The Crisis of Venture Capital: America’s Broken Start-up System



ORIGINAL POST
Posted by Ed 16 days ago

Unicorn startups are even more unprofitable than those that did not achieve Unicorn status.

About 90% of America’s Unicorn startups, ones privately valued at $1 Billion or more, were losing money in 2019 or 2020. According to my recent article in American Affairs, only 6 of 73 were profitable in 2019 and 7 of 69 in the first two or three quarters of 2020 despite most being founded more than 10 years ago.

The six profitable start-ups in 2019 included three fintech (GreenSky, Oportun, and Square) and one startup each in e-commerce (Etsy), video communications (Zoom), and solar energy installation (Sunrun).

For the first few quarters of 2020, three of these firms became unprofitable (Oportun, Square, and Sunrun), and four others became profitable: three e-commerce companies (Peloton, Purple Innovation, and Wayfair) and one cloud storage service (Dropbox).
 

Unicorn startups are even more unprofitable than those that did not achieve Unicorn status. According to Jay Ritter, about 20% of startups at IPO time were profitable over last four years, much more than the 10% of Unicorn startups in 2019 and 2020.

 
Thus, not only has profitability dramatically dropped over the last 40 years among those startup doing IPOs that went public, down from 80% to 90% in early 1980s, today’s most valuable startups—those valued at $1 billion or more before their IPOs—are in fact less profitable than startups that did not achieve $1 Billion in their IPO valuations.

Even worse, a remarkably large fraction of start-unicorns have high levels of unprofitability, as shown in the chart below.

 
  • In 2019, 21 of 73 had losses greater than 50% of revenues, and another 13 (including Uber, Lyft, Pinterest, and Snapchat) had losses greater than 30% of revenues (not counting liquidations).
  • In 2020, 19 of 70 had losses greater than 50% of revenues, and another 11 eleven had losses greater than 30% of revenues.
 
 
 https://hongkong.asiaxpat.com/Utility/GetImage.ashx?ImageID=8870444f-a334-46de-b0ce-c1cf1788ff83&refreshStamp=0
 

Source: Jeffrey Funk, The Crisis of Venture Capital: Fixing America’s Broken Start-up System, American Affairs,

These high annual losses have also translated into large cumulative losses for some startups, much larger than Amazon’s peak of $3 billion twenty years ago. Uber has more than $30 billion in cumulative losses; and Lyft, Snap, and Palantir have more than $5 billion each in cumulative losses.

How many of these startups might become profitable in the near future?

https://wolfstreet.com/2021/03/24/the-crisis-of-venture-capital-americas-broken-start-up-system/ 
 
 

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