0734 GMT February 26, 2020
A unicorn, as every schoolchild knows, is a legendary creature — a horse with a single pointed, spiraling horn projecting from its forehead. As far as we know, nobody has ever seen one. Why, then, is the tech commentariat apparently obsessed with the creatures?
The answer is that the term was commandeered in 2013 by Aileen Lee, a venture capitalist, to describe privately held tech startups that have achieved a valuation of $1billion or more, according to theguardian.com.
These strange creatures have been proliferating like rabbits. At the last count, there are more than 300 of them worldwide with a cumulative value of around $1,050 billion.
The majority are based in a few countries. China, with more than 130, has the largest unicorn population, followed by the US (85), India (20) and the UK (seven) and a longish tail of other countries.
Some unicorns have astonishing valuations, which are based on the price that new investors are willing to pay for a share. Uber, for example, currently has a valuation in the region of $80 billion and there is feverish speculation that when it eventually goes for an initial public offering (IPO) it could be valued at $120 billion. This for a company that has never made anywhere near a profit and currently loses money at an eye-watering rate. If this reminds you of the dotcom boom of the late 1990s, then join the club.
There is, however, one significant difference. The dotcom boom was based on clueless and irrational exuberance about the commercial potential of the Internet, so when it became clear that startups such as Boo.com and Pets.com were never likely to make a profit, the bubble burst as investors tried to get out.
But investors in Uber probably don’t care if it never makes a profit, so long as it gets to an IPO that enables them to cash out with a big payoff. If Uber did go public at a valuation of $120b billion, for example, the Saudi royal family alone would have a $16 billion payday from their investment.
So what’s going on? Some answers are provided in Unicorns, Cheshire Cats and the New Dilemmas of Entrepreneurial Finance, a fascinating paper by two academics, Martin Kenney and John Zysman. If you’re puzzled by the reference to Cheshire cats, stay tuned.
Kenney and Zysman recount what happened after the dotcom bubble burst in 2000. When the dust had settled, it became clear that advances in digital infrastructure had made it much easier to start tech companies.
No need to buy servers (just rent time on Amazon Web Services), for example, or to write whole new software systems from scratch (just leverage free open source code). All you needed at the beginning was a small group of geeks; and there was no need for the kind of initial massive initial funding that the fatuous dotcoms absorbed.
You need money, tons of it, which you have to spend like water to undercut incumbent firms that you plan to eliminate
So there was a kind of ‘Cambrian explosion’ of new startups, many of them, such as Uber and Airbnb, based on the insight that markets where digital platforms operate are winners-take-all (WTA) ones. And when you’re the winner who takes all, then you’re a monopoly, with all the commercial benefits that might accrue.
The corollary, though, is that you have to grow so fast that you get to be the winner. And for that you need money, tons of it, which you have to spend like water to undercut incumbent firms that you plan to disrupt and eliminate.
In that quest, you need to be both ruthless and profligate, because those incumbents are normal firms that have to make profits — a tiresome obligation that does not trouble you. So the deal you offer to investors is this: You give us shedloads of money and stick with us until we get to be the winner that takes all. And then you can cash out.
And that, in a nutshell, is what is happening. In the process, incumbents are wiped out, because they cannot match your predatory pricing. In some cases that may be a good thing because incumbents can sometimes be lazy or corrupt. But in other cases the collateral damage — in terms of jobs, social dislocation and tax revenues — may be terrible.
Kenney and Zysman are too judicious to claim that the unicorn investment racket is definitely a bubble. My guess is that it is, which means that it’s worth thinking about what happens after the bust. What will be its legacy?
And here’s where the Cheshire Cat comes in. When the dotcom bubble burst, one of the things it left behind was the colossal fibre-optic communications infrastructure that had been built at the height of the frenzy. This was what enabled the ensuing rollout of wired and wireless broadband and the exploitation of smartphone technology. So something good emerged from the madness.
But when the unicorn bubble bursts? Since it hasn’t built much, all that will be left is... the grin. Just like in Alice in Wonderland.
*John Naughton is a professor of the public understanding of technology at the British Open University.