Edward Tse's Blog

June 19, 2019articles

China Daily | Many Unicorns Don’t See Profits

China Daily Global

Updated: 2019-05-27

The Hurun Research Institute, which compiles lists of China’s wealthiest individuals, released the Hurun Greater China Unicorn Index 2019 Q1 along with the Hurun China Future Unicorns 2019 Q1 on May 7.

According to Rupert Hoogewerf, chairman and chief researcher of the Hurun Report, which is a research, media and investments business, the total number of unicorns-startup companies valued at $1 billion or more-in China has reached a record 202, possibly the highest across the globe.

These Chinese unicorns include Alibaba’s financial technology affiliate Ant Financial, which is valued at $150 billion, and ByteDance, an internet company behind machine learning-enabled content platforms like TikTok (also known as Douyin) and Toutiao.

Tech startups today have not been able to replicate the financial success of well-known tech giants such as Google, Facebook and Alibaba. For example, China overtook the United States in AI investment in 2017, but around 90 percent of the AI companies were unprofitable.

This phenomenon is not exclusive to China. Some of the biggest names around the world have yet to make money, such as the publicly listed electric car maker Tesla and music streaming company Spotify, which are losing billions. Ride-hailing platform Uber lost $1.8 billion last year, but still made its debut on the New York Stock Exchange this month.

 

Although there are many startups that are unprofitable, it is probably unfair to compare established tech companies with the internet unicorns of today. The nature of entrepreneurship implies that there will always be winners as well as losers, best illustrated recently by the dotcom crash.

So what is driving the rapid valuation growth of many internet startups that are still incurring huge financial losses? Favoring growth over profit, investors are embracing so-called “growth companies” like Amazon, the world’s third most valuable company despite pale profits. As capital is currently cheap, creating growth is more valuable than improving margins.

Why then, do some startups fail but some eventually succeed? First, many of those that failed were not able to address an essential need. The digital boom and fast money in the 2000s created plentiful space for first-generation technological companies, especially in sectors like e-commerce.

However, it is becoming harder for the current generation of tech companies to tap into that growth, since low-hanging fruit has already been taken.

As investors continue to search for the next Alibaba or Google and more unicorns appear, some might just need time to prove themselves, while others will simply be growing for the sake of growth without any prospects for profit.

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Founder & CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. —learn more
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