Unicorns, Unicorns Everywhere, but Not a Profit in Sight
Picture this: a world filled with magical, mythical creatures that are meant to bring us riches and prosperity. No, I’m not talking about leprechauns or Pegasus. I’m talking about the ever-elusive, ever-popular unicorns – those privately held startup companies valued at over $1 billion.
Unfortunately, these fantastical beings are more likely to resemble a donkey in a party hat than a majestic, horned beast. You see, about 90% of these publicly traded unicorns are unprofitable, and many have accumulated staggering losses. So much for that pot of gold at the end of the rainbow.
How Not to Win the Startup Lottery
The stock market is a wondrous place that allows investors to share in the long-run profits generated by well-run businesses. But it also offers a chance for speculators to take a gamble on up-and-coming startups that, let’s face it, usually end up as nothing more than a pipe dream.
In fact, Jay Ritter, a finance professor at the University of Florida, reported that of the IPOs issued between 1975 and 2018, 59% had negative returns, and 37% were down 50% or more. The average three-year return was 17.1 percentage points below the return on the overall stock market. Ouch.
But Wait, There’s More (or Less)!
Despite this less-than-stellar performance, the demand for these startup lottery tickets remained insatiable. Between 2017 and 2021, venture-capital funding set records in the U.S., Europe, and Asia. In 2021 alone, a one-year record was set. Dreams of the gig economy’s rise danced in investors’ heads, with visions of private cars and parking lots disappearing, physical banks becoming obsolete, and doctor’s offices replaced by online visits.
Alas, reality has a way of crashing the party. The stock prices of publicly traded startups have plummeted, valuations of privately traded startups have shrunk, and the number of IPOs and SPACs has dwindled. Dreams? Meet cold, hard reality.
Pass the Tissues, Please
Global VC funding in the first quarter of 2023 totaled a measly $76 billion, a shocking 53% less than the $162 billion raised the year before, according to Crunchbase. And let’s not forget that this figure includes a reported $10 billion investment in OpenAI (largely from Microsoft) and $6.5 billion from payments giant Stripe.
The shrinking interest in these once-coveted unicorns is evident in Pitchbook’s capital-demand-to-supply ratio. It seems the days of chasing these mythical creatures have come to an end, and investors may need to refocus their efforts on finding actual well-run businesses that generate profits. What a novel idea.
So, my friends, it’s time to bid adieu to the enchanting world of unprofitable unicorns and return to the land of reality. Because, as we’ve learned, not all that glitters is gold – or even a majestic, horned beast. Sometimes, it’s just a donkey wearing a party hat.
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