Why Do Today’s Tech Startups Disappoint Investors?
Only 14 of the 45 recent Unicorns showed increases larger than those of the Nasdaq generallyJeff Funk is a retired Associate Professor and winner of the NTT DoCoMo mobile science award for his lifetime contributions to social science research on mobile phones. His recent articles have appeared in Scientific American,IEEE Spectrum, Issues in Science & Technology, Mind Matters News, and Ozy.com. This is the second of a three-part series for Mind Matters News in which he explores the decline in profitability of companies that depend on technological advances. Part 1 is: Where have all the profitable startups gone?
Part 1 showed that today’s successful startups, defined as Unicorns, are taking longer to become profitable than the ones that achieved top 100 market capitalization and were founded between 1970 and 2000. Part 2 looks at the share price changes that followed their IPOs. As shown in the table below, only 14 of the 45 had increases larger than those of the Nasdaq, the main public market for startups, as of March 9, 2020 (See Table 2). Newer data might show smaller increases but the comparison to overall Nasdaq changes means that the date we choose is not significant.
Note that, while the Nasdaq almost doubled between early 2015 and early 2020, only 14 of the 45 IPOs had price increases bigger than the Nasdaq increases. Moreover, of these 14 reasonably successful IPOs, only 3 (Square, Zoom, Etsy) were profitable in 2019—yet the most recently founded one was Zoom, created in 2011, nine years ago. The others were founded at least a decade ago, with one startup (Forescout) created in the year 2000, a year before the burst of the dotcom bubble. Why is it that only 3 of 14 are profitable now when 22 of the 24 successful startups mentioned in Part 1 had achieved profitability by year 10?
Table 2. Change in Share Prices and Market Capitalizations for Unicorns Doing IPOs
| Startup | Year Founded | Share Price | Nasdaq | Market Cap $B |
| Okta | 2009 | +351% | +24% | 13 |
| Square | 2009 | +316% | +41% | 23.3 |
| Mongo DB | 2007 | +264% | +9% | 6.3 |
| Twilio | 2008 | +198% | +46% | 10.9 |
| Roku | 2002 | +197% | +4% | 9.5 |
| Coupa | 2006 | +153% | +48% | 7.4 |
| Zoom | 2011 | +77% | – 10% | 30.2 |
| DocuSign | 2003 | +73% | +19% | 12.3 |
| Etsy | 2005 | +61% | +46% | 5.2 |
| Zscaler | 2008 | +19.7% | – 3.6% | 5.1 |
| Moderna | 2010 | +19.3% | +3.3% | 8.2 |
| Sunrun | 2007 | +16% | +43% | 1.4 |
| Forescout | 2000 | +16% | +7.5% | 1.5 |
| New Relic | 2008 | +14% | +48% | 2.3 |
| Beyond Meat | 2009 | +11% | -10% | 4.6 |
| Cloudflare | 2009 | +6.7% | -12% | 5.8 |
| Wayfair | 2002 | +1.5% | +48% | 3.1 |
| Lending Club | 2006 | -10% | +48% | 0.76 |
| Sprout Social | 2010 | -13% | -17% | 0.3 |
| Nant Health | 2010 | -16.4% | +47% | 0.17 |
| Opportun | 2005 | -19% | -9.3% | 0.36 |
| Grub Hub | 2004 | -20% | +48% | 3.2 |
| Peloton | 2012 | -24% | -10% | 5.5 |
| Pure Storage | 2009 | -30% | +49% | 3.0 |
| Lyft | 2012 | -35% | -8% | 7.3 |
| Quotient Technology | 1999 | -36% | +48% | 0.63 |
| Crowdstrike | 2011 | -35% | -7% | 8.0 |
| Livongo | 2008 | -37% | -12% | 2.3 |
| Box | 2005 | -40% | +48% | 1.6 |
| Slack | 2009 | -42% | -10% | 11.8 |
| Plural Insight | 2004 | -42% | -2% | 1.7 |
| 2009 | -45% | -10% | 7.6 | |
| Dropbox | 2007 | -45% | +3% | 6.6 |
| Uber | 2010 | -46% | -9% | 38.9 |
| Medallia | 2001 | -48% | -6% | 2.4 |
| Domo | 2010 | -57% | -4% | 0.32 |
| Cloudera | 2008 | -61% | +19% | 2.0 |
| Snapchat | 2011 | -61% | +23% | 14 |
| Casper | 2014 | -62% | -25% | 0.2 |
| Nutanix | 2009 | -64% | +36% | 2.6 |
| Bloom Energy | 2001 | -71% | -7% | 0.76 |
| Green Sky | 2006 | -79% | -3% | 0.93 |
| Eventbrite | 2006 | -77% | -10% | 0.7 |
| GoPro | 2002 | -93% | +48% | 0.42 |
| Blue Apron | 2012 | -98.5% | +17% | 0.035 |
Share price also impacts market capitalization, and current market capitalizations for the 14 startups with share price increases greater than the Nasdaq are small. Only a few are over $30 billion (Zoom), $20 billion (Square), and $10 billion (Twilio, DocuSign, Okta) respectively—as of March 9, 2019, just after the market experienced a large drop. These values are far too small to make the top 100 in market capitalization in 2019 ($98 billion required), something that the 24 startups mentioned above achieved within 10 years (2 startups), 15 years (7 startups) and 20 years (7 startups) of their founding. And all 14 startups had much smaller market capitalizations in 2019 than those on March 9, in which the highest for 2019 was for Square, with about a $20 billion value.
Could one of these startups be the next Amazon? How about Zoom, for example? Will video communication become huge, as airline travel declines due to concerns about viruses and climate change? Or Square? Will electronic payments offer huge value for consumers and businesses? Or how about Twilio, DocuSign, or Okta? Will a cloud platform, electronic agreement, or authentication supplier become the next Amazon, despite none having profits in 2019?
What about Unicorns that are targeting more recent technologies—AI, VR, AR, driverless vehicles, or plant-based meat? Will one of them be the next Google or Amazon? For AI, Crowd Strike did an IPO in 2019, and at least five AI Unicorns exist, but all have big losses despite their longevity in business.
VR/AR supplier Magic Leap is poised for bankruptcy. And few observers are still optimistic about driverless vehicles. Plant-based meat will be a favorite among vegans and environmentalists and Beyond Meat has reasonably good numbers; it had higher price increases than did the Nasdaq since its IPO. But it has a small market capitalization ($5 billion) and suffered losses in 2019, albeit small ones, less than 0.1% of revenues.
Might other privately held Unicorns become the next Amazons? The ones with the largest valuations are Juul, Stripe, Airbnb, SpaceX, and Palantir, all with more than $10B in valuations. But they are also losing money.
The bottom line is that none of these startups can be compared to the 24 founded between 1970 and 2000 that achieved top 100 market capitalization. Part 3 of this series discusses possible causes. What is different today from 20 to 50 years ago? Which of these changes may have caused today’s startups to perform worse than those in the past?
Here’s Part 1: Where have all the profitable startups gone? We must distinguish between COVID-19’s devastating impact and pre-existing problems that it is making worse. The most successful startups of today aren’t as profitable as those founded 20 to 50 years ago, suggesting that something is terribly wrong with the current startup system.
And Part 3: Why the next Googles and Amazons, are MIA. The internet has matured, making many new Internet-based companies comparatively low-tech. Today’s startups have targeted a much different set of technologies than did startups in past decades.
