Aug 6, 2022 - Economy

Unprofitable unicorns' public pain

Illustration of a unicorn with a bandaid.

Illustration: Shoshana Gordon/Axios

The current pivot to profitability in the world of venture-backed companies is far from unprecedented. What's new is the degree to which the gory details of corporate finances at former unicorns like Coinbase and Robinhood are now public.

Why it matters: A private company can quietly battle on without its investors having to take any kind of write-down until the very end. When your financials are public, however, your struggles become public, too.

  • Last year’s permissive IPO market showered listings — and the associated public scrutiny — onto hundreds of unprofitable companies.

How it works: When interest rates were low and liquidity was abundant, young companies realized that they could raise large sums of money at multi-billion-dollar valuations if they invested as much as possible in future growth — a very expensive strategy sometimes known as blitzscaling.

  • That strategy burns enormous amounts of cash, and it tends to end in disaster if the money stops flowing before the company achieves profitability. (Exhibit A: WeWork.)
  • Now that money is more expensive and less abundant, it has stopped flowing to almost all such companies.

An IPO doesn't mean you're home free. Robinhood, which raised $2.1 billion in its 2021 IPO, is a good example.

  • This week, the millennial-focused broker-dealer announced losses of $295 million in the second quarter and laid off 23% of its workforce — just months after cutting 9%. So far in 2022, more than 1,000 of its employees have lost their jobs.
  • Or see yesterday's WSJ and NYT stories on Coinbase.

The other side: Slightly earlier IPOs found themselves with enough time, before the music stopped, to start generating cash.

  • Airbnb this week announced it has become so profitable that it can afford to spend $2 billion buying back its own stock.
  • Even the famously cash-burning Uber announced it was cashflow positive in the second quarter — although it still made a loss after accounting for things like stock compensation and its equity investments in other companies.
  • “This marks a new phase for Uber, self-funding future growth," said Uber CFO Nelson Chai in a release.

The bottom line: All the formerly high-flying tech stocks have seen their valuations cut. Those cuts are much smaller for the likes of Airbnb and Uber, however — down 19% and 36% respectively since the date of Robinhood's IPO — than they are for companies like Robinhood, which has lost more than 70% of its value in its time as a public company.

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