The Unicorns Have Lost a Nought !


Unicorns. My niece loves them. This summer I took her to a zoo, and in the inevitable gift shop on the way out I offered her any cuddly toy of the animals she had seen as a momento. A lemur ? A giraffe ? A tiger ? Nope, she went straight for a stuffed pink unicorn.

Such is life.

There were over three hundred ‘startups’ I’m aware of that were valued by investors at $1bn or more at the beginning of 2019.

They were termed ‘unicorns’ and largely reflected a VC business model that was to back a dominant disruptor with enough money to turn it into a monopoly.

Initially, every customer ride, stay, use and purchase would be subsidised by investors, but when they had achieved market domination they could then push up prices and makes their investment back, as they had with the likes of Amazon, Google, etc... during the first wave of the Internet.

This ‘business model’ had merit, but as more and more investors noticed this and backed different companies, the competition ate itself.

Also, some of the companies, sectors and business models being backed were problematic.

The model depends on developing tech that cannot be replicated and buying customers ata rate that builds an ecosystem that cannot be challenged.

However, the likes of Airbnb, Uber, Peleton and WeWork’s models all had flaws.

Airbnb has ready made competitors such as Booking.com, Uber had huge regulatory issues, Peleton was a niche product easy to replicate and WeWork was simply Regus with a reefer.

The VC billions were, consequently, not enough to buy these markets and, from Softbank down, there are serious investors now carrying serious losses.

In the media market everything is replicable and more sophisticated models such as the value of subscriptions against the cost of programme and viewer acquisition should prevail

Of course, there are exceptions. True unicorns such as Tesla. But Tesla has $13bn in debt. Which I reckon takes the profits from around 250,000 cars a year to service. Tesla currently sells under 400,000 cars a year. This is very manageable, and with interest rates and bonds at near zero, you could argue that this is a good investment.

Netflix, on the other hand, has a precarious model, having lost $13bn over the past eight years and now has massive competition and price pressures both on the cost and sales side of its business. In other words, investors have been subsidising us to watch great programming.

In reality (if there is such a thing when you're talking about unicorns, especially pink ones), the unicorns that grew from foals are few and far between and will now be non-existent.

In the wake of the WeWork debacle, valuations are likely to be recalibrated, especially in the US where they reached silly peaks.

As my niece might say: "Oh no! A nought has just disappeared from Unicronland!"