Big revenues, huge valuations and major losses: charting the era of the unicorn IPO

We can make charts galore about the tech IPO market. Yet none of them diminish the profound sense that we are in uncharted territory.

Never before have so many companies with such high revenues gone public at such lofty valuations, all while sustaining such massive losses. If you’re a “growth matters most” investor, these are exciting times in IPO-land. If you’re the old-fashioned value type who prefers profits, it may be best to sit out this cycle.

Believers in putting market dominance before profits got their biggest IPO opportunity perhaps ever last week, with Uber’s much-awaited dud of a market debut. With a market cap hovering around $64 billion, Uber is far below the $120 billion it was initially rumored to target. Nonetheless, one could convincingly argue it’s still a rich valuation for a company that just posted a Q1 loss of around $1 billion on $3 billion in revenue.

So how do Uber’s revenues, losses and valuation stack up amidst the recent crop of unicorn IPOs? To put things in context, we assembled a list of 15 tech unicorns that went public over the past three quarters. We compared their valuations, along with revenues and losses for 2018 (in most cases the most recently available data), in the chart below:

 

Put these companies altogether in a pot, and they’d make one enormous, money-losing super-unicorn, with more than $25 billion in annual revenue coupled to more than $6 billion in losses. It’ll be interesting to revisit this list in a few quarters to see if that pattern changes, and profits become more commonplace.

History

It’s easy to draw comparisons to the decades-old dot-com bubble, but this time things are different. During the dot-com bubble, I remember penning this lead sentence:

“If the era of the Internet IPO had a theme song, it might be this: There’s no business like no business.”

That notion made sense for bubble-era companies, which commonly went public a few years after inception, before amassing meaningful revenues.

That tune won’t work this time around. If the era of the unicorn IPO had a theme song, it wouldn’t be nearly as catchy. Maybe something like: “There’s no business like lots of business and lots of losses too.”

I won’t be buying tickets to that musical. But when it comes to buying IPO shares, the unicorn proposition is a bit more appealing than the 2000 cycle. After all, it’s reasonably plausible for a company with dominant market share to tweak its margins over time. It’s a lot harder to grow revenues from nothing to hundreds of millions or billions, particularly if investors grow averse to funding continued losses.

Of course, the dot-com bubble and the unicorn IPO era do share a common theme: Investors are betting on an optimistic vision of future potential. If expectations don’t pan out, expect share prices to follow suit.

The case for corporates to fill the seed vacuum

Over the past five years, there has been a clear drop in seed investing. Between 2010 and 2014 there was an influx of “micro” VCs, perfectly equipped to deploy seed capital. Since then, we have seen a gradual decline.

One key reason is that the Micro VCs were successful. Turns out that investing at the seed stage is a really strong strategy for generating returns. Their portfolios performed very well and, as a result, were able to raise a much larger second and third fund.

Unfortunately, once your fund size exceeds $75 million, I’d argue, it is very difficult to focus on the seed stage. It is simply too difficult to identify enough quality opportunities to deploy all that capital. Instead, you need to write bigger checks. In order to do that, you start to focus on later rounds. This leaves a gap at the seed stage, which I’d argue, is the most exciting.

Because of that, I believe there is an incredible opportunity for this gap to be filled by corporate venture funds. We, at dunnhumby, have invested here, successfully, for years. And by successfully, I don’t mean just financially, though we have returned far more than we have invested; I also mean strategically. There are incredible strategic benefits to investing at the seed stage.

Innovation

The seed stage is where the greatest innovation is happening. We invest to inform our own strategic direction and identify new technologies and business models prior to their impact on our own business. We also use it to identify and embed with emerging companies who could, one day, be great partners.

In the recent surge of corporate innovation efforts, venturing is not leveraged nearly enough. There are few ways of exposing innovation better than aligning with a company that is innovating daily as a means of survival. There is no better inspiration than watching a team of two grow into a team of 100-plus, often pulling the slower-moving corporate along for the ride.

Collaboration

There is a flexibility and eagerness with early-stage companies that allows for greater collaboration. They are not so large as to have their own, built-out bureaucracy, and are actively willing to work together. For many, it is why they take money from a strategic, in the hope that there is more than just capital that comes from the relationship.

In many cases, these synergies do not emerge right away. However, there is a closeness that forms between the two companies that begins to bear fruit, from my experience, about one year post-investment.

For the startup, there is increased exposure to the investor’s client base and resources. For the corporation, there is firsthand insight into the success of the startup’s business model, technology and market. From this, partnership and acquisition opportunities emerge.

M&A and partner pipeline

Because of the strategic nature behind these investments, they also act as an incubator for future partnerships and acquisitions.

Participating at the seed stage does not require significant capital contributions.

By aligning at the seed stage, you have the unique opportunity to watch the company grow. What is the market demand and is there an opportunity to enter a new space before others have realized the opportunity? Often, we will take a board or board observer position with the company, which brings even greater insight into their performance, as well as the potential upside of an even closer relationship.

Also, nearly as important, is that you gain an even greater insight into the company culture and their alignment with your own. In most cases, these discussions will emerge from early collaborations, where your broader teams will have the opportunity to interact and form a culture of their own. This cultural alignment will increase the likelihood of a successful outcome, whether that is a partnership or full acquisition.

Value

Participating at the seed stage does not require significant capital contributions. For one later-stage investment, you could make three to four seed investments, which increases your exposure to the above items and drastically reduces the financial impact on your balance sheet. If done right, within four to five years, the fund should contribute much more than it costs.

Does this mean that the corporate should finance the entire seed round? Not typically. In fact, for almost all of our investments to date, we are participating as part of a syndicate of investors. Often this syndicate is made up of other corporate investors (often referred to as “Strategics”). This reduces risk as well as the financial burden for each investor at this stage. The goal is to get a seat at the table. For strategic purposes, there is little difference between owning 5% versus 20% at this stage. Once the company grows larger, this dynamic will change.

Conclusion

At dunnhumby we invest in less than 2% of the companies we meet with. We are diligent about where we invest. However, I’d argue that the 98% we pass on are nearly as important. Because we have an investment arm, we are exposed to incredible innovation across a range of industries that most companies, that lack a seed investing strategy, do not see. At least, not until it is too late. Capital gives us a seat at the table.

These conversations provide signals into emerging trends in our industry, as well as our clients’ industries. When we pass, often the relationship does not end. Many times, they will lead to partnership discussions, referrals and introductions that are equally beneficial to the startup.

The opportunity is there. Corporations just need to seize it.

How startups can use Amazon’s SEO best practices to dominate new shopping verticals

Amazon dominates the top ranking positions of Google for tens of thousands of ecommerce queries, but there are plenty of products in newer shopping categories where Amazon has not yet achieved SEO supremacy. Retailers in nascent verticals have an opportunity to follow Amazon’s SEO playbook and become the default ranking ecommerce website.

Achieving this success can be done purely by focusing on on-page SEO without the need to build a brand and a backlink portfolio that rivals Amazon.

For those unfamiliar with mechanisms of SEO, there are essentially two streams of SEO tactics

  1. On-page SEO – This is anything to do with optimizing an actual page or website for maximum SEO visibility. Within this bucket will fall efforts such as the content of a page, metadata, internal links, URL/folder names,  and even things like images.
  2. Off-page SEO – A key component of Google’s algorithm is the quality and sometimes quantity of the links from external sites that point to a page or website. At a high level the better backlinks a page or website has the more authority the page has to rank in search.

On-page SEO teardown

Delving into just their on-page SEO, their tactics can be divided into four distinct areas which we will go through in detail.

  1. Content
  2. SEO site architecture
  3. Cross-linking
  4. Page layout

If you are following along with this process, make sure to log out of your Amazon account or open up an incognito window. Google only views the logged out version of the site, so all of Amazon’s SEO efforts are focused there.

Reality Check: The marvel of computer vision technology in today’s camera-based AR systems

British science fiction writer, Sir Arther C. Clark, once said, “Any sufficiently advanced technology is indistinguishable from magic.”

Augmented reality has the potential to instill awe and wonder in us just as magic would. For the very first time in the history of computing, we now have the ability to blur the line between the physical world and the virtual world. AR promises to bring forth the dawn of a new creative economy, where digital media can be brought to life and given the ability to interact with the real world.

AR experiences can seem magical but what exactly is happening behind the curtain? To answer this, we must look at the three basic foundations of a camera-based AR system like our smartphone.

  1. How do computers know where it is in the world? (Localization + Mapping)
  2. How do computers understand what the world looks like? (Geometry)
  3. How do computers understand the world as we do? (Semantics)

Part 1: How do computers know where it is in the world? (Localization)

Mars Rover Curiosity taking a selfie on Mars. Source: https://www.nasa.gov/jpl/msl/pia19808/looking-up-at-mars-rover-curiosity-in-buckskin-selfie/

When NASA scientists put the rover onto Mars, they needed a way for the robot to navigate itself on a different planet without the use of a global positioning system (GPS). They came up with a technique called Visual Inertial Odometry (VIO) to track the rover’s movement over time without GPS. This is the same technique that our smartphones use to track their spatial position and orientation.

A VIO system is made out of two parts.

Preparing for a future of drone-filled skies

The last few months have seen an escalating series of incidents in which the harmful elements of drones have loomed large in the public eye. In April, rumors of a coup in Saudi Arabia flared after a recreational drone was shot down when flying into an unauthorized zone in the capital. August saw a drone attack on the president of Venezuela. In late December, 10,000 flights carrying 140,000 passengers were grounded over the course of 36 hours at Gatwick Airport in the United Kingdom. In the months since, a number of airports, ranging from Dublin to Dubai, have experienced delays on account of drone activity. The Gatwick incident alone is estimated to have cost the aviation industry as much as $90 million.

While these are spectacular incidents, they speak to the growing ubiquity of drones. Perhaps even more telling than those events were the efforts that authorities put into air security for the Super Bowl. In the days leading up to the event, PBS reported a “deluge” of drones despite a ban on their presence in the airspace around the stadium.

These incidents underline the conclusion that mapping the skies — as well as policing them — is moving from the theoretical to the practical. Just as Google took the noise of the early internet and arranged it into something comprehensible and navigable, so we need to organize and understand the sky as drones become a growing part of civilian life.

Most of the examples I outlined above are “bad drone” problems — problems related to drones that might be hostile — but understanding what entities are up in the air is critical for “good drone” problems too. While drones have risen to prominence primarily as threatening entities, they’ll soon be central in more benign contexts, from agriculture and weather forecasting to deliveries and urban planning. We could soon pass a tipping point: In early 2018, the Federal Aviation Authority (FAA) announced that their drone registry had topped 1 million drones for the first time. While most of those were owned by hobbyists, the agency expects commercial drone numbers to quadruple by 2022. At some point, it’s going to be vital that we have systems for ensuring “good drones” don’t crash into each other.

We need to organize and understand the sky.

For comparison, the FAA reports that in the U.S. there are around 500 aircontrol towers coordinating 43,000 airplane flights a day, with up to 5,000 planes in the sky at any one moment. Some 20,000 airway transportation system specialists and air traffic controllers spend their professional lives keeping those 5,000 planes from bumping into each other. Consider, then, the effort and resources required to prevent potentially hundreds of thousands, or even millions, of concurrently airborne drones from colliding. This a big problem with real stakes.

Countless companies have emerged in recent years to tackle the challenge of organizing this ecosystem. Significant investor capital has gone into different approaches to making sense of a sky filled with drones, from point-sensor solution providers such as Echodyne and Iris Automation to drone management systems such as KittyhawkAirMap and Unifly“Bad drone” solutions ranging from lasers and ground-based bazookas to malware and enormous net shields have cropped up.

The most exciting approach, however, is a unified one that addresses both “good drone” and “bad drone” challenges; one that maps well-intentioned drones and defends against nefarious ones. In this case, knowledge is the first step to understanding, which enables suitable action. In practice, that means we need to start with a firm data layer — typically gathered through a radar detection system. That data layer allows practitioners to determine what and where entities are in the air.

With that data in hand, understanding the nature of those entities becomes possible — specifically, if they’re benign or malicious. That designation enables the final step: action. For benign drones, that means routing them to the right destination or ensuring they don’t crash into other drones. In the case of malicious drones, action means mobilizing one of the exciting solutions we mentioned above — malware, lasers or even defensive drones to neutralize the potential threat.

A full-stack approach is helpful for formulating a seamless response, but the most important element is the data layer. It’s still early days in the mainstreaming of drones, but there’s great value in getting a headstart on creating the infrastructural and security framework for when that moment arrives. Gathering data now gives us more of a baseline for drones in the future. It also allows new entrants to offer solutions on top of that foundation. Moreover, there are strong positive externalities at work here: As with cellular networks 25 years ago, the decision of early adopters to adopt detection and defense systems benefits others who are slower to move. When Gatwick puts that infrastructure in place, Heathrow benefits.

Ultimately, there are as many — if not more — reasons to get excited about solving the problem of drone-filled skies as there are reasons to be concerned about their negative implications. Creating the rails for what Goldman Sachs estimated will be a $100+ billion market is a tremendous opportunity. The sooner we plan for the positive implications of drones in addition to their malicious potential, the better.

Beyond costs, what else can we do to make housing affordable?

This week on Extra Crunch, I am exploring innovations in inclusive housing, looking at how 200+ companies are creating more access and affordability. Yesterday, I focused on startups trying to lower the costs of housing, from property acquisition to management and operations.

Today, I want to focus on innovations that improve housing inclusion more generally, such as efforts to pair housing with transit, small business creation, and mental rehabilitation. These include social impact-focused interventions, interventions that increase income and mobility, and ecosystem-builders in housing innovation.

Nonprofits and social enterprises lead many of these innovations. Yet because these areas are perceived to be not as lucrative, fewer technologists and other professionals have entered them. New business models and technologies have the opportunity to scale many of these alternative institutions — and create tremendous social value. Social impact is increasingly important to millennials, with brands like Patagonia having created loyal fan bases through purpose-driven leadership.

While each of these sections could be their own market map, this overall market map serves as an initial guide to each of these spaces.

Social impact innovations

These innovations address:

Market map: the 200+ innovative startups transforming affordable housing

In this section of my exploration into innovation in inclusive housing, I am digging into the 200+ companies impacting the key phases of developing and managing housing.

Innovations have reduced costs in the most expensive phases of the housing development and management process. I explore innovations in each of these phases, including construction, land, regulatory, financing, and operational costs.

Reducing Construction Costs

This is one of the top three challenges developers face, exacerbated by rising building material costs and labor shortages.

Innovations in inclusive housing

Housing is big money. The industry has trillions under management and hundreds of billions under development.

And investors have noticed the potential. Opendoor raised nearly $1.3 billion to help homeowners buy and sell houses more quickly. Katerra raised $1.2 billion to optimize building development and construction, and Compass raised the same amount to help brokers sell real estate better. Even Amazon and Airbnb have entered the fray with high-profile investments.

Amidst this frenetic growth is the seed of the next wave of innovation in the sector. The housing industry — and its affordability problem — is only likely to balloon. By 2030, 84% of the population of developed countries will live in cities.

Yet innovation in housing lags compared to those of other industries. In construction, a major aspect of housing development, players spend less than 1% of their revenues on research and development. Technology companies, like the Amazons of the world, spend nearly 10% on average.

Innovations in older, highly-regulated industries, like housing and real estate, are part of what Steve Case calls the “third wave” of technology. VCs like Case’s Revolution Fund and the SoftBank Vision Fund are investing billions into what they believe is the future.

These innovations are far from silver bullets, especially if they lack involvement from underrepresented communities, avoid policy, and ignore distributive questions about who gets to benefit from more housing.

Yet there are hundreds of interventions reworking housing that cannot be ignored. To help entrepreneurs, investors, and job seekers interested in creating better housing, I mapped these innovations in this package of articles.

To make sense of this broad field, I categorize innovations into two main groups, which I detail in two separate pieces on Extra Crunch. The first (Part 1) identifies the key phases of developing and managing housing. The second (Part 2) section identifies interventions that contribute to housing inclusion more generally, such as efforts to pair housing with transit, small business creation, and mental rehabilitation.

Unfortunately, many of these tools don’t guarantee more affordability. Lowering acquisition costs, for instance, doesn’t mean that renters or homeowners will necessarily benefit from those savings. As a result, some tools likely need to be paired with others to ensure cost savings that benefit end users — and promote long-term affordability. I detail efforts here so that mission-driven advocates as well as startup founders can adopt them for their own efforts.


Topics We Explore

Today:

Coming Tomorrow:

  • Part 2. Other contributions to housing affordability
    • Social Impact Innovations
    • Landlord-Tenant Tools
    • Innovations that Increase Income
    • Innovations that Increase Transit Accessibility and Reduce Parking
    • Innovations that Improve the Ability to Regulate Housing
    • Organizations that Support the Housing Innovation Ecosystem
  • This is Just the Beginning
  • I’m Personally Closely Watching the Following Initiatives.
  • The Limitations of Technology
  • Move Fast and Protect People


Please feel free to let me know what else is exciting by adding a note to your LinkedIn invite here.

If you’re excited about this topic, feel free to subscribe to my future of inclusive housing newsletter by viewing a past issue here.