If we can use one sentence regarding the startup culture for the past decade, it will be Bubbles and Unicorns everywhere. These days every entrepreneur is trying to create the next unicorn and to fill its bubble with money. Unfortunately, looking at the facts, this approach is unsuccessful and usually leads to the startup’s failure.
But let’s analyze the definition of the unicorn in the startup culture – the unicorn is a startup with an evaluation of over 1 billion US dollars. Here is the essential point of our analysis. Evaluation is not the annual profit these companies are making. We could define evaluation as the “social” trust into a global brand, and we “evaluate” this “social” trust to 1 billion US dollars. Last year’s report showed that from 73 unicorn companies, only 6 had a positive net profit. And to make the situation even worse, 34 of these 73 unicorns had losses more significant than 30% of their revenue.
Having the previous paragraph in mind, we could easily deduce that without a proper IPO, these 34 unicorns would most probably end with a failure. Furthermore, the six profitable Unicorn startups (out of 73) did IPOs many years ago. No Unicorn startup among those announcing or doing an IPO since Zoom in August 2019 was profitable in 2019 (or 2020). The statistic suggests that the privately held Unicorns, which have yet to do IPOs, are primarily unprofitable. Thus, the record low profitability of startups is likely to get worse.
And here is one exciting statement – every IPO company acts as an investment bank. It needs the IPO investors’ money to fund its activities. However, we need to ask ourselves whether this is a sustainable approach and whether we should mark unicorns as “successful” business ventures, considering that they do not operate on profit. And here is a sample list of reasons, marking unicorn as successful is a bad idea:
- No net profit from their main business idea: Making not enough profit from their business idea means that the business idea is not viable. Evaluation of 1 billion US dollars does not mean that the assessment of the concept is so much.
- Need of IPO to survive: Going into IPO mode means that the unicorn is now a public investment bank. In that sense, it starts acting as a bank, but not as a business venture. Another hint that the business idea was not profitable enough.
- The considerable margin between evaluation and revenue: Sometimes, there is a significant margin between profit and revenue. It is essential to understand that evaluation is based on mathematical formulas, and as with every formula, the results can be set up for enormous evaluation. So, in short, a significant evaluation does not mean a successful business idea.
In conclusion, I think it is suitable for every entrepreneur and investor to ask themselves whether it is good to operate a business this way. Maybe a more prudent approach to doing business and ensuring the company has a minimized positive net profit will make the startup environment much better and less stressful.