Last year, we saw the biggest implosion in the history of startups. American shared workspace provider WeWork postponed its planned IPO, laid off more than 20% of its global workforce, all this after its valuation decreased from $47 billion in January 2019 to just $10 billion in September – less than the value of investments it attracted since 2010. Its losses were massive – more than $200,000 a day, according to Business Insider.
Other startups in the emerging sharing economy are showing signs that agility and disruption are not enough to make it in our modern world. Uber and Lyft have seen their stocks sink like the Titanic. Beijing-based bike-sharing company ofo, once valued at $2 billion, was unable to pay its debts last summer. And many other companies are having their share of issues that seem to indicate an economic bubble preparing to burst.
High Growth Comes With High Costs
The companies we mentioned above – and many others – have embraced a high-growth, high-cost business model. While it is spectacular, it’s also hard to monetize. Some startups go public before finding a way to turn profitable, expecting the equity market to pay the bills. The prospect of recession coming has, in turn, made investors more cautious about pushing money into these companies. A recent report published by CBInsignts has shown that venture capital funding has decreased by 16% in the final quarter of 2019 – while the number of deals has grown in Asia and Europe, it has decreased in the US for the second quarter in a row.
Startups are under increasing pressure to cut their cost and slow their expansion – this often translates in layoffs, which doesn’t really send a great message.
Agility and disruption work in some areas but not in others – ride-hailing services like Uber are perhaps the best example. Uber was a sensation in the early 2010s, quickly spreading from New York to Chicago, then France, Canada, the UK, and many other countries. Its expansion around the world was, in turn, followed by protests of taxi drivers in many areas, criticism because of its employment practices (or lack thereof), and dedicated regulations triggered by its spread. Ride-sharing companies have been bashed for everything from the payments made to drivers to the drivers’ use of their phones while driving.
All these factors combined led to Uber’s disastrous IPO last year: its shares dropped 11% on the day after their listing, then posted losses after losses throughout last year.
A Bubble Waiting To Burst?
Last year, International Banker author Samantha Barnes wrote that it seems that there is a bubble forming in tech stocks – and most examples of the sharing economy are heavily relying on modern technology – citing a warning from Goldman Sachs about their overvaluation. She compared the situation to that of Bitcoin – perhaps not as volatile, she writes, but according to some analysts, there are some parallels between the two. And that we should be preparing for, well, maybe not a bubble burst but at least a market correction in the future.