At the end of last month, US-based ride-sharing service Lyft kicked off what is expected to be a record year for US flotations of private companies worth at least $1bn – so-called unicorns. Lyft incurred a net operating loss of $911.3m in 2018, a record for any business in the year leading up to its initial public offering, according to the Wall Street Journal. It might be a short-lived record. Uber, Lyft’s larger peer, could have its IPO as soon as this month and posted a $1.8bn loss last year.
Overriding the losses for investors, however, is the growth prospects for these businesses. Lyft reported revenues of $2.2bn last year, twice its 2017 revenues, while Uber’s increased to $11.3bn, up 43%.
And even the losses might be overstated. A significant component of Lyft’s $3.3bn of expenses relates to its intangible assets and might be more properly capitalised as an asset on the balance sheet instead of an expense on the income statement, according to Antonella Puca in a blog for the CFA Institute.
In their book, Capitalism Without Capital: The Rise of the Intangible Economy, Jonathan Haskel of Imperial College and Stian Westlake of Nesta say investment in intangibles, such as research and development, training, design, organisational development, branding, marketing, software and data, and original artistic material, has gradually increased over the past half-century, overtaking traditional tangible investments in buildings, equipment and manufacturing around the time of the global financial crisis of 2007-08.
Lyft and Uber are effectively companies with limited tangible assets, as they rely on drivers with their own cars, and fewer employees, as the workers are seen as contractors or freelance. Similarly, room-sharing service Airbnb, data analytics provider Palantir Technologies, and social network Pinterest, which were also all valued at more than $10bn in their latest venture rounds and potentially also heading for their IPOs this year, according to data provider Pitchbook, rely on intangibles for their value.
In addition, messaging service Slack is set to go public this year via a direct listing rather than a traditional IPO, accordng to data service PitchBook, while cybersecurity service Crowdstrike, transport efficiency service Peloton, video conferencing producer Zoom and food delivery service Postmates are “among the other unicorns that could ultimately make 2019 a year of VC-backed IPOs to remember” and worth a combined $200bn primarily through intangible assets.
This is underpinning similar to the wave of Chinese IPOs that started about 18 months ago (see special report). However, a notable point of difference has emerged in their approaches to investing in the ecosystem they have helped spawn. Slack has set up an effective corporate venturing fund of its own but Uber and other US unicorns have made limited venture deals from the tens of billions of dollars raised (see analysis). By comparison, many of the most highly-valued China-based unicorns have used corporate venturing to develop their products, services and international reach.
While Lyft and Uber might be competing more intensely in the US, China-based peer Didi Chuxing has already consolidated its domestic market and taken stakes or acquired peers in the main international markets even as it rolls out more advanced mobility services.
The shift in value-add from the US to China has happened. The number of VC-backed IPOs in the US declined from 125 in 2014 to 58 in 2017, before rising to 85 last year, according to PitchBook data. Hong Kong alone in greater China had 133 IPOs last year raising about HK$300bn ($38.4bn), according to accountant KPMG, while the number of Chinese IPOs in the US hit an eight-year high last year with 33 listings on the New York and Nasdaq stock exchanges, according to the Financial Times.
However, while the attention is, rightly, on China’s growth and success, other parts of Asia have been perhaps under-appreciated. From Japan to India through Southeast Asia’s populous countries of Indonesia and the Philippines, corporate venturing groups have been seeding and funding a wave of success stories. Even beyond the omnipresent SoftBank, Japanese and other Asian corporations are starting to do more.
As the FT also noted, the “Asian century” will begin next year, when Asia’s share of world gross domestic product will, once again, exceed 50%.
But rather than view this as a bipolar world – US and China – the plurality of opportunity is such as to offer encouragement to all the investment hunters who dare to explore it and tackle the headwinds and challenges in their search for the next unicorns.
