.

During this article, we will return to this definition to probe a few assumptions:

• As start-ups, are these giant companies still experimenting to find a working business model?
• Are platform businesses more or less vulnerable right now?
• Are the unicorns really worth as much as they say?
• How will the pandemic affect their future plans?

The Unicorn World

The unicorn name was coined to highlight the supposed rarity of such a being, but there are now over 400 of the things, up from 82 in 2015. 

There is no doubt that they have fundamentally altered how we view the start-up world. The unicorn label is something to aspire to, even if it is a jarring image of aspirational purity in an otherwise murky world.

Unicorn status is more an exercise in branding than an actual, verifiable assessment of the company’s performance. Acquiring this status attracts investors, talent, and customers; perhaps then, the company will become as big as it always said it was. 

The pandemic has brought a few of these companies back down to earth and their nebulous promises to break even “in future” now require urgent specificity.

This is far from a unicorn-only phenomenon. 

When the future looks a little bleaker, we all start looking at the present in more detail. 

The Williams Formula 1 team is up for sale now, for example, as companies collectively tighten their belt worldwide. Huge losses are no longer something to ignore, since any reversal of fortunes is unlikely to arrive soon.

It is the sheer scale of the losses in the start-up world that continues to bemuse, nonetheless. They clearly know how to bring money in, but they spend their investors’ money at an even greater clip.

A Formula 1 team is not a money-making enterprise and never will be.

Selling office space, on the other hand, is rarely something one does for the sheer, adrenal thrill.

The charts above reflect the accounts of only the unicorns that have either listed recently or plan to do so soon.

These are the good ones.

“84% of companies pursuing IPOs have no profits. That is remarkably high. Ten years ago, the proportion was just 33%.”

- The Economist

Vision Fund

SoftBank’s Vision Fund has been at the epicentre of the unicorn world for some time.

SoftBank CEO Masayoshi Son has had some notable successes in this arena. The $20 million he invested in Alibaba pre-IPO is now worth about $500 billion.

Everyone is out to repeat the trick. The idea is that these companies will define the future, if they act now to seize the initiative. There is little point in playing it safe to post minimal profits now, if they can keep investing and deliver mammoth profits in future. 

SoftBank has set aside $100 billion to invest in the next Alibaba, and is aware that many of its bets will not pay off. 

Of the 88 investments SoftBank has made in large start-ups, 47 have been marked down in this fiscal year. 

Masayoshi Son showed investors an excruciating presentation to relay how some of its unicorns will grow wings and fly out of the coronavirus crisis.

No, really. That’s the level of metaphor these bros can handle.

Son also compared himself to Jesus when asked to explain some of his decisions, so all is well chez SoftBank.

It would have made more headlines, were we not already chock-full of deluded leaders these days.

“Jesus was also misunderstood and criticized.”

- Masayoshi Son, SoftBank CEO

SoftBank’s investment in WeWork has been beset by controversy and intrigue, exposing the start-up world to increased scrutiny long before the pandemic hit.

WeWork’s botched attempt to float is a cautionary tale and the pandemic has set back Airbnb’s plans to go public. 

Still, the likes of Uber have managed to go public and they keep burning through the cash. 

No doubt, the pandemic has had strange effects on supply and demand that economists will pore over for years to come. The recalibration of these elemental forces affects every business, from noisy start-ups to the stuffy establishment. 

Nissan, for example, has restarted many of its production lines and can now build a lot more cars than people want to buy. 

In response, they will cut back on new models and will focus on their core range. 

At the entirely opposite end of the spectrum, dog breeders are struggling to keep up with demand. 

In lockdown, we have all realized just how great pooches are. Since we’ll all be working from home for a while longer, it’s the ideal time to snap one up. 

In the process, we’ve driven the price of Cavapoos to more than ￡3,000 per pup. You could buy two laptops for that. 

Apparently, criminal gangs are moving in to shore up supply.

Are platform businesses in a better position to deal with the pandemic?

The unicorn companies typically operate on a different business model, however.

They create the platform upon which supply and demand meet.

As a result, they do not have the same outgoing costs as a traditional product-based company. 

Airbnb doesn’t own the properties; it is protected if demand falls through the floor, so to speak.

These platform businesses boast of their ability to “scale up or down” at a moment’s notice.

They can also change their services much more readily than incumbent businesses.

Airbnb can move into “experiences” or virtual tours, whereas Marriott is stuck with its rooms. Do Marriott even pivot?

Spotify’s CEO Daniel Ek noted, pre-IPO, that “As a platform, we can be anything.”

This points to the core challenge in defining how well platform businesses have responded. There are hundreds of them and they operate in every industry.

Some companies have been the beneficiaries of a surge in demand for their services. ByteDance (TikTok’s parent company) posted a $3 billion profit for the last quarter and we are all well versed in Zoom’s ubiquity. 

Other industries have suffered the opposite fate. 

In the chart below, taken from layoffs.fyi, we can see the number of layoffs by start-ups across different industries during the pandemic.

This is largely in line with what the wider economy has reported. There has been a huge drop-off in demand in these areas and it seems to translate directly into startup layoffs. 

In spite of appearing to be a transportation company, Uber certainly views its business as a platform and this has been its defence against the case that its drivers should be classed as employees.

Uber’s lawyers maintain that it is just an app and, if people should happen to book a lift on said app, that’s up to them. This feigned ignorance hasn’t washed with the lawmakers, of course. 

Uber is close to buying out food delivery service GrubHub, but the recent increase in Uber Eats orders has not counteracted the 80% decrease in Uber car rides. 

Pre-pandemic, Uber managed to lose $25 billion. I lost a tenner once and I was absolutely heartbroken. 

Uber has invested $170 million in e-bike company Lime, too. Just this week, Uber threw away thousand of the bikes it didn’t want any more. That’s one way to save the planet. 

Platform businesses should be able to adapt quickly, but they also need to pinpoint where the demand is today. That is much easier said than done, since the landscape changes so often.

Indonesia-based Gojek and Singapore-based Grab (both ride-hailing apps) have suffered a similar decline of late, compounding their existing losses. 

The FT reports, “Zomato, one of India’s biggest food delivery companies, in May said it would lay off workers and forecast that the number of restaurants in India would shrink by 25 to 40 per cent over the next six to 12 months.”

There have been more layoffs in the Bay Area than in the rest of the world, according to publically available company data.

The US has a rather different approach to layoffs than most other countries, but has also been affected very severely by the pandemic. Moreover, it’s where most of the unicorns are to begin with. 

Next, let’s look at specific companies, sorted in descending order by the number of pandemic layoffs so far. It’s grim, I know, but here we go:

Notably, just under half of these companies have already gone public. 

Uber is listed twice due to the structure of the company. There are two different subsidiaries that report figures, hence the duplication here. 

Just imagine if Uber considered their drivers to be employees too, eh?

It has been suggested that the unicorns should now instead be camels, with their hump full of cash reserves to see them through barren spells. 

I’m not even embellishing the facts; it’s what literal adults are saying. 

Still, it’s not crazy to suggest that startups might want to establish and then use their own profits to fund strategic growth initiatives. 

I spoke with Professor David Rogers from Columbia Business School this week about how start-ups are responding to the crisis and he noted that start-ups are really experimenting to find a working business model.

This applies to late-stage start-ups like Airbnb, too.

As such, the outlandish valuations they receive are counter-productive and hinder progress towards finding a model that is sustainable. The pressure is on to start justifying the weighty price tag, before they have even identified their long-term strategy. 

In 2017, two business school professors analyzed 116 “unicorn companies” and found that over 50% were really worth under $1 billion. Some were overvalued by “over 100%”.

The Economist added, 

“Justifying the valuation means not just staggering increases in sales, but also a very large improvement in margins. In aggregate these would have to increase by 34 percentage points. That would be truly unprecedented. The average for Amazon, Facebook and Google was only 19 percentage points.”

So, the odds were already stacked against the current crop of unicorns. They not only need to keep selling, but they also need to change how they do it, to stand even a small chance of reaching their valuation. 

Since the beginning of the pandemic, JPMorgan estimates that unicorn valurations have fallen by about 40% on average. This brings them closer to their true value, anyway. 

As SpaceX (highlighted in the chart as overvalued by 65%) sends its first rocket into orbit, it serves as a fitting metaphor for what these companies all aim to achieve. 

The crisis has added scrutiny to the lopsided balance sheets of Uber and company. 

The fissures in their structure have now become caverns. 

Every business is braced for impact and it is telling that the unicorns have shifted resources away from their more adventurous plans like self-driving cars, towards services with immediate revenue potential.

This will lead to a short-term realignment of priorities and those that survive will hopefully do so in a stronger position. 

Perhaps then, we can ditch the jejune unicorn metaphors and focus a little more on the real world.