2019 may be remembered as the year so many unicorns turned into donkeys. After its IPO, Uber fell from the stratospheric valuation it commanded as a private company. So did its prime competitor, Lyft — together, they have shed more than $40 billion in value since going public. Even more spectacularly, WeWork lost $40 billion in value before its IPO. African e-commerce darling, Jumia, rode into public markets on high expectations but lost half its value within six months.
In 2020, many other high-profile companies are expected to go public — Airbnb, Gitlab and Didi Chuxing, to name only three. The debacles of 2019 carry two simple lessons for investors and analysts: first, as many have argued, do the hard work of valuing a company the old-fashioned way, and second, far more overlooked, adjust a start-up’s value according to its realistic global reach. Given the borderless nature of most digital unicorns, it’s important to remember that doing business — especially digital business — in one country is very different from doing business in another.
Too many investors draw too heavily on American experiences and expectations when evaluating digital companies. Although such companies create products that can cross national borders at the speed of light, their ability to capture value is only as fast as the speed of a country’s politics, regulations, infrastructure and consumer attitudes. Uber is in 85 countries, WeWork is in 37 and Airbnb is in a whopping 191. Each one is different. The valuation rules of thumb analysts are taught simply aren’t enough to aggregate across this degree of geographic heterogeneity.
Consider the Indian market. On paper, it is large, with 293 million active internet users in India’s cities alone. Yet there are many challenges to doing digital business in India. The country’s central bank, the Reserve Bank of India (RBI) has mandated data localization, whereby the data of Indian users on digital platforms must be stored within the country’s borders. Starting in January 2020, the Indian government intends to mandate that social media and e-commerce companies monitor messages, track senders and even take down some content. A bill, recently introduced in the Indian parliament, gives government agencies the rights to set aside privacy considerations in the name of national security.
Such measures could prove to be a barrier for many international digital companies and make a theoretically huge market extremely unattractive.
Then there are the countries in which it is easy to do digital business, but only offer a small market, like tiny Estonia. While some larger European countries have responded to the sharing economy with bans, Estonia has made it easier for companies like Airbnb and Uber to operate with a new tax arrangement that allows hosts and drivers to pay tax authorities seamlessly.
Turkey is one of the fastest evolving nations when it comes to digital technology, but that potential upside also comes with caveats. Ridesharing businesses have had to contend with multiple barriers — Istanbul taxi drivers have taken them to court, and some drivers have reported hostility from yellow cab drivers. Online freelance platforms have found only a small available pool of Turkish freelancers and projects. And Turkey has one of the largest gender gaps in financial inclusion in the world, which limits potential users and entrepreneurs alike. These issues and others make Turkey one of the toughest major countries for digital businesses, ahead of only Indonesia and Russia, according to research on the “ease of doing digital business” worldwide that I conducted with Ravi Shankar Chaturvedi.
Even the Nordic countries did not rank as highly as you might expect, in part because some Nordic governments are highly motivated to protect user privacy. For example, in Denmark, the Danish Bookkeeping Act requires firms to store financial data of Danish citizens in either Denmark or another Nordic country for five years. This may make this market less valuable for companies that derive value from accumulating and combining trans-regional user data.
Of course, most countries are not uniformly welcoming or hostile to all digital businesses; a lot depends on the specifics of the platform and the business model. E-commerce will be slower in countries with unreliable physical infrastructure for fulfillment, logistics and cross-border taxes and regulations. Digital media will take a hit in countries that censor content. The sharing economy doesn’t do as well in countries with resistance from incumbents, such as taxi unions or building owners or municipalities with zoning regulations. Freelancing platforms struggle in countries with lower English language proficiency or complex invoicing and tax filing regimes.
So as 2020 rolls around, and more unicorns prepare to gallop into the public markets, it would be wise for investors to tease out these differences and the impact they have on a digital company’s value.
The collective noun for a group of unicorns is a “blessing.” Investors have a role to play in ensuring that companies teeming with innovative energy don’t get stuck with the curse of 2019.