By Jeffrey Lee Funk and Gary N. Smith
Fears of a major bankruptcy inevitably create financial turmoil. In our interdependent global economy, one failure can lead to many, just as Lehman Brothers’s 2008 collapse sparked fears of many bankruptcies, a cratering of stock prices, and a $700 billion U.S. government bailout package.
Today, it is China Evergrande Group /zigman2/quotes/208605330/delayed HK:3333 -10.39% , the world’s most heavily indebted real estate developer, with $300 billion in liabilities to bondholders and untold amounts owed to suppliers, employees and the owners of 1.4 million unfinished homes. Living up to its grandiose name, Evergrande’s obsession with growth fueled the extravagant debt binge that now threatens to topple it.
If you think Evergrande’s liabilities are something to worry about, consider the many stock-market “unicorns” that are on life support with far more debt than Evergrande and that, unlike Evergrande, are losing money year after year.
A unicorn company, or unicorn startup, boasts a valuation over $1 billion. While Evergrande has been profitable and is still profitable in 2021 , most of today’s now publicly traded unicorn startups have incurred losses since inception — losses that have swollen their liabilities to bondholders, employees, customers and suppliers, and will bankrupt them if investors tire of providing them more cash infusions.
After Aileen Lee coined the term unicorn in 2013 , the media have elevated unicorn founders to an almost god-like status that seems sacrilegious to criticize. Few consider the extent of their losses and what unicorn bankruptcies might mean for the global economy.
Unicorn losses are unprecedented in the history of U.S. startups. Among publicly traded unicorns, Airbnb /zigman2/quotes/222990650/composite ABNB -3.35% has $7.0 billion in cumulative losses, Snap /zigman2/quotes/205087158/composite SNAP +0.20% has $8.3 billion, Lyft /zigman2/quotes/208999293/composite LYFT -4.76% $8.0 billion and Uber Technologies /zigman2/quotes/211348248/composite UBER -3.71% has lost a jaw-dropping total of $22 billion. Before unicorns became all the rage, the startup with the largest cumulative losses was Amazon.com /zigman2/quotes/210331248/composite AMZN -2.12% , with a now-modest peak of $3 billion.
Eleven publicly traded U.S. unicorns each have more than $2 billion in cumulative losses; 17 have between $1.0 and $2 billion, and 26 have between $500 million and $1 billion. Overall, 54 of 78 publicly traded unicorns have cumulative losses larger than $500 million, and this count excludes the money-losing unicorns that have already gone bankrupt (e.g., Katerra, Quibi) or were acquired by other companies at bargain prices.
The average market capitalizations in fact are largest for those companies with the largest cumulative losses. One sliver of sanity is that the average market capitalization is lower for the 47 companies with cumulative losses greater than 2020 revenue. On the other hand, even if overall revenue were to magically increase to the level of cumulative losses, with profits equal to 10% of revenue, it would take 10 years to erase the cumulative losses.
The $108 billion in cumulative losses for these 78 publicly traded unicorns are currently just liabilities for stock investors. If investors and banks stop funding these losses, which they eventually will, the unicorns will have trouble paying suppliers and employees, and may have liabilities that far exceed those of Evergrande.
Little money to show
Are these unicorns moving from money-losers to money-makers? No. Just 18 of the 78 companies had profits in the first half of 2021, and only Moderna /zigman2/quotes/205619834/composite MRNA +20.57% ($4.0 billion), Coinbase Global /zigman2/quotes/225893452/composite COIN -2.94% ($2.4 billion), Zoom Video Communications /zigman2/quotes/211319643/composite ZM +5.72% had ($0.54 billion) had profits of more than $300 million.
Most continue to lose money and those that make money don’t put even a small dent in their cumulative losses. For the 11 publicly traded unicorns with the largest cumulative losses, their total losses increased from $28.3 billion at the end of 2018 to $42.8 billion at the end of 2019, $59.7 billion at the end of 2020, and $66.8 billion after the first half of 2021.
In addition to these 78 publicly traded unicorns, there are currently 424 privately held U.S. unicorns with an estimated value of $1.38 trillion and cumulative losses likely between $200 billion and $500 billion. After all, the most profitable startups have already gone public. Remember WeWork’s /zigman2/quotes/222085303/composite WE -2.92% IPO rejection by investors once they realized the magnitude of cumulative losses, estimated to be $10 billion as of March 2021 .
Then there are the non-U.S. unicorns. As of October 2021 there were 427 privately held foreign unicorns valued at $1.37 trillion. Fewer foreign unicorns have gone public than have American unicorns, so there’s far less data about them. Yet the large number of big bankruptcies, from Luckin Coffee /zigman2/quotes/212253358/composite LKNCY -2.57% to Wirecard /zigman2/quotes/208618968/delayed WCAGY +50.00% , Greensill , and Powa, and the bailout of OneWeb by the U.K. government, suggest the cumulative losses of foreign unicorns are comparable to those of American ones.
Among China’s publicly traded startups, cumulative losses are $12.4 billion for ride-sharing startup Didi Global /zigman2/quotes/227703899/composite DIDI -2.84% , $6.6 billion for media startup iQiyi /zigman2/quotes/203657421/composite IQ -3.68% , $2.9 billion for e-commerce startup Pinduoduo /zigman2/quotes/208876581/composite PDD -15.86% , and $34.7 billion for video streaming startup Kuaishou Technology /zigman2/quotes/224263069/delayed HK:1024 -8.02% — even more than for Uber. Cumulative losses for China’s electric-vehicle startups are $5.3 billion for Nio /zigman2/quotes/204905836/composite NIO -3.45% , $1.5 billion for xPeng /zigman2/quotes/219982686/composite XPEV -6.00% , and $700 million for Li Auto /zigman2/quotes/219811686/composite LI -0.67% . Privately held AI startups also have cumulative losses in the billions, including SenseTime with $3.6 billion , several billion for Megvii , and lesser amounts for Yitu, and CloudWalk .
Other Asian unicorns also have big losses. Singapore’s gaming and e-commerce startup SEA has $7.8 billion in cumulative losses and ride-sharing startup Grab has $11.5 billion . Indian startups such as ride-sharing Ola , food-delivery Zomato /zigman2/quotes/228045439/delayed IN:543320 -7.23% , hotel chain Oyo , and others have cumulative losses greater than $500 million , for example Freshworks /zigman2/quotes/229432462/composite FRSH +1.46% at $3.1 billion. Overall these figures add up to almost $100 billion in known Asian losses.
These data suggest that the cumulative losses for foreign unicorns are likely to be similar to those of U.S. Unicorns. If America’s privately held unicorns have cumulative losses twice, triple or quintuple those of publicly traded unicorns, and foreign unicorns have similar bleak numbers, then total global cumulative losses are in the range of $600 billion to $1.2 trillion — far larger than Evergrande $300 billion indebtedness.
If Evergrande does default, investors will run, not walk, from companies with large liabilities — not only publicly traded companies, but privately held ones, too. Even if Evergrande does not default, money-bleeding Unicorns can’t remain castles in the air forever. What goes up will come down.
Jeffrey Funk is an independent technology consultant and a former university professor who focuses on the economics of new technologies. Gary N. Smith is the Fletcher Jones Professor of Economics at Pomona College. He is the author of “The AI Delusion,“(Oxford, 2018), co-author (with Jay Cordes) of “The 9 Pitfalls of Data Science” (Oxford 2019), and author of “The Phantom Pattern Problem” (Oxford 2020).