Business Columns & Blogs

Look at WeWork: Unicorns are pretty, but do you want to do business with them?

Adam Neumann, WeWork’s co-founder and former chief executive, onstage at the company's "2018 Creator Awards" at Madison Square Garden in New York on Jan. 17, 2018. After it failed to sell its stock to the public, throwing its funding plans into disarray, the company was bailed out last month by SoftBank, its largest outside investor.
Adam Neumann, WeWork’s co-founder and former chief executive, onstage at the company's "2018 Creator Awards" at Madison Square Garden in New York on Jan. 17, 2018. After it failed to sell its stock to the public, throwing its funding plans into disarray, the company was bailed out last month by SoftBank, its largest outside investor. NYT

WeWork’s change of control and downsizing should cause South Florida companies to reconsider whether doing business with a tech startup that’s quickly attracting investors and users is fairly riskless.

Truth is, the rules have changed. According to a recent Wall Street Journal article: “Making money suddenly matters in tech. Venture capitalists have, in a matter of months, gone from trumpeting growth at all costs to evangelizing a new ethos that includes…perhaps most important, ‘profitability.’”

There are nearly 500 unicorns, according to TechCrunch. The term describes young tech companies valued at over $1 billion by public or private market investors. Miami’s first unicorn is ParkJockey, a parking management platform that received a large private investment in December.

The Kaufmann Index ranks South Florida is the top metro nationally for start-up activity. And eMerge Americas reports that venture capitalists put $1.54 billion into South Florida startups in the first half of this year, suggesting that more unicorns will appear in our region.

Twitter was once a unicorn. So was Pinterest. Today, the best-known names include Airbnb, InstaCart, Rent the Runway and DoorDash.

Some, like GrubHub, make money; most of them bleed it. When private investors stop funding a company or Wall Street pushes back against its initial public offering, as it did with WeWork, everyone who earns a living in some way from that unicorn should be concerned.

As our executives have learned through our many years as court-supervised fiduciaries, insolvencies and bankruptcies are messy. Unicorns are least likely to survive in part because of their business models. A bankrupt chain of convenience stores can easily be absorbed by a profitable one. Could Marriott immediately operate Airbnb? Probably not.

Tech platforms for ordering meals account for only 5% to 10% of the total restaurant business, they are the fastest-growing part of the industry. Next year, people will be spending more on meals eaten off-site than consumed in the establishment’s dining area, according to the National Restaurant Association.

That bodes well for meal-delivery unicorns, but as every new industry has many entries at the start of the race, economic forces and capitalism thin the ranks of those who finish it.

Consumers would be little inconvenienced by a unicorn’s demise. If DoorDash closes, there’s still GrubHub, UberEats and Postmates. But as restaurants fill more orders through apps, the loss of one startup means an immediate drop in their sales and a rise in questions about the entire sector.

If venture capitalists, who pumped $1 billion into the tech company in the first half of the year, suddenly pushed DoorDash to turn a profit, restaurant deals could be less sweet, payments lower for its 1 million drivers, and restaurant suppliers and food growers would feel price pressures.

The lesson here predates the internet by centuries: Don’t put all your eggs in one basket. Many drivers work the equivalent of full-time for Uber and Lyft. If conditions change such that they’re no longer securing living-wage fares through either company, they will have problems paying bills.

As noted in an earlier Herald article, the South Florida office market would take WeWork’s demise in stride. It’s too small and its online platform isn’t essential to finding office space. That’s not the case where tech companies transformed the market, such as dating, travel, electronics and books, and deliveries of people and meals.

Even if your business is one or two steps removed from an online marketplace, consider today to what degree do you want to tie your fortunes to its future. More than you realize, your future depends on it, too.

Joseph J. Luzinski is senior managing director of the South Florida office of Development Specialists Inc., a provider of turnaround management and financial advisory services nationwide. jluzinski@DSIConsulting.com.

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