Beware The “Mythical Unicorns”.

by Patrick Liew on August 20, 2019

Beware The “Mythical Unicorns”.

Unicorns in the business world refer to privately-held tech companies that are valued from US$1 billion upwards.

These companies are known to be growing and globalizing at great speed.

Their growth is supported by rapid advancements in online commerce, cloud computing, mobile devices, artificial intelligence, social media, and other technology.

Unicorns are generally more focused on “blitzscaling” or growing their customer base rapidly than improving financial bottom lines.

Amongst the current stable of unicorns; like everything in life, there are real stuffs and there are others that are plain illusions – and I must add some of them are highly-appealing illusions.

Many unicorns have sound business models that value-add to their customers, and they have potential to increase their profits, advantages and growth at a rapid rate.

On the other hand, there are unicorns that are sprinting on steroid because of enormous amount of “foolish” capital raised to fund their growth.

The following are some of the key challenges faced by unicorns.

1. Business Model

To sustain their growth, unicorns need to achieve economies of scale so as to lower costs and improve profit margins.

Ensure that barriers of entry are raised high enough to deter new competition, and stop incumbents on their track or better still, take over their market shares.

Margins have to improve in order to support higher valuation prices and facilitate raising of capital to fund stronger growth.

One of the red flags to watch out for is that many unicorns are developing other products and services, and going into different markets to enhance growth rates.

For example, Uber has launched Uber Eats, its food delivery business, and it is also looking into rolling out Autonomous Vehicles.

These new businesses may not necessarily win hearts and minds of stakeholders, improve competitive edge, and create desirable network effects.

Conversely, over expansion may dilute foci on their current markets and core competence.

In addition, developing new offerings and penetrating new markets may increase expenditures and deplete their financial resources, a major lifeline to fuel their quality and speed of growth.

2. Consumers

Consumers are becoming increasingly sophisticated and demanding.

They may not necessarily be loyal to any particular vendor and in fact, many have been known to switch camps depending on which vendor offers them the best deals.

Case in point, WeWork may have been one of the pioneers in the serviced office and co-working space industry.

However, WeWork can hardly prevent developers and landlords from moving into its market space and offer similar or better services.

A red flag to be concerned about is that unicorns have not been the most forthright about revealing how many of their customers are repeated customers or have moved on to support their competitors.

If unicorns cannot retain their customers and encourage repeated purchases and referrals, they are building their businesses on shifting sands.

3. Competition

Many unicorns may have first-mover advantages.

However, with collapse of the informational float, their business models can be easily adapted and even improved upon.

They face current and new competitions – locally as well as from other countries.

Case in point, Uber fought severe cash-draining battles and lost their market shares in different market segments to companies such as Lyft and Gett in the US, Didi Chuxing in China, and Grab In Singapore.

4. Funding

Growth of unicorns is usually supported initially by angel investors, venture capitalists, and alternative investment firms.

Sovereign wealth funds and
institutional investors have also invested in different unicorns and many of them have invested quite possibly because of fear of missing out.

With each subsequent round of funding, valuation prices of unicorns have been growing.

Are investors unwittingly or carelessly helping to set up a musical chair or worst, a pyramid scheme to attract others to find a lot of gold at the end of the rainbow?

There’s growing concern if the increase in valuation prices are justifiable and equitable.

Consider that Lyft’s shares have fallen substantially below its IPO prices.

Some unicorns such as Pinterest plan to float at a lower valuation prices than what it was deemed to be worth.

In addition, some unicorns are offering better deals to new investors than those that had invested in them at an earlier stage.

If similar phenomenons happen to other unicorns in the near future, it may dissuade investors from supporting unicorns.

Many unicorns may not be able to survive a cut-off or a slow-down in funding to support their businesses and future growth.

In addition, some unicorns have restricted investors’ voting rights to prevent investors from intervening in their business operations.

Executives of some unicorns have also established “poison pills” to prevent investors from influencing major initiatives, such as possibilities of being acquired or merged with other companies for stronger growth.

Some unicorns are making it hard for investors to manage and track their investments and take the necessary actions to protect their investments.

Unicorns have to continue to prove that their business models are providing adequate values to justify potential increases in profits and valuation prices.

And that they are not just spending other people’s money to “buy” customer base and growth.

5. Regulatory Challenges

Authorities were unable to enact legislation fast enough to regulate unicorns’ fast-changing business models and their evolving practices in the marketplace.

Also, at earlier stages in the growth of unicorns, regulators may be hesitant to intervene and interfere in a unicorn’s governance and operations because they do not want to be seen as potentially hindering entrepreneurship, creativity and innovation.

In fact, governments of developed countries have created “regulatory sandboxes” to allow many unicorns to contravene existing laws and even have unfair advantages over incumbents in similar industries.

For example, Uber was able to operate without need for requisite taxi licenses in many countries.

AirBnB was offering illegal sub-lettings in many of their targeted markets.

Many unicorns were allowed almost free play to grow at all costs in a somewhat winner-take-all battle to capture market shares.

Unfortunately, some unicorns have abused such privileges.

They have caused undue effects on society, including causing traffic congestion’s, weakening of public transportation systems, and abuses of human resources.

Many governments are increasingly crafting regulatory measures to prevent unicorns from “breaking things”, a term used by Facebook and achieving unfettered growth.

Laws are being crafted to regulate online content, stamp out fake news, prevent data leak and undue use of private data, and impose digital taxes.

Authorities are also sharpening antitrust laws to prevent profiteering due to a unicorn’s undue dominance and influence in the marketplace.

6. Economy

Unicorns was able to thrive in part because interest rates have remained relatively low for a protracted period of time.

Low interest rate has fueled channeling of funds to unicorns in the hope of generating better returns.

However, interest rates have increased and may potentially continue to increase.

If that happens, unicorns may find it harder to to raise funds as there may be more choices in the capital market.

Just as importantly, the global economy is predicted to slow down and dark clouds are looming in the horizon.

All it takes is one wrong turn of event such as undue fallouts from the US-China trade war, and the economy may go into a spin.

A downturn in the economy may put off or dampen investors’ interests in funding unicorns.

In summary, be mindful as the proverb goes, all that glitters may not be gold.

Ignorance, apathy, fear, greed and foolishness are five horsemen that contribute to formation and bursting of economic bubbles.

A substantial sum of money has been invested in unicorns and the investment will most likely continue to increase.

The stakes in unicorns are much higher than that which was behind the dot-com boom that occurred roughly from 1994 to 2000.

Any potential crash may cause more damages and destructions than the dot-com crash that happened from March 11, 2000, to October 9, 2002.

Will history happen again?


I hope this message will find a place in your heart.

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