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Unicorns and the Future of Capitalism by Sven R. Larson

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Essay

Unicorns and the Future of Capitalism

Capitalism is the most successful economic system humankind has ever invented. It can elevate every nation, every society out of poverty, should it so desire. 

The key to the success of capitalism is that the system does not designate any winners ahead of time. They emerge ex post facto, carried to success by their own merits. 

At the same time, the system is far from infallible; as Albert Bikaj insightfully points out, neoliberalism, the most “naked” pro-capitalist ideology, promotes capitalism without values:

Since the only goal of the free market is profit, the market must offer everything the consumer asks for, regardless of ethics and values. The principal neoliberal economic value is thus popularity, which goes hand in hand with vulgarity—something mega-corporations today exploit.

In a nihilistic society, Bikaj notes, corporations are free to “embrace and propagate” wokeism while undermining “family, religious and traditional values, culture and civilization.” These are harsh words for any pro-capitalist to hear, but they are essential. 

At the same time, as I noted back in June, the problem with nihilistic capitalism is not the economic system itself, but human nature:

[In] absence of higher moral values, the profit motive expands beyond its proper confinements. As it does, it encourages activities that boost profits even at the expense of other values. 

Put simply, while capitalism is vulnerable to exactly the nihilistic problem that Albert Bikaj points to, it is by no means a given that the neoliberal roll-back of government is the source of the problem. Increased government per se may not be the solution. 

Cronyism is a good example of bad government interference with capitalism. Entrepreneurs and investors learn to use their clout to wield the sword of government powers to their advantage. As it expands, cronyism takes the capitalist’s focus away from the pursuit of profits by means of productive industry and trade. His pursuit of profits is detached from the economic activity that is the very foundation of said profits; in place of productive industry and trade, the capitalist’s pursuit of profit gets attached to non-productive shortcuts.

For the most part, cronyism rewards government lobbyists, political donors, and winners of procurement contracts. However, the private sector is increasingly home to its own version of pursuing profits without a foundation in productive work. A new class of entrepreneurs has emerged, who see a very different path to making money than men like Henry Ford or Ingvar Kamprad.

This new entrepreneurial class is clustered around the so-called technology industry. It is present all over the world but has made its biggest footprint in America. Their businesses are often referred to as “tech” companies, in good part because they often focus their customer interaction to a telephone application, or “app.” The app essentially replaces sales-center phone operators from the pre-internet era. 

App-based businesses often start their lives as so-called unicorns. These are start-up companies with the potential to “disrupt” existing markets and existing technology. Unicorns also have the ambition to be introduced on the stock market at some point. 

The stock-market IPO (initial public offering) is crucial; in order to see why, we need to take a closer look at four tech unicorns that have already made it onto the New York Stock Exchange, NYSE. Three of them are active in multiple countries. (All financial information is retrieved from nasdaq.com.)

WeWork offers landlord services. Their specialty is short- or long-term leasing contracts on office space for businesses. Their configurations run from individual desks all the way to full-floor, customized suites. They sell their services over the internet, preferably via their smartphone app. 

WeWork has a stormy past, including a badly botched initial attempt to enter the NYSE. Today, they sell their office rental services in 23 countries and pulled in close to $2.6 billion in revenue last year.

Airbnb is a travel agency specializing in overnight accommodations provided by private homeowners to private or business travelers. This bed-and-breakfast service has existed for decades in, e.g., in Britain and Denmark; the market-disrupting idea behind Airbnb is to drop the “breakfast” part and to use a telephone app as the hub for providing its services. 

With a presence in 220 countries, Airbnb is present in every corner of the world. It took in almost $6 billion in revenue in 2021. 

Uber offers its services in approximately 85 countries (the exact number varies a little bit based on source). This company took the call-a-cab service into the smartphone app era, but they did not just replace the old-fashioned taxi phone receptionist with a click-your-phone technique. They also challenged the existing licensing system for taxi services by contracting private citizens and their personal vehicles. 

Much like Airbnb, the business idea behind Uber was to modernize the brokering of supply and demand for an already existing service. They have been successful, at least in terms of revenue: in 2021 Uber took in $17.5 billion.

DoorDash are reportedly only available in North America and Australia, but their 2021 revenue still reached almost $4.9 billion. Their business idea is the same that my grand uncle offered from his small grocery store in Kramfors, Sweden. He took orders by telephone and sent his errand boy out on a cargo-box-equipped tricycle. 

DoorDash has upped the ante, letting people place their orders through a smartphone app and have private citizens use their own vehicles to make the deliveries. 

There are more app-based unicorn companies, but these four are representative of the entrepreneurial philosophy that often characterizes these companies. To that point, it is interesting to note that three of these companies consistently take in insufficient revenue to pay for their expenses. The fourth barely breaks even.

In 2018, DoorDash earned $291 million but ran up $501 million in combined cost-of-revenue and operating-expense outlays. In other words, they spent a total of $172 for every $100 they made. In 2021 the imbalance had improved, but costs still overshot revenues by 9.2%. Their finances were also in the red in 2019 and 2020.

Uber, which has a division that directly competes with DoorDash, also runs deficits every year. From 2016 through 2021, they spent on average 48.5% more than they earned in revenue. In fairness, though, the deficit in 2021 was the smallest on record.

WeWork is in even worse shape: where the delivery-service companies are crawling closer to profit, this landlord-service business is sinking deeper into the red. In 2018 they spent $3.5 billion, almost 100% more than their revenue; the red ink grew to $213% in 2019 and 227% in 2020. In 2021 their costs were 244% of revenue. 

The only one of these companies that can almost break even is Airbnb. With the exception of the pandemic year of 2020, their costs have on average exceeded revenue by only 1.5% since 2017. At the same time, their earnings before interest and taxes, EBIT, was only 2.3% of revenue in 2021, their best financial year to date. 

They still ran a loss after taxes and interest payments. They share this no-profit status with Uber (-$489 million in negative profit in 2021) and DoorDash (-$469 million). WeWork reported a loss (negative profit) of $4.4 billion last year—on less than $2.6 billion in revenue.

If these four companies were representative of what American capitalism had to offer, there would be reasons for grave concern about the future of our economic system. There may still be: despite consistent losses or shaky-break-even results, these companies continue to operate, even grow. The only way this can happen is if they get infusions of money from the outside, either in the form of government subsidies or venture-capital investments. 

While private investors are of course free to do whatever they want with their money, there comes a point where venture-capitalist investors have to earn money on their investments. Despite the talk among unicorn entrepreneurs of finding “angel investors” who simply donate their money to them, eventually the lack of profit will cause even the most benevolent faucet to dry up.

What happens at that point? Hopefully, capitalism can survive based on a big enough presence of traditional, profit-making corporations and patient investors with their eyes on long-term profits, not short-term speculative capital gains. This will function as a dampener on the negative fallout when the executives of no-profit, so-called tech companies reach the end of work-free, investor cash infusions. 

Since they all started out as “tech unicorns”, i.e., upstarts with a “technology” idea and their eyes set on the stock market, they have been able to dodge the usual requirement that a corporation makes money. The very business idea with a unicorn is that it is so special in its innovative prowess and “industry disruption” acumen that it deserves to live off venture capital for years on end. 

The problem is that while the unicorn founders and executives adopt this as their very business model, the venture capitalists who fund them take a bigger risk betting on a successful stock-market IPO, than if the company was consistently turning a profit. Their outlook on getting their money back with some profit is contingent on the stock market valuating the company higher than they did when they invested in it.

Plainly: a venture capitalist buys $100 worth of stocks in the Fantastic App Development company. The FAD company does not make nearly enough money to pay for its expenses; while they develop their app-based idea and attract a few customers, they also constantly hunt for more investors. 

One day, when the hype around FAD is big enough, they announce their IPO and the stock market goes bonkers. The venture capitalist sells his FAD stocks for $200. He now got his money back and, hopefully, a profit that made it worth the risk.

If FAD makes a profit, it becomes assimilated into the stock market like traditional corporations. Investors will include its stock in their portfolios for the stream of dividends it will produce. However, if FAD continues to run a loss (as our esteemed examples above), then whoever bought its shares from the venture capitalist has only one way to turn a profit: to hope that FAD’s stock value continues to rise.

Right here, the tech unicorns have set a bad precedent for the future. While these companies do not dominate any major stock market—the top-ten list on NYSE is dominated by banking and finance corporations—they do create an environment where investors divert interest from long-term profit to short-term capital gains. 

In other words, it becomes more important to prop up the stock-market value of a company, than to make it financially solid for the long term. As an example of what this can lead to, Airbnb, the least unprofitable of the four examples above, has a market cap—total stock value—that is 18% larger than Ford Motor Company. At the same time, Ford rakes in 22.7 times more revenue than Airbnb does. 

The stock market value of Uber, whose total costs over the past six years have exceeded revenue by 48.5% on average, is almost the same as Ford’s, yet Ford’s revenues are almost eight times bigger than Uber’s. 

The notoriously unprofitable food-delivery company DoorDash has a market cap that is 82% of that of DuPont, a 200-year-old engineering-heavy electronics and materials company. Total DuPont sales revenue is four times that of DoorDash.

Many factors go into determining the stock-market value of a company. Many factors also go into the decisions that investors make as they choose where to put their money to work. However, when the traditional pursuit of profits through productive entrepreneurship takes a back seat to speculation and pure market hype, the very essence of capitalism is in danger. 

For all its faults and shortcomings, capitalism is worth saving. If we lose it, what will we get instead?

Sven R. Larson is a political economist and author. He received a Ph.D. in Economics from Roskilde University, Denmark. Originally from Sweden, he lives in America where for the past 16 years he has worked in politics and public policy. He has written several books, including Democracy or Socialism: The Fateful Question for America in 2024.

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