April 11 at 1:25 PM
Uber Technologies Inc.’s coming IPO is a moment to reflect on the oodles of investment cash that have resulted in a herd of “unicorns,” the awful but convenient shorthand for tech companies that reach valuations of at least $1 billion while they’re private.
There are now more than 340 of them, according to CB Insights, compared with the 18 unicorns identified in 2013 by investor Aileen Lee when she coined the term. (Her list had 39 companies, but many of them had already gone public or been acquired. Uber was on Lee’s list even back then.)
This unicorn proliferation is a result of changes in technology and investing, including a decade of low U.S. interest rates that pushed investors to hunt for better returns in riskier, high-growth assets including tech startups. Last year was the first time since 2000 that U.S. venture investments in tech startups topped $100 billion, according to figures from the National Venture Capital Association and PitchBook. It was the capstone — so far— to what has been several years of eyebrow-raising amounts of capital going into startups worldwide.
A defining characteristic of the unicorn years is the importance of investment cash. Winners and losers are determined in part by which companies can raise the most money, not necessarily the ones that create the best product or service.
Uber is the perfect encapsulation of this trend. Money was a big way Uber differentiated itself from Lyft Inc. Its big bank account dictated Uber’s strategy of going global and splurging into adjacent categories such as restaurant food delivery and freight handling, while Lyft stuck mostly to on-demand rides in North America. There would be no Uber, or at least not one of this size and breadth, at any other time in history.
That’s not to say that Uber’s product or its strategy is inferior to Lyft’s, but the company was able to dream bigger because it had more access to capital. At some point, availability of cash becomes self-fulfilling. The startups that look like winners get more capital, which ensures they win.
Whether that’s good or bad is up for debate. The elite startups of the 2010s including Uber, Didi Chuxing Inc. and SpaceX are bigger, more disruptive and potentially more lasting companies because they had limitless access to cash to grow.
But the venture capitalist and Lyft investor Keith Rabois recently told my colleague Emily Chang that a large amount of investment money “usually creates more problems than it solves” for startups. This is not a new idea. There’s a Silicon Valley axiom that the best young companies tend to grow up during recessions, which forces them to spend wisely and make sure they’ve honed their products.
Regardless, now that some of the biggest unicorns such as Snap Inc., Lyft and Uber are starting to go public, it may be the beginning of the end of the period in which startups differentiated themselves on fund-raising ability.
Not the end-end, of course. Electric scooters continue to be a capital-raising race. So does restaurant food delivery, in which Uber is playing the role of market share-grabbing, cash-burning entrant.
One thing that won’t change as the elite unicorns go public: They’re still wildly unprofitable and will be for some time. But from now on, fewer unicorns will be able to rely on the gushers of investor cash on which they’ve built their lush magical forests.
A version of this column originally appeared in Bloomberg’s Fully Charged technology newsletter. You can sign up here.
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Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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