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Which of the “unicorn” startups are going to become the biggest, and which are most likely to fail? Why? What kind of trajectory are they on right now? How are they likely to be affected by global and market shifts over time?
For the sake of clarity, I’ve split my analysis into three sections:
- Context. Major trends and market-specific shifts.
- Criteria. Defining what success and failure might look like quantitatively.
- Companies. My top picks (for both fliers and flops).
We’re entering a new era, which we might define as “post-Uber” (for reasons we’ll get to in a minute). I see the coming age being defined by five guiding principles:
#1: Profits will re-take the throne.
From the ’08 collapse through the recent round of unicorn markdowns, the “Amazon effect” was in full swing. VCs placed large bets based on user growth relative to assumptions about future market size, with less consideration on classic metrics.
To paraphrase MLK, “the financial arc of the tech universe is long, but it bends towards fundamentals”. The Nasdaq is a good benchmark for long-term realism, and it suggests thatand that
This implies that we can understand the rationality of a company’s valuation by asking one simple question: can it reach $4.7b in revenues at a sustainable market-average margin?
If it can, it’s worth $10bn by those historical averages.
(Granted, not every market or segment is equal. A 12% margin is high for some and low for others. We’ll leave some contextual wiggle-room for discussion in each case that follows.)
#2: Companies with structured advantages will outlast those that don’t.
This might seem so obvious as to be trivial. Yet the last decade has seen a lot of heavy bets placed on players with time-limited advantages (such as first-to-market, which isn’t always a net positive in the long-run).
Because of how well-defined the growth model has become, new entrants are far more savvy than they’ve ever been historically. Uber might represent the last major unicorn to take a market by surprise.
Additionally, lean models have become the “indispensable minimum”, cloud-services are reducing start-up costs, and capital is as easy to get as it ever was.
The net result? Fresh, hungry competitors can grow and leap-frog their peers at a startling pace. Past-era advantages like scale, market-share, and deep pockets will only mean so much in the decade to come.
#3: Growth will be evaluated with more nuance.
As the old saying goes, “growth for growth’s sake is the ideology of the cancer cell.” While this isn’t quite gospel, I feel that it’s increasingly becoming a core investor consideration.
Perhaps there’s no better example than Uber, which reached a valuation of $60bn+ with private money based purely on its overall growth prospects.
But will that growth be accompanied by eventual margins? Will they become the next Amazon (i.e., a company that runs at a continual loss as it builds insurmountable leads in new markets), or will every b-school student in 2020 use them as case-study on how hyper-expansion doesn’t always pay off?
I like investing in companies that can return my money based on profits and dividends. I’m OK with paying a premium for expected growth, but only when that growth is sure, strategic, intelligently paced, and thoughtful in execution.
#4: Regional markets will increasingly favor home-grown solutions.
The success stories of the past era depended on them being able to reliably port their products to other, larger user-bases. Given the relative lack of local competition, that worked well for the Facebooks and PayPals of the world.
But the world, she a-changing.
- China’s most recent see regulatory and financial support (to the presumed detriment of western ones). made it clear that domestic companies are going to
- India just told Facebook, in no uncertain terms, that it has no interest in being treated as a client market.
- Europe is throwing up every possible roadblock in front of Uber.
- Africa and South America are beginning to come of age.
If I’m a VC and the unicorn in my boardroom is asking for a valuation based on 75% foreign user-growth, I’m going to laugh them out.
#5: The gap between the adults and the babies will become a moat.
Remember when everyone placed Twitter in the same conversation as Facebook and Amazon?
As I wrote about themthey were never the same breed and never had any real potential to be:
They’re attempting to put themselves in the same category as Google and Facebook: mother platforms that buy up startups to increase their scope and reach. But they’re a different type of beast, and that dream is probably never coming true.
Users aren’t tied to it as a platform in the same way. It has a reasonably strong position right now, but not strong enough to allow it to be aggressive in pursuing revenues. As such, it makes a lot more sense as an acquisition than as a company. The problem is that, at a market cap of $30bn, it’s a very, very expensive acquisition. Which leaves it in a quite awkward and dangerous middle-place.
Twitter makes sense as an $8-10bn independent. That’s a price equally palatable to potential buyers and present share-holders.
But, at that corrected valuation, Twitter has lost two key advantages that the larger players have: acquisition and recruiting power.
Twitter can’t win a bidding war with Google today, nor can it reliably attract the same level of talent (not to say that their team isn’t generally strong, but only that they aren’t going to poach the next Yann LeCun).
I feel pretty strongly that investors will begin classifying new unicorns into one of two distinct categories: $10bn+ potential, and everyone else. Those in the higher tier will get more favorable access to cheap capital for acquisitions and will be given more leeway on their timelines to profitability.
With the above in mind, I’m going to sort a list of 19 current unicorns into one of two camps:
- The Fliers – An IPO or acquisition by 2020 at no less than $10bn.
- The Flops – An aggregate write-down of 50% of present value by 2020.
These cut-offs are admittedly somewhat arbitrary (a necessity when there are some), but I feel they fit the broader context well. This template can easily be applied to sort the rest of the list, but that would result in a report of unreadable length.
While I’ve written some pretty negativeon their current valuation ($16bn), I don’t think there’s any real likelihood of a correction of greater than 50% or a world in which won’t IPO for at least $10bn.
Using my own metric (i.e., can it reach $4.7b in revenues at a sustainable market-average margin?), I feel like they’ll get there by the skin of their teeth.
(Bear in mind that this only implies that they’re worth at least $10bn, not necessarily that they have definite growth potential past that point. I suspect that their IPO will pop for a fair amount more before a correction comes somewhere around 2018.)
I’ve written elsewhere that they’re my pick forparticularly based on their expected dominance
Put briefly, I expect their unique ability to meld traditional business consulting with PaaS expertise, machine learning, and data semantics and visualization, to give them an unfair advantage that will hold up well over the coming decade.
They’re definitely in a risky category, but I don’t think any investor is likely to make money by betting against Elon Musk.
They also have the added benefit of being synergistic with Tesla and SolarCity — by which I mean that these other businesses will supply Musk with mountains of cash that he can use to prop up SpaceX through any rough spots, on top of being able to leverage their top talent between businesses.
Given that they have a credible chance of being the prime contractor on future manned missions to Mars, their potential market cap is easily in the 12 digits.
No, their current pace won’t continue. Yes, they’ll face increased regulatory pushbacks in some markets. But, no, they’re not facing the same sorts of existential risks as Uber.
They took inin revenues last year, which gives them quite a bit of work ahead. But a total of only 78m nights booked over that same period leaves them a solid window for getting there.
The global hotel industry is worth about . For Airbnb to live up to its current $27bn valuation, it needs to own about 2.8% of that market (or $12.7bn in annual revenues).
I don’t think they’ll get all the way there, but, as with Snapchat, they’re also unlikely to be corrected by as much as 50%. I’d peg them as being worth closer to $15-16bn by 2020.
Theyfrom day one, waiting to monetize until exactly the right time, which they went about in a very sensible way.
Though they do have some competition (Houzz, for example), I don’t see any credible scenario holding them back from a $10bn+ IPO.
Though they started off as a glorified knock-off of Apple, they’re playing a clever strategy with a user-base they understand better than anyone. Their Android-based MIUI software platform connects all new phones with other products that young professionals are already buying for their first homes (TVs, water purifiers, weight scales).
They’re also the perfect example of a company that China is going to support into market dominance.
They took their early lead in payments and built on it, allowing for their growing suite of value-added products to be much slicker and stickier than that of any other competitor except maybe PayPal.
Their most recent offering, Atlas, allows for foreign companies to set up shop in the US with a Delaware-based incorporation for $500. It also gives them immediate access to partner services like AWS. Brilliant.
They’re already expected to, at a valuation somewhere around $20bn.
They only have 3.6m active users (using their peer-to-peer lending services), but that translates to a 10x YOY pop. Like Stripe, they’re also building an impressive suite of complementary services (including wealth management for the growing class of young, new money).
They’ll certainly face competition from other domestic subsidiaries (like Ant Financial), but they’ll still have the blessing of the Chinese powers (including the banks, who generally don’t care about small-scale lending).
Another Chinese company ready to make the jump. They’re focused on a single product (drones), but they’ve made some very creative plays into large niche markets like agriculture,
Their largest unfair advantage, however, is their partnership acquisition might be forthcoming (even if not, I don’t think Apple takes that step without having strong confidence in their future).— who actually carries DJI products in their own stores. I don’t think it’s unreasonable to suspect that an
#10: Zhong An
China’s first online-only insurer (backed by domestic giants Tencent, Alibaba, and Ping An) is already planning an IPO.
Their valuation as of last round was only $8bn, but given that underwrotein their first year, that number already seems conservative.
They’re the most devilish company to value in the world. They have profound regulatory challenges. They have intense competition in their largest markets. They have the worst new logo I’ve ever seen.
Beyond all the hype and doom-and-gloom messages on both sides, I’ll restrict myself to answering just one question: can they get to the $23bn in revenues that their $50bn valuation implies (at a decent margin)? I don’t think so.
Are they the next Amazon, where those numbers don’t matter? Maybe. But I can’t get there. I think their value gets trimmed, settling at around $20-25bn.
(Admittedly, you could tell me their real number is 10 or 100 and I wouldn’t be that surprised. They’re a unique enterprise. We’re all just guessing.)
#2: Didi Kuaidi
The “Chinese Uber” has some unfair advantages in their home market (the support of their government and their integration with the wildly popular WeChat being two of them).
I think they win their market, but fail to live up to the upsides elsewhere. I don’t see how you can peg their values to one another.Though they compete against Uber in terms of daily rides in one (very large) region, they don’t have the same
They didn’t do enough to get into the enterprise market, nor can they defend themselves against the horizontal encroachment of Google, Microsoft, Amazon, etc. Expect an acquisition at some point.
India is a tough market to understand from the outside (and, perhaps, even from the inside). While I suspect that domestic players will always have an advantage in modern India, Flipkart’s brand has been battered by net neutrality violations (a huge hot-button there presently) and by fairly severe technical problems.
They were one of the largest victims of the last few months of markdowns, and I don’t think they’re out of the woods yet.
#5 / #6: Theranos & Zenefits
Putting these guys together because they’re facing the same fundamental problem: is there a possibility of a comeback after disclosures that absolutely damning?
America might be the country of second chances, and both might still have a product worth buying (well, more so in Zenefits’ case), but there’s simply too much competition for me to feel comfortable betting on their recovery.
If I could sit down with a CEO from a first-to-market company, I’d strap them to their chair and repeat the same line to them until I risked violating the Geneva Convention: “Never pay the marketing cost for your entire industry unless you have an unfair advantage.”
WeWork has nothing proprietary. That’s a problem. Their model will probably work, but I see no compelling proof that their company can do better at scale what local companies can do with less friction and more information.
Yeah, they just hitYeah, they’re .
But they also had to raise their last round via convertible notes after the VCs passed on grabbing more equity.
Why? They don’t make any money, nor are they likely to do so in the future. Given the number of massive independent companies in this space (Deezer, Pandora, Rhapsody, Tidal, etc.), there’s just no real chance of raising prices without falling afoul of antitrust laws.
Given that giants like Apple and Google and Amazon are happy to operate their competing services at a loss, good luck.
Uber, but with less competitive advantages and a less sexy brand? I’ll pass.
Notes: All figures in USD. All research my own except where quoted.