In November 2013, venture capitalist Aileen Lee published an article coining the term “unicorn” to describe a startup that’s less than a decade old and worth at least $1bn (about £783m now). She chose the word carefully, to convey a mix of rarity and alchemy. What Lee seemingly didn’t anticipate was that just a few years later it would have become a flagrant misnomer: these days there’s nothing rare about unicorns.
According to website Crunchbase, 142 new companies met the criteria in 2019, taking the herd size to over 500. They’ve got a combined worth of more than $2tn, which is bigger than the gross domestic product of countries such as Canada and Italy, and their heft is perhaps the most striking indicator of our global economy’s return to absolute and unmitigated exuberance.
It might seem odd to the majority of us, who are used to stagnating wages and an increasingly dilapidated public realm, but businesses are actually flooded with cash. Squeezed by years of rock-bottom interest rates, investors have been on a desperate hunt for assets that offer a yield above zero, throwing money at every conceivable candidate.
Globally, more than half of outstanding government debt offers a negative yield – which is to say that many investors now have to pay for the privilege of lending money to states, where they at least know their assets will most likely be safe. But even corporations, which have more of a chance of defaulting, have been able to issue bonds with yields below zero, because the interest that their debt offers is marginally higher – or less negative, if you will – than the interest on other assets.
So how did the rules of the economy get turned on their head like this? Interest rates were initially cut in the wake of the 2008 collapse of Lehman Brothers and the ensuing financial crisis, in order to kickstart economic recovery. But in the absence of any real growth to speak of, they’ve been stuck there ever since. The result is both cheap borrowing and lots of lending.
Against this background – too much cash and too few places to put it – investors have been easily seduced by the bright lights and shiny things of Silicon Valley, where a growth-at-all-costs mentality trumps such antiquated and pedestrian metrics as profitability. Why invest in a plain old low-risk government bond or mundane index that offers – at most – a sliver of return, when you could take a punt on a super-innovative startup? Obviously the downside risk is substantial, but the prospect of having spotted the next Jeff Bezos or Mark Zuckerberg makes splashing major cash palatable. If you’d spent $22 on one Apple share in 1980 when the company went public, your holding would now be worth almost $18,000.
And so we’ve ended up with these frequently absurd overvaluations. Uber, Lyft and the owner of Snapchat have all in the last year received investment that gives them multibillion-dollar price tags, despite all making a solid loss. Tesla, more than $13bn in debt at the end of last year, recently had a market capitalisation of $160bn, greater than General Motors and Ford combined.
The money sloshing into those entrepreneurial coffers is being propelled by a desperation to survive in a low-interest world, often foundationless optimism and – quite likely – an exaggerated belief in one’s ability to spot tomorrow’s wunderkind. But red flags are starting to appear and we should take them seriously.
WeWork, famous for operating buzzy beer-on-tap co-working spaces, was forced to abort a huge stock market listing last year, despite having attracted billions from Tokyo-based conglomerate investment company SoftBank. SoftBank owns considerable stakes in businesses like Uber, Alibaba and Slack and its billionaire founder, Masayoshi Son, is regularly hailed as Japan’s answer to Warren Buffett.
The misfire led commentators to refer to WeWork’s CEO and co-founder, Adam Neumann, as a sort of Icarus – a visionary who flew too close to the sun and came crashing down. The company’s valuation was slashed from a preposterous $47bn to a still eyewatering but comparatively puny $8bn; Neumann was ousted as CEO and was forced to give up majority voting control of the business.
Morgan Stanley strategist Michael Wilson declared in a note to clients last September that the “days of endless capital for unprofitable businesses” are over. WeWork’s failure to float, he said, was reminiscent of three historical events: United Airlines’ disastrous leveraged buyout in October 1989, which effectively ended the 1980s boom of companies being bought with debt; the AOL-Time Warner tie-up in 2000, which marked the start of the dot-com bust; and JP Morgan Chase’s 2008 purchase of defunct investment bank Bear Stearns. “It was one heck of a run,” wrote Wilson. “But paying extraordinary valuations for anything is a bad idea, particularly for businesses that may never generate a positive stream of cash flows.”
And while markets still look fairly buoyant, it’s clear change is on the horizon. There are more WeWorks out there – houses of cards run by delusional wise guys – and we should endeavour to spot them before they catch us off-guard.
Why? Because the collapse of a large company can send shockwaves through the entire economy and we don’t have much in the way of defences at the moment. Remember General Motors? By some accounts the US government bailout after the company’s 2009 bankruptcy cost taxpayers more than $10bn.
And then there’s the fact that interest rates can’t stay pinned to the floor for ever. Central banks need to raise them in order to be able to cut them again when necessary. The process of doing so, however, is unlikely to be pretty. Record low rates have created distortions. Many companies have taken on a huge amount of debt because it’s been dirt cheap to do so. When rates rise it will become harder to service that debt. As Buffett famously said: “You only learn who has been swimming naked when the tide goes out.”
For now this might sound abstract and irrelevant. But financial systems are a complex web of intertwined risks and dependencies. Our savings, our pensions, our mortgages and our loans are all at the mercy of what’s happening elsewhere, including in companies that seem invincible until the moment they aren’t. So beware of the unicorn, especially if it’s actually a dishevelled nag with a cone stuck to its head. It might seem thrilling for now, but it could well be an omen of unpleasant things to come.
• Josie Cox is a columnist, reporter, commentator and broadcaster
