Unicorns represent mythical horses projecting a single horn from their foreheads, an image of unreal beauty. In our modern business jargon, we define unicorns as privately held high tech companies worth over $1 billion that are supposedly unique and ready to beat the world. Uber, Lyft, Alibaba, Facebook, and others belong in this category.
Are they really companies of unreal promise? Let’s examine the question. Uber is getting ready to list its IPO and collect $1 billion as a result. Pinterest has listed its IPO and done well, so far. Undoubtedly, these companies have delivered an attractive value proposition to customers. Ride apps are very convenient for riders and food delivery is speedy for sure. Disintermediation enabled by online business models has allowed for low cost services. Finally, lack of regulations and taxes have ensured a competitive advantage. Their advantage rests in part on heavily discounted services designed to generate revenue growth, a policy known in Silicon Valley as “blitzscaling”, that is, taking over the market and eliminating the competition regardless of cost.
A careful look at their business models, however, reveals two significant problems. First, consumers are not locked into any one firm. Because competition is intense, margins cannot improve, despite increasing sales. Second, consumers are now waking up to the need for data security and regulation. More regulation will increase the internal friction in their business models reducing effectiveness. Scrutiny from regulators will eventually result in taxes, thus increasing costs further.
As a result, skepticism on the blitzscaling ability of unicorns to take over their markets is increasing. Lyft, which had a loss of $911 million in 2018, has significantly fallen below its initial IPO price. Uber, revealing a loss of $1.8 billion in 2018, is ready to list its IPO. These are facts that will surely diminish investors’ appreciation, and investment, in recognizing the beauty of a Unicorn. Going forward, we can expect the market to be a great deal more discriminating about which Unicorn to support.
Source: The Economist, April 20-26th, 2019
Dr. Walter Kruz
Chairman, MIS Department
Lincoln University