To understand how Covid-19 has influenced technology “unicorns”, we need to consider both factors. Lime, a $ 2.4 billion scooter rental start-up, halted service operations in Europe and the United States when a travel restriction was imposed. Meanwhile, DoorDash, the $ 13 billion food delivery app, has an advantage when the whole society is in quarantine.
At a glance, DoorDash has benefited from the pandemic, while Lime has suffered. In fact, a pandemic may have brought an “imbalance” more than that. Covid-19 has “attacked” at the right time about 450 “unicorns” in the world are in a weak state. Continuous loss business models are raising big questions about the effectiveness of their operations. According to Dara Khosrowshahi, Uber’s boss, some unicorn startups will go bankrupt.
Alfred Lin, a board member of Sequoia Capital, a Silicon Valley venture capital firm, said that for investors, the “FOMO” mentality has been replaced by “fear of people.” others think that they are stupid “. Many investors have abandoned new deals, instead trying to “save” old deals. One company is warning shareholders that revenue may be reduced by 30% in the next two quarters and the corresponding costs will be cut.
On March 5, Sequoia released a memorandum called “Coronavirus: Black Swan of 2020”, warning that the outbreak of the disease would drag down the growth of start-ups and call for companies in their portfolio (one of which is DoorDash) should cut costs, save cash and prepare for a scenario of capital depletion.
In fact, the belief for promoting growth momentum at all costs has become a new principle. Ryan Dzierniejko – the board of directors of law firm Skadden, Arps, Slate, Meagher & Flom, said that after many years of IPOs done without focusing on profit factor, “towards profit. “is a new slogan again.
This fact has been happening with unicorns since before the US declared a national emergency with Covid-19 on March 13. Venture capitalists (VCs) believe that one-third of billion-dollar startups in the country will be acquired or collapsed. As investors around the world talk enthusiastically about safe-haven assets in a volatile market, Khosrowshahi’s prediction may come true sooner. Some even see the risk of a dotcom bubble recurring. Other opinions are more optimistic. No matter which scenario comes true, the post-pandemic start-up space will not be the same as before.
Waves in the start-up space
In the past decade, startups have received plentiful investments from national investment funds, mutual funds and hedge funds. Total venture capital in the US has increased from US $ 32 billion in 2009 to US $ 121 billion in 2018. About US $ 822 billion has been poured into US startups since 2010, startups in The rest of the world receives similar capital flows. The rapid influx of money has allowed companies to “burn money” to avoid close scrutiny of the market, with “winged” promises of profit.
Excitement for unicorns has cooled down since last year. The first case was Uber, which went public in May, priced at 30% below what the investment bankers had promised. Currently, Uber’s market capitalization is 43 billion USD, one third lower than the time of IPO. The IPO of Lyft and Slack was also disappointing. In October, SoftBank’s “darling”, WeWork, postponed the IPO indefinitely after the information about the constant loss made investors not interested in this start-up. WeWork’s valuation has dropped from $ 47 billion to under $ 8 billion.
After WeWork, a number of other start-ups also failed, such as Brandless and Zume, which ceased operations in January and February, both of which were backed by Vision funds. OneWeb, also invested by billionaire Masayoshi Son, filed for bankruptcy.
In fact, the unrest is beyond the scope of “empire” of Mr. Son. In the fourth quarter of 2019, start-ups backed by US VC companies raised capital by 16% lower than the previous quarter, with large funding rounds also decreasing by 1/3. Last year, Chinese start-ups entered a “gloomy winter”, when investors no longer wanted to pour money into “burning money” companies at breakneck speeds.
The plunge of “fake tech”
The shock caused by the corona virus arrived at just the right time for technological unicorns showing potential risks. Some, most notably WeWork, actually have never been worthy of the “unicorn” title. Calling this a technology company is nothing more than a superficial self-labeling, they mostly want to follow the “flywheel” effect – which promotes the development of Amazon or Facebook applications. When they have a large enough user base, it will attract and attract new users and so on.
The remaining companies may be real tech companies, but like Uber or Lyft, they soon encounter this stagnant and problematic digital flywheel. And too many unicorns have an unreliable and opaque financial structure that can exaggerate their valuation.
According to Randy Komisar – a lawyer from VC Kleiner Perkins, said that for a unicorn start-up considered “real technology”, their products must be technology. “Everything is not just about technology,” he said. Companies that sell physical goods and services often do not.
Technology startups often provide cloud-based services, especially to other companies. This is what helps companies like Slack and Zoom to be immune to the corona virus, as social isolation boosts their business.
Weaker when Covid-19 arrived
All of the factors encountered by unicorn startups indicate a certain thing about the “shakes” they will face. Companies most affected by social blockade and blockade are having to lay off their employees. Even before Covid-19 broke out, Lime had laid off 14% of its staff and ceased operations in dozens of cities. On March 27, Bird said it laid off a third of its staff to ensure cash reserves.
In general, unicorn startups have cut thousands of jobs, but that’s probably not the end of the layoff process. The remaining employees are witnessing the company’s stock price drop day by day and the prospect of “evaporation” IPO. These deals will be “frozen” until the pandemic is over.
Meanwhile, the unicorn start-up community is constantly talking about acquisitions. SoftBank has long wanted to merge DoorDash and Uber Eats. The Japanese conglomerate may once again attempt to merge Grab and Gojek, as the price competition is costing them about $ 200 million a month. In the US, Uber may convince Lyft about a “team”. Or, the sale to another company is also a “way out”.
If all fails, “sell it to one of the strongest bad guys” as a VC director said. “The strongest bad guys” here are Apple, Microsoft, Alphabet, Amazon and Facebook, they own cash flows of up to $ 570 billion. Executives often don’t want big tech to take over deals like this, but this is no ordinary time. When a recession brings about a loss, ensuring the number of jobs can overcome antitrust concerns.
Even if some unicorn start-ups survive a pandemic, thanks to acquisitions, mergers or simply good luck, Covid-19 will certainly devastate them.