Bubble maketh Bubble: In the world of unicorns, be a horse


Crunchbase data promises $1.6 trillion valuation for the 452 unicorns produced just in the last 5 years. Russia, South Korea and Canada’s GDP last year were also almost identical to this valuation. You don’t need to be told how many of these mythical creatures are actually profitable. And if we don’t go back to valuing the ability of a corporation to make money over raising it, we might invoke serious recession with this one big shared bubble where everyone comes out the other side as Apple.


In mine and am sure in millions of households across the world the altitude of success was taught to be your actual present liquidity. If there is science in making money, there is an undeniable art in saving it. And only so much common sense justifies to burden the future with the promise of sudden miraculous increase in profits. As Warren Buffet once said, “The biggest mistake is not learning the habit of saving properly.”


1. Novelty of Fundraising < Old School Business Operations:


It is not surprising to me that two of the most famous corporations of this decade were doing business old school before whose valuation is bigger became a regular drinking game in the startup world. The content icon Netflix and skateboarding turned fashion brand Supreme. They understand the simple Biblical fact: if the value in a bank is a matured millionaire, the value in books is a spoilt, penniless teenager.


Let’s try to understand this valuation bubble with a simple example:


Brand A enters the lifestyle category and raises $1Bn

Brand B enters the hospitality category and raises $400M

Revenue of Brand A for the first three years is $220M and cost of $370M - Net Income of $-150M

Revenue of Brand B for the first three years is $70M and cost worth $165M - Net Income of $-95M


Fourth year Brand B while competing with the other 4 players in discount wars increases losses by double. And after series C funding all investments start to drizzle down affecting daily operations. Brand A now with $500M losses itself but with strong $1.4Bn funding decides to take over Brand B in an all cash $100M deal. 70% of employees are fired and a discounted scale of operations are restarted under Brand A.


Where do we stand?

From the market, Brand B disappears and with it disappears more than $300M worth of investment just like that. Poof. Not to mention Brand A itself is touching $600M worth of losses post the takeover with no profit margin in the foreseeable future. What took Thomas Cook 178 years and a $2Bn debt for compulsory bankruptcy can take less than a decade for these multi billion dollar startups swaying in reverie around us.


2. The Recurring Anomaly:


Every trend before spiraling will hint some red flags. Remember Tencent Holdings (WeChat), Meituan-Dianping? It is often called one of the most innovative companies in the world. They are fighting for blood with unbelievable subsidies against able warriors Alibaba’s Ele.me and Fliggy to rule the merciless on-demand services. They lost $17.2 B (115.5 B yuan) last year with less than $10B revenue. Now multiply this case by a dozen in all modern economies like the US, UK, India and China. The collective losses that would have happened just in the last five years would be enough to fund visits to each planet in our galaxy.


Why this is so concerning comes also from the fact that out of the hundreds of these unicorn cases around the world only a dozen would eventually survive in the next two decades. Hostile takeovers will begin very soon when each category will only have a place for a maximum of two leaders and absolute monopoly if not strictly regulated after the Facebook lesson. What Airbus and Boeing are to airplanes - Uber is waiting for its worthy opponent in DiDi Chuxing, Ola, Grab, EasyTaxi and Lyft. So the remaining players from the bunch and a hundred other car hailing services across the world would cease to exist anywhere in the next 8-10 years as the two giants encroach their strongholds. If Grab isn’t able to go public by 2023 it would have to contractually pay Uber $2B cash for the 23% shares it sold.


Flipkart - now acquired by Walmart, in 2016 took over its competition Jabong (shut down last month) once ‘valued’ at $1.2Bn for mere $70M (Déjà vu of Shopclues with almost the same alarming devaluation happening this past month). WeWork, a volatile multi billion dollar dream is struggling for IPO nod for survival while buying out Asian competitors like NakedHub for $400M. While its Zeus like investing father SoftBank earlier this week reported the biggest quarterly loss in 14 years of $6.5Bn Franklin famously said, money makes money, today he might have coined bubble maketh bubble.


3. The Great Amazon Complex:


Billion dollar StartUps should vary from The Amazon Complex and its otherworldly success story, cross categories. Amazon penetrated the Internet market when Mark Zuckerburg was 10 years old and Google was still to be conceived by two PhD students. So the benchmarking for your growth story is based on last generation’s conditions. It’s like planning to enter print media in 2020; the bridge from first mover advantage to saturation has been crossed. Now everything is cut throat with assassins like investment banks and bankruptcy or takeover looming right after series C funding.


After launching in ‘94 Amazon took only two investments before going for IPO - In ‘95, $1M from 22 individuals and $8M from Kleiner Perkins Caufield & Byers in ‘96. Summer of ‘97 they went public. (By 1999, the value of Kleiner Perkins Caufield & Byers investment in Amazon created returns of over 55,000%.)


Indian Zomato was founded 12 years ago, WeWork from US has been raising funds since 10 years ago and Singapore’s Grab has been trying to dominate from 7 years yet all three are neck deep in losses and eyeing IPO to survive as much as prosper. Let’s not forget IPO itself might not be the savior you think it to be - Market shares of Uber and Lyft have fallen 26% & 36% respectively since going public. Even the otherwise rainbow story of Tesla has its own flaws with a cash crunch and close to negative $1Bn net income last year when General Motors were comfortably sitting on $8Bn profits. GM with this money can create the world's greatest electric car in a year but Tesla will find it difficult to manifest liquidity that easily.


Another little brand Microsoft has similar teachings. They waited 11 years to go public and in Bill Gates’ own words, “We didn’t have to build any factories, we were cash positive and we didn’t have a year where we lost money.” And the only external investment pre IPO came from Technology Venture Investors of a humble $1M. Simply put, they went from being comfortably profitable to massively profitable unlike the present scenario of most negative net income bunch, desperately praying to be the last man standing on a very thin layer of ice. Profitability is directly proportional to both sustainability and dare I say, core confidence of a corporate.


World economy will suffer if we don’t go back to evaluate the success of a company in accordance to the actual profit it earns and recycles back into the system, rather than the mere perception of its fickle valuation. Can you imagine the state of global markets even if one third of these 452 billion dollar unicorns like WeWork, Grab and Meituan plunge into bankruptcy in the near future? Dear Tony Starks of the world, in the world of unicorns, be a horse. They are reliable, smart, strong and most importantly real.


Abhik Choudhury, December 2019


© Abhik Choudhury  2020