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THE BOTTOM LINE

The year the markets stopped believing in unicorns

AT THE start of this year, it seemed as if the most valuable tech startups in the US - Uber, Lyft, Airbnb, Pinterest, Slack, WeWork and Palantir - were on the cusp of triumphant initial public offerings. In San Francisco, where many of these companies are based, a number of my friends became unhealthily fixated on the ways in which a new generation of IPO millionaires were about to ruin the city.

Those who had grown up in the Bay Area and remembered the tech boom of the late-1990s predicted a year of obnoxious parties, flash yachts and even more unaffordable property prices. The landlord of my building seemed positively giddy, telling residents to enjoy living in San Francisco while we could still afford it. A tech news website called 2019 a gold rush, while national media claimed the city was at "boiling point".

For many, those imagined riches have evaporated into thin air. Ride-hailing company Uber set the tone in May, when it listed shares well below a hoped-for US$120 billion valuation. Founder Travis Kalanick and early investors still reaped billions of dollars. But later-stage investors and employees did not. Shares of Uber have since fallen by one-third.

Uber's main rival Lyft has also lost about one-third of its value. Workplace messenger Slack skipped a traditional IPO and sold shares straight to the public, but its prices have also dropped. Office space startup WeWork yanked its IPO and had to scrabble for a rescue deal. Of the startups poised to join markets, four listed and flopped, one nearly collapsed and two have yet to take the plunge.

It has been an unexpected year of reckoning for so-called unicorns. In tech lingo, a unicorn is a startup with a valuation of at least US$1 billion. They used to be rare. When venture capitalist Aileen Lee coined the term in 2013, startup tracker CB Insights counted 43. Now, there are more than 400.

The rise of the biggest unicorns can be traced back to the global financial crisis and the economic upheaval of its aftermath. The first version of Lyft was a carpool company called Zimride, created in 2007. Airbnb arrived in 2008. Uber in 2009. WeWork and Pinterest in 2010.

The founder-myth version of this story is that only the most dedicated creators start their own companies in a crisis, making them more likely to succeed. But they owe something to circumstances, too.

As the decade progressed, more people owned smartphones, which meant they could access services from companies such as Uber and Lyft more easily. High unemployment after the crisis created a pool of people willing to work without security or benefits. New regulations increased the number of potential startup investors and central banks cut interest rates to the bone, unleashing money willing to accept risk.

Chief kingmaker was Masayoshi Son, SoftBank's chief executive. Armed with a US$100 billion fund to invest in companies that would shape the next 300 years, he told startups to put growth first.

Combined, these factors created huge companies. Uber has nearly four million drivers. WeWork became the largest private tenant in London and New York. Pinterest has more than 300 million users. All received multibillion-dollar valuations from private investors. None made a profit.

Profits were not supposed to matter when stock markets had been starved of high-growth new companies to invest in. Nor were complaints from workers or threats from regulators. But the losses revealed in prospectus documents were shocking.

This might have been all right if convincing plans to stop leaking cash were also available. But they were not. Add in worries about a possible US recession and a trade war with China and these vast, world-changing startups began to look both expensive and precarious.

Not every IPO has done poorly though. More conservative pricing in the second half of the year probably helped. A fund run by Renaissance Capital that tracks newly-listed US companies across all industries is up 30 per cent this year.

Industry champions are also keen to point out that many tech stocks fall at first. When New York Times journalist Erin Griffith joked on Twitter that newly-listed stocks should be dubbed Plumps - Publicly Listed Unicorns Miserably Performing - venture capitalist (and Uber investor) Bill Gurley was quick to reply that tech success stories like Facebook and Amazon all traded below their initial IPO price too.

As the exchange might suggest, private investment in tech is not slowing down. In recent months, I have met two sovereign wealth funds opening new offices close to startups. Money is being raised for new funds. San Francisco may not be overflowing with garish parties and new yachts this year, but the unicorn era is far from over. FT