Uber and out?

Time to find out if the tech unicorns are for real

Next week, the online storage company Dropbox will list its shares in New York, with a value expected to be in the range of $7bn-$8bn (£5bn-£5.7bn). It will be the biggest tech float since Snapchat last year and the start of what is expected to be a queue of emerging internet giants staging IPOS. Spotify is poised to make its debut, with Wework and possibly Airbnb not far behind, while in this country Funding Circle and Deliveroo are gearing up to join the London Stock Exchange. The tech unicorns are finally going public.

That will be great for the markets, and for ordinary investors. The equity indexes badly need some fast-growing, dynamic businesses. There is only so long you can keep on trading the fading giants of the 20th century, which still dominate most bourses. But it will also be a stiff test for the companies themselves. They will have to prove they are real businesses. Because when you strip away the hype, that is not always clear. And the public markets are far less forgiving owners than the venture capital funds.

The last few years have seen an explosion of rapidly growing web businesses. There are an estimated 236 unicorns – that is, start-ups valued at $1bn or more – according to CB Insights, with a total value of $804bn. They include some huge companies, such as Uber, worth $68bn, Airbnb, worth $29bn, and Wework, worth $20bn. Most have stayed private far longer than an earlier generation of entrepreneurs. Easyaccess venture capital has meant they could grow into huge global firms without needing the stock market. That has allowed them to expand very quickly. But it has also allowed many of them to avoid addressing some tough questions. Dropbox is coming to the market with a valuation below earlier expectations. Sure, it is a great concept, with more than 500m users storing and sharing files online – in many ways, it is the perfect business for the networked, freelance, global economy. But it also faces ferocious competition. It is hard to charge much for a product if Google or Amazon gives it away for free.

Likewise, Spotify has completely revolutionised the way we all listen to music. But it too has struggled to demonstrate it can make money. It has 70m paying subscribers, and the numbers are growing rapidly. But it pays out so much to the major music labels in royalties for all those songs it still makes huge losses. Can it increase price? Or lower royalties? Perhaps. But in a fight with Apple and Amazon, you wouldn’t want to bet your last chill-out playlist on it.

There are similar questions to be asked of many others. Airbnb has a fantastic product. But it faces regulatory battles around the world that may drive up its costs, and the hotel chains are getting their act together to compete. Peer-to-peer lenders have done brilliantly, but a lending product can only prove itself in a downturn, and none of the new web companies have experienced one of those. Deliveroo? Everyone loves a curry on a bike. But the margins are wafer-thin, marketing costs are high, and staff costs may spiral upwards if legislators decide that “freelancers” are actually staff with employment rights and taxes to pay.

The point is that start-up internet entrepreneurs are often not bothered by big losses. They are risk-takers by nature. The venture capital funds and private investors who have pumped money into the unicorns’ explosive growth are very tolerant of pages and pages of deep red ink. They are planning to make their money from a spectacular IPO not from a flow of steady dividends.

But stock market investors are different. They will want to see real profits, they will want to see responsible management, and they won’t appreciate constantly being asked for another few billion to fund the next round of expansion.

As they start to float, we will find out whether the tech unicorns are real businesses. Of course, lots of them will be. The app economy is huge, and there are lots of new ways of connecting customers and products profitably. But many, when you strip away the marketing hoopla and the avalanche of VC money, will turn out to be very flimsy. As they list over the next year, we will find out which are the real winners – and which ones will fall by the wayside.

‘Public markets are far less forgiving owners than the venture capitalists’