SINGAPORE (Apr 22): Uber Technologies’ coming IPO is a moment to reflect on the oodles of investment cash that have resulted in a herd of “unicorns”, the awful but convenient shorthand for tech companies that reach valuations of at least US$1 billion while they are private.
There are now more than 340 of them, according to CB Insights, compared with the 18 unicorns identified in 2013 by investor Aileen Lee when she coined the term. (Her list had 39 companies, but many of them had already gone public or been acquired. Uber was on Lee’s list even back then.)
This unicorn proliferation is a result of changes in technology and investing, including a decade of low US interest rates that pushed investors to hunt for better returns in riskier, high-growth assets including tech start-ups. Last year was the first time since 2000 that US venture investments in tech start-ups topped US$100 billion ($135 billion), according to figures from the National Venture Capital Association and PitchBook. It was the capstone — so far — to what has been several years of eyebrow-raising amounts of capital going into start-ups worldwide.
A defining characteristic of the unicorn years is the importance of investment cash. Winners and losers are determined in part by which companies can raise the most money, not necessarily the ones that create the best product or service.
Uber is the perfect encapsulation of this trend. Money was a big way Uber differentiated itself from Lyft. Its big bank account dictated Uber’s strategy of going global and splurging into adjacent categories such as restaurant food delivery and freight handling, while Lyft stuck mostly to on-demand rides in North America. There would be no Uber, or at least not one of this size and breadth, at any other time in history.
That is not to say that Uber’s product or strategy is inferior to Lyft’s, but the company was able to dream bigger because it had more access to capital. At some point, availability of cash becomes self-fulfilling. The start-ups that look like winners get more capital, which ensures they win.
Whether that is good or bad is up for debate. The elite start-ups of the 2010s, including Uber, Didi Chuxing and SpaceX, are bigger, more disruptive and potentially more lasting companies because they had limitless access to cash to grow.
But the venture capitalist and Lyft investor Keith Rabois recently told my colleague Emily Chang that a large amount of investment money “usually creates more problems than it solves” for start-ups. This is not a new idea. There is a Silicon Valley axiom that the best young companies tend to grow up during recessions, which forces them to spend wisely and make sure they have honed their products.
Regardless, now that some of the biggest unicorns such as Snap, Lyft and Uber are starting to go public, it may be the beginning of the end of the period in which start-ups differentiated themselves on fundraising ability.
Not the end-end, of course. Electric scooters continue to be a capital-raising race. So does restaurant food delivery, in which Uber is playing the role of market share-grabbing, cash-burning entrant.
One thing that will not change as the elite unicorns go public: They are still wildly unprofitable and will be for some time. But from now on, fewer unicorns will be able to rely on the gushers of investor cash on which they have built their lush magical forests.
