If Silicon Valley's unicorn bubble bursts, what legacy will it leave?

["Dave Farber" <farber () gmail com>]

Begin forwarded message:

> From: Dewayne Hendricks <dewayne () warpspeed com>
> Date: February 5, 2019 at 4:18:56 PM GMT+9
> To: Multiple recipients of Dewayne-Net <dewayne-net () warpspeed com>
> Subject: [Dewayne-Net] If Silicon Valley's unicorn bubble bursts, what legacy will it leave?
> Reply-To: dewayne-net () warpspeed com
>
> [Note:  This item comes from friend David Rosenthal.  DLH]
>
> If Silicon Valley’s unicorn bubble bursts, what legacy will it leave?
> Many tech startups are vastly overvalued and will one day vanish, leaving nothing but the ghost of a smile
> By John Naughton
> Feb 3 3019
> <https://www.theguardian.com/commentisfree/2019/feb/03/if-silicon-valleys-unicorn-bubble-bursts-what-legacy-will-it-leave>
>
> A unicorn, as every schoolchild knows, is a legendary creature – a horse with a single pointed, spiralling horn 
> projecting from its forehead. As far as we know, nobody has ever seen one. Why, then, is the tech commentariat 
> apparently obsessed with the creatures? The answer is that the term was commandeered in 2013 by Aileen Lee, a venture 
> capitalist, to describe privately held tech startups that have achieved a valuation of $1bn or more.
>
> These strange creatures have been proliferating like rabbits. At the last count, there are more than 300 of them 
> worldwide with a cumulative value of around $1,050bn (£803bn). The majority are based in a few countries. China, with 
> more than 130, has the largest unicorn population, followed by the US (85), India (20) and the UK (seven) and a 
> longish tail of other countries.
>
> Some unicorns have astonishing valuations, which are based on the price that new investors are willing to pay for a 
> share. Uber, for example, currently has a valuation in the region of $80bn (£61bn) and there is feverish speculation 
> that when it eventually goes for an initial public offering (IPO) it could be valued at $120bn(£91bn). This for a 
> company that has never made anywhere near a profit and currently loses money at an eye-watering rate. If this reminds 
> you of the dotcom boom of the late 1990s, then join the club.
>
> There is, however, one significant difference. The dotcom boom was based on clueless and irrational exuberance about 
> the commercial potential of the internet, so when it became clear that startups such as Boo.com and Pets.com were 
> never likely to make a profit, the bubble burst as investors tried to get out. But investors in Uber probably don’t 
> care if it never makes a profit, so long as it gets to an IPO that enables them to cash out with a big payoff. If 
> Uber did go public at a valuation of $120bn, for example, the Saudi royal family alone would have a $16bn (£12bn) 
> payday from their investment.
>
> So what’s going on? Some answers are provided in Unicorns, Cheshire Cats and the New Dilemmas of Entrepreneurial 
> Finance, a fascinating paper by two academics, Martin Kenney and John Zysman. If you’re puzzled by the reference to 
> Cheshire cats, stay tuned.
>
> Kenney and Zysman recount what happened after the dotcom bubble burst in 2000. When the dust had settled, it became 
> clear that advances in digital infrastructure had made it much easier to start tech companies. No need to buy servers 
> (just rent time on Amazon Web Services), for example, or to write whole new software systems from scratch (just 
> leverage free open source code). All you needed at the beginning was a small group of geeks; and there was no need 
> for the kind of initial massive initial funding that the fatuous dotcoms absorbed.
>
> So there was a kind of “Cambrian explosion” of new startups, many of them, such as Uber and Airbnb, based on the 
> insight that markets where digital platforms operate are winners-take-all (WTA) ones. And when you’re the winner who 
> takes all, then you’re a monopoly, with all the commercial benefits that might accrue.
>
> The corollary, though, is that you have to grow so fast that you get to be the winner. And for that you need money, 
> tons of it, which you have to spend like water to undercut incumbent firms that you plan to disrupt and eliminate. In 
> that quest, you need to be both ruthless and profligate, because those incumbents are normal firms that have to make 
> profits – a tiresome obligation that does not trouble you. So the deal you offer to investors is this: you give us 
> shedloads of money and stick with us until we get to be the winner that takes all. And then you can cash out.
>
> And that, in a nutshell, is what is happening. In the process, incumbents are wiped out, because they cannot match 
> your predatory pricing. In some cases that may be a good thing because incumbents can sometimes be lazy or corrupt. 
> But in other cases the collateral damage – in terms of jobs, social dislocation and tax revenues – may be terrible.
>
> [snip]
>
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