Most Chinese Ex-Unicorns Are Unprofitable, But Fewer Than in America
Eighteen of 32 Chinese-Ex Unicorns are unprofitable or delisted (See below table), and many privately held Unicorns are also likely unprofitable. These Unicorns were valued at $1B or more while they were privately held, and the prefix “ex” means they have done IPOs and thus regularly report income. Only those startups defined as Unicorns after 2013, which was when Aileen Lee first described the phenomenon[i], and before 2018 are listed in the table. Newer unicorns are ignored because they will have had fewer years to achieve top 100 market capitalization and become profitable.
The 18 of 32 (58%) figure is high but not as high as the 85% that I have found for America’s ex-Unicorns in previous reports[ii]. The biggest reason for the lower percentage of unprofitable ex-Unicorns in China than in the U.S. is likely the more rapid economic growth of the latter than the former. China’s ex-Unicorns are on the average 11 years old, being founded in 2009, about the same age of America’s ex-Unicorns. But, 11 years in China is like 33 years in a Western country because China’s growth has been at least three times that of Western countries.
China’s much more rapid economic growth means that most of China’s ex-Unicorns initially competed against much weaker incumbents than did America’s Unicorns when they were founded. America’s Unicorns, mostly founded in the late 2000s and early 2010s, have been competing against well-entrenched incumbents such as Microsoft, Apple, Amazon, Netflix, Google, and Facebook, startups that were founded 17 to 45 years ago[iii]. These incumbents, sometimes called the FAAMNG, now represent almost 25% of America’s S&P stock index[iv]. In contrast, China’s ex-Unicorns and still privately held Unicorns have been competing against much weaker rivals with only five of China’s 10 most valuable companies founded before 1997 and three before 1980 (China Construction, China Bank, Agricultural Bank of China)[v].
Looking at the profitable startups in the top table, 4 of the 14 were founded at least 20 years ago and 9 of 14 were founded at least 10 years ago, The ones founded at least 20 years ago are of the Facebook (2004), Salesforce (1999), PayPal (1999), Google (1998), and Netflix (1997) era, the very era of incumbents that are providing tough competition against America’s Unicorns.
Furthermore, many of China’s ex-Unicorns were either spun off from previously existing companies or were founded by China’s most valuable companies including #1 Alibaba and #2 Tencent. These ex-Unicorns clearly received valuable assistance from the powerful incumbents, assistance received by few of America’s Unicorns. For instance, Alibaba spun off Ant Financial in 2014, Tencent spun off Weimob in 2013, Alibaba, Tencent, and Ping An founded Zhong An Online, Xiaomi founded Viomi and Huami, Meituan (and ByteDance) founded Li Auto, and Baidu founded iQiyi in 2010. The two biggest, Alibaba and Tencent, have invested in more than 30 startups (see figure[vi]) of which many (more than half?) are Unicorns.
The big role played by large incumbents in China’s startup system means that many of China’s Unicorns have had much smaller challenges than have America’s Unicorns. China’s Unicorns benefited from years of support and protection by large incumbents often selling their services to the incumbents or through them. For instance, Ant’s services were initially developed for Alibaba’s e-commerce businesses, WeiMob’s services built from WeChat, and Zhong An’s, Li Auto’s, and iQiyi’s services were built from similarly strong incumbents. In contrast, America’s ex-Unicorns have received much less support from strong incumbents.
Adjusting for these differences is difficult to do. Spinoffs involve the largest amounts of support and thus the founding dates for Alibaba and Tencent are used for Ant and Weimobi in the table, and removing the spinoffs increases the percentage of unprofitable startups from 58% to 62%. I also considered removing the startups that were founded by large incumbents, but the number of profitable and unprofitable ones are almost the same between the two groups and thus removing them would not change the percentage of unprofitable ex-Unicorns.
Moving to a different question, how different are the industries of Chinese and American ex-Unicorns? Ranging from fintech[vii] to ride sharing, food delivery, consumer Internet[viii], and business software[ix], the variety is similar. But there are only two business software ex-Unicorns in China vs. more than 20 in the U.S. and one, Weimob is a spinoff from Tencent. On the other hand, there are 3 electric vehicle and 5 hardware, which is much more than among American Unicorns. One hardware Unicorn is QuantumCtek, a provider of quantum communication hardware, something not found among America’s ex-Unicorns.
What about Unicorns that have yet to do IPOs? As of the end of June, 586 global Unicorns were valued at $1.9 trillion of which 233 are American and 227 are Chinese[x]. The similar number of Chinese and American Unicorns suggests that the number of completed and announced IPOs should be similar in the two countries. But there seems to be about ½ the number of completed IPOs in China as in the U.S., although this may be due to differences in available information[xi]; it is very hard to obtain information about Chinese startups without knowledge of the Chinese language. This article provides data on 32 Unicorn IPOs in China while I have discussed almost 60 completed and announced ones in the U.S. in previous Medium articles[xii]. This might be one reason Jack Ma has said it is time for Chinese Unicorns to go public[xiii].
The smaller number of Chinese IPOs is likely hiding the unprofitability of Chinese Unicorns, a trend that exists in America’s Unicorns. Only 6 of 45 American ex-Unicorns were profitable in 2019, according to an analysis I did at the end of March 2020, but this percentage seems to have fallen[xiv]. I have been unable to find a single profitable Unicorn among those that subsequently did or announced an IPO, a total of more than 20 Unicorns and winner-take all arguments are unlikely to change these results[xv]. If similar trends exist in China, it could be that most of the remaining privately held Chinese Unicorns are unprofitable and thus not releasing financial information and/or doing IPOs.
A similar argument was made in a recent article on China’s four Tigers of AI: SenseTime, CloudWalk, Yitu, and Megvii[xvi]. The article claims they are unprofitable and hungry for funding that is becoming harder to obtain. Megvii has more than $2billion in cumulative losses and the high VC funding appetites for the other three suggest they are also losing vast amounts of money. SenseTime has raised more than $4B but is only valued at $6B. The other two have raised less but details were not released during some funding rounds. CloudWalk raised $400, valued at 5.1B. Yitu raised $350M, valued at $3.5B. The article claims that all four startups need more funding and the drop in venture capital funding for AI startups suggests this may be difficult. Bigger drops occurred in the first half of 2020.
In summary, although a smaller percentage of Chinese than American ex-Unicorns are unprofitable, this mostly reflects less competition, fewer IPOs, more corporate spinouts and funding, and older startups. This suggests the lack of profitability among today’s Unicorns is a global phenomenon, one with a global explanation, and that the remaining Unicorns, ones that have yet to be IPOs, are also likely unprofitable whether they are in China, the U.S., India, or elsewhere.
[i] Lee, Aileen (2 November 2013). “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups”. TechCrunch. AOL.
[ii] Data for ex-Unicorns as of March are presented here: https://medium.com/@jeffreyleefunk/how-successful-are-todays-startup-unicorns-893043f32d24 Data for a larger set of Unicorns is presented in these articles for business software (https://medium.com/@jeffreyleefunk/can-business-software-unicorns-become-profitable-c038d4db5b98), fintech (https://medium.com/@jeffreyleefunk/can-fintech-and-insuretech-unicorns-become-profitable-2b586f50f81, deep tech (https://medium.com/@jeffreyleefunk/deep-tech-unicorn-startups-are-unprofitable-why-8f65dc7f2a8d), and the consumer Internet (https://medium.com/@jeffreyleefunk/will-consumer-internet-unicorns-ever-become-profitable-67c5c2cc24f3).
[xii] https://medium.com/@jeffreyleefunk/deep-tech-unicorn-startups-are-unprofitable-why-8f65dc7f2a8d. https://medium.com/@jeffreyleefunk/will-consumer-internet-unicorns-ever-become-profitable-67c5c2cc24f3. https://medium.com/@jeffreyleefunk/can-business-software-unicorns-become-profitable-c038d4db5b98. https://medium.com/@jeffreyleefunk/can-fintech-and-insuretech-unicorns-become-profitable-2b586f50f81