Market turns sour on tech unicorns

The clock appears to be ticking on the days in which loss-making tech companies are valued at tens of billions in the public market.

Adam Neumann, founder and chief executive of WeWork, which had its public listing postponed by parent company We Co. Picture: AP

The clock appears to be ticking on the days in which technology companies losing billions of dollars are valued at tens of billions in the public market. That realisation may be forcing the hand of today’s unicorns — for better or for worse.

On Thursday, lodging company Airbnb confirmed plans to go public next year. The timing of that announcement — coming the same week WeWork parent We Co postponed its own public offering — was telling.

Both are among the most valued companies still sitting in the private market with valuations that would put them in the upper half of the S&P 500 if they went public.

But as Uber and Lyft have already shown, enchanting private investors doesn’t mean an easy ride with public ones.

We Co demonstrated this in dramatic fashion. The glorified commercial real estate provider lost nearly $US2bn ($2.95bn) last year — more than the revenue it brought in. That was never likely to resonate with public investors who have dinged ride-hailers for their own mounting losses without a clear path to profitability.

Creative accounting metrics like “Community Adjusted EBITDA” also rang alarm bells, as did the eccentric and self-dealing behaviour of founder and chief executive Adam Neumann. Public investors rightfully made clear that cashing out We Co anywhere near its last $US47bn private valuation was fanciful.

That doesn’t necessarily doom Airbnb, though. Valued at $US31bn as of 2017, the company has grown into a ubiquitous global home share service offering 7 million listings — more than the combined rooms of the eight largest hotel chains worldwide. The company says revenue surpassed $US1bn in the second quarter and its business was profitable in both 2017 and 2018 in terms of earnings before interest, tax, depreciation and amortisation.

Some other former unicorns, market shorthand for private companies valued at more than $US1bn, have fared well. Pinterest, privately valued around $US12bn before its April IPO, has since jumped 59 per cent from its listing price.

It may be that middle-aged unicorns like Airbnb have no choice but to step up to the plate. With the longest US economic expansion ever in the books, forecasters and market indicators alike signal a growing likelihood of a recession.

Airbnb, now 11 years old and counting, doesn’t have forever to please anxious investors and employees who jumped on board in expectation of a lucrative public exit within a reasonable time frame.

Prospective investors should take comfort in the fact that not all tech companies risk becoming damaged goods. They just might have some explaining to do.

Wall Street Journal