Lyft and Uber are racing to IPO this year
before they have even come close to registering a profit

With the huge success of tech companies over the past couple of decades, investors are constantly on the look out for the next letter to be added to the FAANG acronym (that’s Facebook, Apple, Amazon, Netflix and Google, if you didn’t know).

Isn’t a unicorn a mythical animal?

It is, but it’s also the name given to a privately-owned start-up business valued at $1 billion or more.

In 2013, when Aileen Lee originally coined the term “unicorn”, there were only 39 companies classified as unicorns. Today, it is estimated that there are almost 300. Tech unicorns are, contrary to their name, no longer rare – it’s a herd, according to Tony Greenham of the Royal Society of Arts.

Indeed, tech companies are being valued higher than any other type of company before; such is the demand for the latest tech start up.

The rise of the tech unicorn has been unprecedented. The likes of Lyft, Slack, and WeWork, as well as Uber and Airbnb, are prime examples of tech’s strength with all expected to go public in 2019. Slack, by way of an example, reached the prized unicorn status in record time, reaching the $1billion valuation in only eight months.

In this respect, it is interesting to note that Google was never valued at $1billion as a private company, nor was Amazon. The likes of Slack, however, has reached that milestone well before its IPO, which may or may not arrive this year.

The question is, will the rapid rise in tech unicorns continue or are we really witnessing a bubble?

Rapid technology advances have driven the so-called boom, as are companies that are upsetting traditional markets. Uber, for example, has changed the landscape for ride-hailing apps – it is the word’s largest taxi company yet owns no vehicles. Airbnb is the world’s largest accommodation provider, but owns no real estate. Investors have been quick to target these innovative companies.

However, just as companies can be ‘unicorns’, Aileen Lee and her colleagues have also adapted the term to describe a growing number of billion-dollar valued companies that have stalled during their fast-track to IPO. The term used? ‘Dead unicorns’.

So where do Uber and Airbnb sit currently?

It is fair to say that investors are interested in finding the next unicorn companies.

Uber commands a 70 per cent share of the ride-hailing market, with Lyft accounting for just under 30 per cent. Uber filed for IPO privately in December, one day apart from Lyft, with the two companies now racing to get to market first.

Uber’s floatation in the next few months could be one of the biggest of all time, valued at around $120 billion – twice its valuation of just a few months ago – putting its value in the same bracket as McDonalds and IBM.

Airbnb, another of the tech herd hoping to IPO in 2019, is performing remarkably well. Since its founding nine years ago, Airbnb has spent less than $300million of the $3billion it has raised from outside investors.

Its technology may be simple, yet it has five million listings in over 190 counties. Revenue grew by $1billion in the latest quarter and it has been cash flow positive for two years.

So, all is well for Uber?

This point has been debated by many. Uber’s growth has largely been down to plentiful and regular injections of private capital.

However, it continues to burn large amounts of cash to subsidise its growth, with the company constantly developing new ventures, such as UberEats, scooters, and autonomous driving to maintain growth and to keep up with the sector.

The key figures from a report by the analysts at Lipper Alpha Insight show Uber had $13 billion in gross bookings in the 3rd quarter of 2018, but made a loss of $1.1 billion, after losing a total of $4.5 billion in 2017. Uber is investing heavily now and banking on increased profits – eventually. Silicon Angle commented that Uber will “test how much tolerance investors have for unprofitable companies”.

NYMagazine’s article titled ‘Will Uber Survive the Next Decade?’ digs into the apparent deficiencies of Uber’s business model. It warns that the IPO is little more than a ploy for the company’s venture capital investors to make a tidy return before it’s clear whether the company is genuinely financial viable. So, it warns, Uber’s ‘hype outweighs its profits’.

So what is the problem?

In NYMag’s opinion, Uber has been buying customer satisfaction with subsidies and a strong PR campaign, drawing investors’ attention away from its losses. It maybe that these initial losses are just part of the growth of a tech start up, even the FAANG companies suffered them. Whilst this is true, Facebook and Amazon were cash flow positive by their fifth year but after nine years Uber is still not making a profit.

As a Skift article states “Uber has lived for years on vision and adrenaline“. It suggests that the Uber model was predicated on burning cash and hoping competitors would simply give up. However, Uber has seen the opposite of this, especially in China and Russia.

“If Uber goes ahead with the cash-burning strategy, it will fail in more places, because it’s unsustainable,” it adds. Furthermore, the rivals it has sold out to in some parts of the world will almost certainly become competitors at some point in the future in places that Uber regards as its home turf.

Last year Uber’s new CEO Dara Khosrwshahi stated that the company could be profitable if it stopped operating in new markets and ended its new research divisions. He added that choosing to become profitable would sacrifice growth and innovation. However, this isn’t the full story.

The Uber model is difficult to maintain because of overheads, which are much higher compared to your usual taxi company. Uber has prime office space with highly paid staff, recruitment centres, PR, advertising, research and development, and litigation costs.

Uber also heavily subsidises costs (at around 74 per cent) and more Uber drivers on the road means drivers get fewer fares. Couple this with the increased spending and ongoing heavy losses and investors may not as forthcoming as Uber hopes when the IPO finally takes place.

So why are investors still interested in Uber?

Because transport is big business.

As one BBC article stated ‘gone are the days of wanting a car immediately and passing your test‘. Tech and public transport is much further advanced in cities now and with links directly to your smartphone, young people are just not driving in cities. Uber has responded to this by investing in electric bike rental and electric scooters to further grow their offering in the market.

The IPO and the future of unicorns

Whether profitable or not, the new tech unicorns, such as Slack, Airbnb, Uber and Lyft, are likely to IPO at some point in the near future and investors still seem keen to be involved.

The challenge for these tech unicorns is find a suitable business model to sustain their growth, while reacting to future developments in technology, so they too can join the illustrious FAANG group of companies.

On the other hand, as companies have done previously, investors may be wary that even the biggest companies, with the largest valuations, have the potential to very quickly become be dead unicorns.

~source