What Unicorn Money-Sinkholes Actually Disrupt

They have accomplished an amazing feat: losing tons of money year after year during the Good Times in what were profitable industries.

By Wolf Richter. This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

What do the companies Wayfair, Zillow, Uber, Lyft, WeWork, Carvana, Tesla, Airbnb, Casper Sleep, Zume, and many others have in common in addition to their current or former status as unicorns with huge valuations?

There is one fundamental thing they all have in common: Supported by what seemed to be an endless flow of investor money, they barged into profitable industries, such as retailing furniture, house flipping, real estate brokerage, taxi operations, serviced temporary offices, selling used cars, manufacturing new cars, retailing mattresses, pizza delivery, and the like, and they disrupted them by throwing around often billions of dollars that they obtained in wave after wave from investors.

And in these profitable industries, they accomplished an amazing feat: they managed very successfully to lose a running ton of money, not just the first year or two while getting their feet on the ground, but year after year, in many cases for over a decade, without hopes of ever making a profit as defined, not by their own home-made metrics, but by Generally Accepted Accounting Principles, or GAAP.

And in the process, they turned themselves into money-sinkholes, supported and subsidized by investors’ willingness to throw good money after bad, right into that sinkhole. That’s how these companies disrupted: They turned classic profitable business models – from house flipping to used car sales – into endless cash-burn machines. And it took a lot of genius to accomplish that.

These are not teeny-weeny startups. Many of these companies have been around for over a decade, have thousands or tens-of-thousands of employees, and they’re still losing a running ton of money each year even during the Good Times, that are now over.

Whereas the companies that have been in these industries before them – often small operations, such as house flippers or taxi companies, furniture stores, or used-car dealers … they have to make money to stay alive – and if they start losing money, they’re gone.

Even before the crisis, publicly traded US companies were a money-losing bunch. As stocks reached an all-time high in January and February during the end of the Good Times, nearly 40% of the listed US companies had lost money in the prior 12 months, according to the Wall Street Journal back then. Outside of post-recession periods where companies always book big losses or go bankrupt, that is the highest percentage since the 1990s.

OK, IPOs are essentially dead so far this year. And those that flew out the IPO window last year already ran into trouble. The entire IPO market came unglued in the second half. This was well before the Covid-19 crisis.

But three-quarters of the IPOs last year were money losing companies – including Uber and Lyft. In 2018, 81% were money losing companies. It matched the 81% money-losing-companies record set in the year 2000, the peak of the dot-come bubble that then collapsed. Both those years, 2018 and 2000 share the all-time record for money-losing IPOs.

So what are we really looking at here with Wayfair, Zillow, Redfin, Compass, Uber, Lyft, WeWork, Carvana, Tesla, Airbnb, Casper Sleep, Zume, just to cite a few?

These are companies that have an app – OK, anyone can have an app these days – and they’re doing what other companies have been doing for a long time profitably, except these new entries are losing a ton of money doing it.

Let’s start with Wayfair. Wayfair is an online furniture retailer. I’ve used it, and it was OK. I’ve used other furniture retailers, and they were OK too. The thing that makes Wayfair unique is that its losses have nearly doubled every year. They’re rising on an exponential curve: from $77 million in losses in 2015 to $194 million in losses in 2016, to $245 million in 2017, to $504 million in 2018, to nearly $1 billion in losses in 2019.

I dread to see what 2020 will look like. It’s going to be a doozie. During the stay-at-home phase of our economy, consumption has shifted to the internet, and Wayfair sales will likely rise sharply in the current quarter, but the losses will make our ears ring – because Wayfair operates on the principle: the more it sells, the more it loses.

A regular furniture retailer has to make money long term. They cannot lose money year after year. But Wayfair can. By the time 2020 is accounted for, it will have lost over $3 billion since 2015. A furniture retailer like this should be worthless, and when it runs out of money, it would need to file for bankruptcy, like JCPenney did on Friday.

But these companies are different from JCPenney in that investors keep throwing good money after bad at them. They keep funding the losses of these companies when they raise more capital by selling more shares or issuing bonds. And by being able to raise more money, and by having a super-inflated share price, these companies see that they have the investors’ approval to just keep burning their cash.

Then there are the house flippers and real estate brokerages. Both, house flipping and real estate brokerage, are profitable businesses, if done right.

A friend of mine is a house flipper. He’s got some employees, and he’s using some contractors, and he is buying run-down homes, rehabs them thoroughly, and then sells them at a profit. The real value he adds – not just to the house but to the neighborhood, is the rehab. His business survived the housing bust. It was tough, and he had to find renters for some of the homes, but he got through it. And he’s likely to get through the next crisis – because in the good times, he makes lots of money. That’s how that works.

Zillow and Redfin are now also into house flipping. And even during the best of times, they lost a ton of money doing it. But investors loved them for it. Losing money for these investors is a badge of honor. Both of these companies have been around for many years.

Redfin, which is also a real estate brokerage, lost money every single year over the past five years. Over the past three years, during the Good Times, its losses have doubled each year.

Zillow became a house flipper in early 2019. And since then, its quarterly loss has more than doubled. This was during the Good Times, before the Crisis.

Uber, the global taxi operation, with some side hustles in e-scooter rentals, food delivery, and freight, has lost $18 billion over the past five years. That was during the Good Times.

Carvana is an internet-only used car dealer. Selling used cars is very profitable. It’s profitable even during tough times. But not at Carvana. Over the past five years, during the Good Times, its losses surged year after year. It lost $37 million in 2015; and by 2019, its annual loss had ballooned to $364 million. The more it sells, the more it loses.

And on and on and on.

All these companies disrupted existing industries with reckless losses. And investors rewarded them by given them more money, rather than cutting them off until they come to their senses or file for bankruptcy.

If a company that has been in business for years and has thousands of employees and hundreds of millions or billions of dollars in sales, and it cannot make a decent profit during the Good Times, it doesn’t have a functional business model.

Having a functional business model means conducting business in a profitable way over the long term. This means that during the Good Times, the company must make a solid profit, and during the bad times it might have to scramble.

But these companies lose money hand over fist even during the best of times. They’re designed that way, and executives are rewarded that way, and investors want it that way. They disrupt existing industries by not having to stick to the principle that a business has to be a self-sustaining enterprise.

The easiest thing in the world is to run a money-losing business, where bigger losses are better. As long as investors are willing to pay for it. The hard part is bamboozling investors into paying for it.

The only way they disrupt is by having temporarily changed the logic of business – that a successful business is now a cash-burn machine, and the more cash it burns the better. And it took a lot of genius to accomplish that.

The genius lies in bamboozling public and corporate investors into enthusiastically and unquestioningly going along with this, and making them believe in this new religion. And that works for a while. But in the end, there is the harsh reality of business, as the dot-com crash has shown when most of these companies disappeared, and as the current generation of unicorn busts is beginning to show, and as this crisis is beginning to show.

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  142 comments for “What Unicorn Money-Sinkholes Actually Disrupt

  1. Sporkfed says:

    Malinvestment, brought to you by
    the Federal Reserve

    • timbers says:

      And why not? The Fed has said repeatedly with words and actions it will make the stocks go higher, no matter what. And so they will.

      • Phoenix_Ikki says:

        Ain’t that the true and so far they have done a wonderful job at propping the market back up close to pre-crisis level. I have seen some stock like Mastercard gone back up to $300 range where they were in Jan of this year..oh good times.

        Unemployed filed numbers are out tomorrow, if this is the new reality, I am guessing Dow will be up couple of hundred points minimum tomorrow. At least if it does then it wouldn’t surprise anyone..

      • Ralph Hiesey says:

        Here’s what I just read today on “Yahoo.” Who the heck writes this stufff? How much do they get paid? Or are these investors who are looking for an opportunity to invest their money at negative interest rates?

        “Meanwhile, Wayfair’s current year figures are also looking quite promising, with 14 estimates moving higher in the past month, compared to none lower. The consensus estimate trend has also seen a boost for this time frame, narrowing from a loss of $8.89 per share 30 days ago to a loss of $4.90 per share today, an increase of 44.9% .”

        • Wisdom Seeker says:

          Ralph, most likely a robot wrote that article using routinely available financial data.

    • Joe says:

      Federal Reserve should be renamed for what it is…the Bankers Bank. But this was done on purpose to deceive the people.

      • Nat says:

        The Bank of International Settlements is already bequithed the title “The Bankers’ Bank.” Within the US though you are correct, the Fed is the American Banker’s Bank.

      • brian says:

        Oh man Joe, this could be a fun game!

        How about:

        The Bank Monopoly


        Non-consensual redistributor of wealth bank

    • Raging Texan says:

      spork – malinvestment is a nice polite way to say it.

  2. Anthony A. says:

    Last year, we ordered a leather, powered recliner from Wayfair…..three times they sent us the wrong one (all this took 6 months). We finally asked for a refund and their customer service was happy to oblige. We are done with Wayfair.

    • BuySome says:

      You might not believe it but an episode of Ozzie and Harriet covered this kind of thing back in the ’50’s. And people make jokes about Ozzie’s show…looks like he knew his stuff. Maybe they ought to show it for staff training at Wayfair.

    • Petunia says:

      I have three broken tables in my garage from Wayfair. I gave up and got a refund, but they would have kept sending me broken replacements.

      • Joe says:

        When we moved 3 years ago, my wife says to replace our 25 year old, great condition, quality furniture. I talk her out of it showing the crap quality of furniture. She did agree and we are quite happy and oh so comfortable.

        • VintageVNvet says:

          10-4 to that concept Joe,,,
          Many folks do not apparently understand the very clear savings from buying the very best quality ”whatever” they can afford, both in durability and day to day performance.
          good mentors convinced me of this early on in my industry, construction, with concrete (eh) examples of tools lasting 20 years instead of 2 years, and the very extreme differences in those tools performances
          Furniture likely another; Godmother had invested in really good stuff in Scandinavia in her early years, and they still looked like new 50 years later, and you can believe me when I say that stuff was worked hard by her children, including me!!!
          OTOH, we of the thrifty focus find most of our furniture on the side of the road or Salvation Army and similar thrift stores, etc.

        • Clete says:

          @Vintage: Amen to that. Sandpaper, varnish, and elbow grease are cheap. I even learned how to reupholster when I finally found the chair I wanted.

        • Joe says:

          Re:VintageVNvet, I agree.
          Good quality takes time.
          What currently has happened, is our governments trade deals gave away our manufacturing industry to other countries that could care less about quality.
          Even over the decades, it has gotten so terrible that you can’t trust what your buying anymore.
          I too still have my quality tools and at anytime can build whatever I want. Be it a loghome or furniture,I did create some gorgeous things. Took a great deal of work and time but the effect was well worth the time.

      • c1ue says:

        Disruption is just another word for monopoly, with a side of deregulation.
        Or in more plain terms: ways by which rentiers can prey on existing businesses as well as methods to evade labor-friendly regulation.
        That’s the only way any of these businesses could ever return the capital invested.

  3. Jerome says:

    What they actually disrupt is people and families who have been forced from their homes and communities where they’ve built their lives but can no longer afford to live. I will forever hate the Fed for pouring gasoline on the fire inflating the Bay Area tech bubble. Great way to create a stable, cohesive society when people trying to save and make an honest living get upended by idiots chasing bubble after bubble.

    • Bernadette says:

      Come back to the City of San Francisco! Follow your heart’s sentiment: You left your heart in San Francisco.

      By January 2021, you can rent a luxury condo (don’t buy), wear a mask while walking along the Embarcadero, smell the cool SF breeze, stare at the Bay Bridge, Golden Gate Bridge, everything in between, strut to Peet’s Coffee (going IPO), Boudin’s Bakery, walk around the eccentrics-druggies-homeless, visit your old haunt locations, meet Wolf for a pow-wow lunch then kick up your heels and pinch yourself and quietly say: I’ve got my groove back.

      Life is a Journey.

      • Debt Wazoo says:

        You forgot to say “needles and feces”.

        • Kevin says:

          You forgot to say, five unoccupied units of housing for each homeless individual in SF. Ah, the glories of the dying god that is the market.

          Signed, a former SF Mission District resident (25-plus years) driven out during the mass eviction wave of 2013.

      • Jeff says:

        You left out theft and burglary that will neither be investigated nor prosecuted.

    • Wisdom Seeker says:

      @Jerome, you do realize that the Bay Area economy has been bubble-and-bust since 1848, with newcomers consistently driving up prices during the serial bubbles?

      You can also blame the local governments for failing to manage land-use zoning to maintain adequate balance between housing and employment in the core cities. That plus a bit of NIMBY is a big part of what forces the long commutes, drives up local housing prices, and so on.

  4. rick kravitz says:

    Wolf – where does the money that flows to the Unicorns from — wealthy individuals or the 10% of pension plans that do not have to disclose their portfolios?

    • Wolf Richter says:

      It comes from everywhere — not being facetious here — including finally, when they IPO, from the public.

      • Singyee Chung says:

        Blockhead Wolf, actually these case burning machines have a conveyor belt directly hooked up to the Fed’s cash printing machine. No intermediary is needed.

      • BuySome says:

        Wow. If you think about extensions through the economic plumbing, it ultimately takes from capital accumulation at the household end and gives away to capital depletion at the plant end with building less potential bathrooms in between. Truly a fine example of accelerating “throwing money down the shitter” at both sides. Toilet bowl finance? Makes the Fed into a real “plummers helper”.

      • Richard Martin says:

        A fascinating article/podcast, Wolf. But you don’t address WHY these investors do this. It’s not as if these companies are hiding their losses. So what motivatest he investors to keep pouring good money after bad?

        • Wolf Richter says:

          The hoped for “exit” — finding someone to sell this to at an even higher price.

        • Ed says:

          The only argument that kind of works is that these money-losing “businesses” are aiming to become something close to a monopoly, dominating their market. And then finally make buckets of money.

          They want to be Amazon, the modern Walmart.

        • Ed says:

          In my opinion! But I never bought that argument or invested. Neither did I invest in Amazon. :(

        • They keep expanding the global monetary base. If you’re a trader for an investment bank, you come in each AM and check your balance. Then you put the money to work.

    • lenert says:

      Maybe a fair amount comes from low wages and underfunded pensions, healthcare and schools.

      • Kristine says:

        Ienert- Thank you! Some losses are being mitigated on the backs of labor. Every time I see a prominent WSJ article on layoffs or subsistent wages- the market rises. Wages decrease, tax base dries up, public sector services suffer. For a momentary lift.
        It is as if those at top do not realize that demand must exist to keep things going. The top 1% cannot buy what the middle class once did.
        This cash burn model is a Ponzi scheme – each investor waiting for the next sucker so they can cash out, or if not as bright, delight in unsupported stock rises until it crashes, blindly trusting the Fed. CEOs love it- they facilitate buybacks and jump ship whenever they want. Neo-pump-and-dump.

  5. andy says:

    Amazon app was losing money since the Internet was invented, but look at it now. Same for Netflix, new record price today.

    • MC01 says:

      Amazon lost money for the first three/four years of existence, then alternated between profits, losses and breaking even each quarter for a couple of years and has been turning a steady quarterly profit since Q1 2002. That’s 18 years of steady profits and running.
      Amazon’s profits are kept under tight control for purely fiscal reasons, meaning to pay as little taxes as possible while remaining profitable: remember, nobody, not even the guys who wrote them, knows tax codes around the world as well as Amazon does.

      I understand it’s fashionable to hate Amazon these days (because… ?) but I honestly don’t understand where the idea they lose money comes from.

      • Jim says:

        How much of Amazon’s profits come from cloud services, as opposed to the selling of physical products? My understanding is the cloud side subsidizes the rest. Which gives Amazon an unfair advantage against other retailers, much as did years-long evasion of state sales taxes.

        “Disruption” should be translated as “breaking the law.”

        • Willy Winky says:

          And of course they deploy lobbyists to bribe… oh did I say that.. I meant twist the arms of government people to provide them with lucrative cloud services contracts.

        • c1ue says:

          Cloud is a legit business, but the real Amazon hack was taking advantage of the “no sales tax” for cross state mailed goods.
          All the other stuff: long tail inventory, low brick and mortar rents, cheaper labor etc were secondary to that until Amazon buildout was finished.

        • Jon says:

          Jim, from what I understand, taking money from the profitable AWS side and putting it into Amazon retail in order to bankrupt competitors is in violation of the Sherman Antitrust Act. At least that’s what Denninger says. I don’t know if he’s right. But if he is, it’s an easy win for Trump.

        • Sheldon says:

          And from what I understand their primary cloud service customer is the CIA. It could just be a way provide a government subsidy.

      • Petunia says:

        Wall St. never liked that Amazon reinvested it’s profits/cash flow into growing the business generically. The propaganda campaign against Amazon was to get them to buy growth instead, thereby generating fees for Wall St. and losses for Amazon. That’s Wall St.’s preferred business model.

        • Ed says:

          And that propaganda campaign went on for years and years. It only stopped after AWS started making giant profits.

          Amazon Web Services’ success is really impressive. Bezos built something people really, really wanted.

      • Kristine says:

        MC01, (because…?) Employees in adult diapers and wrist monitors propping up the income of the richest man in the world. Not every reason is monetary.

        • Kristine says:

          Sorry! Wrong link. Made me wince that there are so many articles on workers wearing adult diapers so they do not take bathroom breaks, Utterly dehumanizing.

  6. Tank says:

    Like the bar and restaurant that lost money on every sandwich they sold, but they sold so many they made it up in volume….

  7. Duane says:

    “Whereas the companies that have been in these industries before them – often small operations, such as house flippers or taxi companies, furniture stores, or used-car dealers … they have to make money to stay alive – and if they start losing money, they’re gone”.

    So is the (rather sinister) end game, to force more consolidation by further killing off smaller, locally owned, profitable businesses?
    Is that what’s really behind this stock market rally? “Wall Street” is on a mission, thanks to monetary policy set by the Fed, to weaken “Main Street” even more than it has?

    • Debt Wazoo says:

      Basically, yes.

    • Sheldon says:

      The final model being similar to the Chinese SOE. Massive conglomerates that dominate through state subsidy and access to capital. The state entertainment company, the state department store, the state social media company, the state transportation company , etc…

  8. DR DOOM says:

    Jerome says they have unlimited money to finance the bubble that contains these Unicorns. This party ain’t over as long as the rest of the world keeps financing our consumption.

    • paul easton says:

      And what with bungling meanie Trump combined with pandemic driven oil glut that might not be long.

  9. Samurai says:

    So true for all these unicorns… same situation for most of the fracking industry. And federal deficit spending is at all time insane highs. While the FED prints trillions.
    It makes you wonder how much of the economy around us is just make believe. And doesn’t give me a warm and fuzzy feeling about were this will all go!

    • paul easton says:

      US GNP is a simulation, a dreamlike image summoned up by a magical constellation of tiny charge blips in a silicon substrate.

  10. Suzie Alcatrez says:

    How on earth can Carvana lose money selling used cars? They finance at up to 30%!

    • Canadian says:

      Bloated costs. A typical used car reseller doesn’t have an enormous head office in an eye-wateringly overpriced city like SF, packed with employees making a minimum of $100K per year.

      • MC01 says:

        Carvana has its headquarters in Maricopa County (Metro Phoenix). Phoenix has become expensive, it’s true, but it’s still a far cry from the Bay Area and Silicon Valley.

        If you look at online reviews of Carvana they seem to be extremely generous with trade-ins, offering 10 or even 15% more than ordinary used car sellers. They also give away $500 coupons like candy.
        Nothing wrong with these practices as long as they are employed short-term to generate buzz and/or the company makes up for them in other sectors, but Carvana seems to be all about using extraordinary means to achieve ordinary objectives.

        • Willy Winky says:

          Do they have a private jet (like WeWorkd Adam had?) …. filled with the best weed money can buy?

          Perhaps they have a floor in their office with free beer, food, blow, lap dances, foosball, and other misc this and that.

          Perhaps they have bloated management… like yoga instructors with MBA degrees?

          These unicorns are very creative at wasting investors money

          Do not underestimate them

        • Canadian says:

          Check out the average salaries on Glassdoor sometime.

          That’s a big part of their problem.

        • Harrold says:

          Ernest Garcia is the biggest shareholder in Carvana. He also owns DriveTime another company specializing in selling used cars.

          He is also a convicted fraudster in the infamous Lincoln Savings & Loan scandal.

    • Bead says:

      Who buys from Carvana?

      • Harrold says:

        People with bad credit.

        They will finance anyone as long as you make $10k per year.

  11. Canadian says:

    I know a number of people who were working for some of the companies on that list.

    Some asked me what I thought of them joining. I am old enough to have worked through Dot Com 1.0, and suggested they avoid cash burning companies and work for profitable ones instead. I recounted the stories of deluded Dot Commies who would scream cliches when you pointed out that their companies were money losers.

    “That’s old economy thinking! We have eyeballs and stickiness! We are measuring value in ways that nobody could have anticipated!”

    By 2002, they were all gone. I remember encountering one “digital startup CMO” guy who told me how stupid I was selling mobile phones in a carrier store.

    I was roundly mocked by all of the people who asked me for advice this time around. One even suggested I was trying to “hold her back.” Every one of them believed that magical money from investors would flow forever to staunch ever skyrocketing losses while share prices rocket to the moon.

    This was the thesis of the original Dot Com cash torchers too.

    Now many of them have been laid off and are shocked. How could this happen? It was coronavirus! They still don’t understand that their employer’s failure is preordained. COVID just accelerated the process by a few quarters.

    Nothing is ever truly “new.” This current bubble has lasted much longer since interest rates are at zero, but burst it has… And many people are about to learn the virtues of working for a Real Company with Real Revenues and Real Profits. And those who believe It Is Different This Time are lined up to be shorn.

  12. Dale says:

    I saw this great article about pizza arbitrage. It turns out that Doordash will charge $16 for a $24 pizza. So the pizza vendor can places orders for his own pizza from Doordash, and make $8 additional profit off each.

    Just google pizza arbitrage doordash…

    • Willy Winky says:

      Awesome. If I was the pizza company I’d buy 1000 pizzas per day and pass them out to food banks and PR the hell out of that.

      Great business model. Reminiscent of Uber, Wework, Casper, Airbnb, Lyft, Tesla, Wayfair, Deliveroo, Grubhub, Lime Scooters….. and on … and on … and on…..

      BTW – did anyone notice that Facebook is buying Giphy for 400M… this is a company with a library of animated images… that has ZERO revenue.

      Money for nothing just took on new meaning. Lots and lots and lots of money – for nothing.

    • Jeremy Wolff says:

      Read that article and ended up down the comments rabbit hole that compelled me to write my congressman. Thanks for that.

  13. Richard Kline says:

    Everything here is true . . . yet everything here is nearly irrelevant. The disconnect there is in the single term ‘investors.’ Those buying stocks of these enterprises are not ‘investors’: they are speculators. If they buy a share at x = 100 and in the next quarter it is x – 105, they are in the black. Moreover, they turned 5% net, in economic conditions where that is damned hard to do. Because the Fed killed actual ‘investing’ with twelve years of neg real rates. The point here is that those putting money into stock offerings of these plague beast unicorns are not investors, and don’g care even a spiracle of amoeba dung if those concerns earn—or lose—money at all. They are not there for a dividend: they are there for the run-up.

    ‘Investors’ in the corporate debt of these plague beasts also don’t care if the firms are pyrodineros of historical magnitude. In fact, the reverse. BECAUSE those firms are losing beaucoup bucks, each bond issue pays a fat rate. In fact, I’ll bet (without looking) that each successive issue pays a better rate than the one before, which is, like, cocaine for said bond speculators. The only thing that matters is that the bond a particular speculator is holding doesn’t tank while they are still holding it. And there are derivative plays to be bought on the cheap (from suckers) to lay off even the risk of that. So no, it’s actually a grand good thing for the bond holders that the firms lose more money quarter over quarter and year over year.

    One could say, “The day will come when . . . ” Except it did—-and Uncle Feddy stepped in to ‘manage’ rates. Then manage corporate bond markets. Now, it would seem, even to manage equity markets. So there is never a loss to be taken. Only guaranteed speculative profit, insured by the Federal Reserve, come what may.

    Where this all ends, i don’t know. But I know where it starts: in the boardroom of the Federal Reserve. It is hard to conceive if there has ever been a greater distortion of financial markets in modern history than what we have witnessed for the last 12 years. All of these distortions can be tracked back to the unwillingness of the Fed to led markets correct, and grotesque speculators take a loss. And the Fed has never been more committed to that policy than it is in the hour you read this. “No speculator left behind” is the maxim of the day.

    Given the massive distortions in valuation which Uncle Feddy continues to support, the existence of these plague unicorns isn’t just an incidental distortion: it is a required outcome. it is essential that there be new firms to run up the market. Their actual profitability is quite entirely irrelevant so long as Uncle Feddy keeps flooding the market with ultra cheap money to the top echelon to roll over gains in those run ups, and drag along past unicorns and zombie firms to at least stable bond and equity valuations. One by one, those can be pushed off the back of the bus, well after those in the know have distributed their allocations to rubes and suckers to take the fall.

    The problem isn’t the unicorns, it’s the Fed.

    • Jos Oskam says:


      Thanks for your clear and enlightening analysis. I live in Europe, and as far as I can see, the ECB is following just one step behind the FED. And now there is COVID as a whole new card in the game. I really do wonder sometimes if an all-of-a-sudden economic collapse like the former Soviet Union is on the horizon. You know, Hemingway-like, “gradually, then suddenly.”

      We truly do live in interesting times.

      • Canadian says:

        The Soviet collapse was primarily of credibility, not economics. The USSR was always economically backwards and miserable, yet continued plodding along.

        It was glastnost that did it in. Once the actual criminal history of communism came to light, and it could be critiqued in the light of day without fear of a visit from the KGB, faith in the system collapsed.

        Soviet citizens no longer wanted to be Soviet. They wanted to be Russian, Ukrainian, Lithuanian, Kazakh, etc.

        I don’t see that dynamic playing out in the USA. National identity is too engrained. However, one could argue it played out to some extent in the EU in the form of Brexit.

        • RD Blakeslee says:

          We have the equivalent of Samizdat (Blogs) here in the U.S. but so far it hasn’t produced Glasnost. That requires pervasive government repentance and there’s no indication of that, yet.

        • Jos Oskam says:


          Agreed. Sorry, I did not make myself clear. Of course the former USSR and the USA are completely different cases. The point I wanted to make is, that not many people had seen the collapse of the Soviet Union coming, it caught many people completely by surprise. And I have this feeling that the USA may surprise the world in a similar manner…as may Europe, by the way.

          Although it doesn’t seem like it at the moment, there really *are* limits to the amount of f*ckery economies and financial systems can tolerate. Herb Stein said it: If something cannot go on for ever, it will stop.

          And that may happen quite unexpectedly.

        • Tim says:


          I was not there, but I very much suspect that what broke that particular camel’s back was nothing more sophisticated than fatigue.

          If I am right, there is a very cold lesson to be learnt from that.

        • Wotan says:

          Really, what about the Civil War?

        • A says:

          I don’t have a strong opinion about this either way, but it occurs to me that people who are tired of being Americans might still be proud to be from their state or region. The bioregions, interstate agreements, and natural divides of the Union might come into play more than we would now predict, if things did go south. We already see evidence of this in the handing of COVID, various regulations, etc. States team up sometimes. Many people like their home state even if they don’t like others.

          But weirdly, I think state rivalries often tend to be with the very next state over, so I’m not saying there’s a whole happy kumbaya circle waiting to replace a nation with a bunch of regions-state alliances.

          But I admit to the seditious thoughts of what states could do if they got the taxes that current go to the country…often with little in return.

          Taxes can be crippling, and they go for what? A bigger military?

          IDK, I’m really not a fiscal expert. But I have begun to wonder what we actually get out of the taxes that seem to go to every profligate purpose possible, instead of sensible things like infrastructure.

    • No Expert says:

      Correct on speculation. Wrong on cause, its not the Fed. Rates of return on capital have been falling from the mid 1960’s. You can look up the Penn World Tables 9.1 who have data and handy graphs (not free unfortunately) on what they call internal rate of return on capital (IRR) you can select any country 1950 to 2017. Capitalism is trapped by its own logic, the rate of return falls over time. When money cannot be deployed profitably into the real economy it flows to fictitious capital – financial products, speculation, buy backs etc. Fed actions are just trying to hold this shit show together but like many here have pointed out adding liquidity wont fix a solvency crisis.

      • c1ue says:

        I would point out that financialization of the US economy is the problem.
        This is why interest rates keep trending down: that’s the best way to goose bank and financial product company balance sheets.
        FIRE is now over 40% of the US GDP whereas it was under 15% in the 80s.
        The Fed is the tool, not the architect.

      • Noelck says:

        You assume we have capitalism.

    • Petunia says:

      The only correction I can add to your narrative is that this started a lot longer than 12 years ago. It goes back to the early 1980’s from my recollection. Maybe you are a bit younger than me.

      • wkevinw says:

        I have always thought this was the timeline:
        -1987- Greenspan is new and props up with easing, which “works”
        -1995- soft landing + irrational exuberance
        -1996- the “experts” can’t figure it out, really, but think they have found the “fact” that the “new/knowledge” economy is the secret sauce
        -1998- LTCM/currency crisis- another prop/easing which “works”
        -1999-2000- .com bubble- which in my mind was the tipping point, and we have been swirling since then with jacked up asset prices +

        • Petunia says:

          I would date it earlier to the late 1970’s when Micheal Milken normalized the junk bond market. Once investors were comfortable investing, the corporate raiders era began. All the M&A from that time forward was funded by junk bonds and the target’s assets.

        • coalman says:

          Repeal of Glass-Steagal, might have something to do with it ?

    • mtnwoman says:

      So the lesson (so far.. for years) is “dont fight the Fed” ?

      My sibs are all in the market, believers.

      I’m not. Haven’t been for awhile.

      Who’s the fool? Seems like me.

      All these calls for collapse never (haven’t) happened.

      If a once in a lifetime pandemic with almost Depression level unemployment have barely touched The Market, what will?

      • Jon says:

        I have the same feeling but I am not fighting the FED although I have no trust in the market fundamentals.
        I do believe that in due time, not sure when exactly, this insanity would end.
        You can’t use logic to stock market.

      • sierra7 says:

        “If a once in a lifetime pandemic with almost Depression level unemployment have barely touched The Market, what will?”
        Stay tuned….
        The game is not over yet.
        Wait until the “PPP” (large $$ supports for the crisis) expires; all the tens of thousands of small businesses that will not re-open their doors; so many larger businesses will revamp their employee relations setup for working from home or back working at “the old site”; and on and on and on.
        So many will be unemployed and unemployed for a long period of time; even those employed will have taken a new attitude to spending their monies.
        I firmly believe there will be enormous economic dislocations for business and the working public.
        I can’t imagine things going back to “normal” anytime soon.
        Stay tuned.

        • mtnwoman says:

          And do you think the stock market will ever reflect this reality of the future you expect?

          Or will the Fed continue to prop it up, no matter what? Can they do this into infinity?? So far,, seems like it..

    • MARK J. says:

      Good assessment…Organized Crime, at the Eccles Building in DC.

  14. MonkeyBusiness says:

    They will all blow to bits, but it will be around Nasdaq 30K or something.

    The national security state is intent on tracking everyone so they’ll pay whatever is required. Just think of our armed forces. I mean these companies look like geniuses compared to that.

  15. MCH says:


    Did you read the story about how Doordash acquired customers and a pizzeria had a bit of fun with arbitrage and made a few bucks? It is a bit of nutty fun.

    But in this context, it really is nothing.

  16. Willy2 says:

    – It reminds me of the internet bubble in the late 1990s, goldmines in 2006, 2007 & 2008.
    – Doesn’t one W. Richter understand that growth costs A LOT OF money ? And that lining the pockets of the board of directors also costs A LOT OF dough ?

  17. Anthony says:

    Actually, Uber has quite a good product with Uber Eats…whether they can make a profit is…….well who knows……??????

  18. Andy says:

    The Fed , and a debt ridden US govt are both to blame.

    I’d like to see the Fed shareholder list, and returns to shareholders.

    I understand for under $10bn equity banks – 6% of capital paid in and tax free dividend of 6% pa – payback on investment is one year.

    Sweeter deal for larger bank member shareholders.

    And the deal with US govt around returns to US Gov “after expenses”. No doubt expenses would make you nose bleed.

    Strange how its so hard to find publicly – i guess its sooo good a deal for the banks.

    Amazing the American public hasn’t mutinied about this issue and had the details exposed for all to see.


  19. jack says:

    Wolf, I’d add Amazon to this list – maybe they are a little masked now with AWS profitability
    But their base operation of ecommerce retail – has always been unprofitable even as they have disrupted other retailers.
    the premise that you can ship items in single units from source to consumer in a day – (at a better cost mind you) is incredibly costly and wasteful. Remember they started the “We need it in a day, in an hour or yesterday” movement.
    Initially they even offered items at lower costs (books) with free delivery and in the process, they eliminated the profitable book store industry. Now they’ve raised their book prices to the same price as the book store and are extending delivery timelines (due to COVID?) (because you can’t make money giving shit away and spending a fortune on distribution).

    Now, they have moved on to food – where the same action of same day delivery, lower retails is forcing the Walmarts, Targets and Krogers to match services by having employees pick orders in stores. Listening to the earning reports -these low margin (<4%) retailers are now adding tremendous costs to their business to a fast growing ecommerce segment of their businesses. They don't want to be doing this – they are doing it to compete –
    the end result when a more expensive supply chain eliminates a lower cost supply chain – is that eventually we as consumers will all eventually subsidize this inefficiency. Amazon will do it by increasing their fees to suppliers who will have to pass on the costs)
    Amazon – the most valuable company in the world – is the ultimate smokeshow in retail.

    • Jos Oskam says:


      Sorry if I am dense, but how is Amazon distributing packages to say 100 customers in a delivery round, worse than 100 customers getting into their cars and driving somewhere to buy and pick up an article?

      I just can’t follow the math :-(

      • jack says:

        thank you for the reply.
        1) regarding the last mile segment – i don’t have the math on this – because to your point – it’s very difficult to calculate the consumers portion of the work – but it is easier to calculate the Amazon shipping costs – to your point – they may be a wash
        2) regarding the order fulfillment – Historically the consumer essentially did the picking of the order and the pickup of the order and now that work has been moved to Amazon – those costs are new – and at some point will end up in the price of the goods or reduced retailer margin – so far it’s reduced retailer margin.
        I’m interested if you know where i could find any real data or info on this
        thanks for the discussion

        • Jos Oskam says:


          Yes I agree that some work originally done by the consumer is now done by Amazon and you would expect that to show up in their figures somehow, either by upward pressure in pricing or downward pressure on margins. Leaves me wondering in how far that is mitigated by economies of scale, or if Amazon is “eating this” for the moment to win market share.

          Unfortunately for me this remains an area of speculation since I have not been able to uncover any real figures.

          Thanks for your reply and have a nice day.

    • sierra7 says:

      Can’t feel sorry for any of the “big box” stores/companies. They did their “crushing” of the completion in their rise to the top of the garbage pile.
      And, Amazon couldn’t be doing all the one day purchase/delivery if so many Americans weren’t into the “me, me, me”, “I’m more important than you” attitude….narcissistic necessity of instant gratification.
      Amazon in my opinion, screwed so many on the way up by not doing the sales tax work in the first years and got away with it because we have politicians who are scared crap-less to “cross” any businesses.
      And without the public to buy so much of the useless crap there wouldn’t have to be “big box stores” or an “Amazon” Goliath.
      Where I live both Wal-Mart and Lowe’s have put the really good hardware stores out of business over the past ten years.
      And Wal-Mart just sucks off the public teat with their sub-standard wages they pay.
      To top it all off now the big box stores that include food in their inventory have remained open during the virus problem and thousands of smaller food retailers plus restaurants had to close.
      Can’t feel sorry for those “biggies” at all….
      Stay safe and healthy!

      • jack says:

        Agreed – no love lost either way for retailers – it’s a dog eat dog world.
        to your point, ultimately driven by US – the consumer needing MORE.
        Amazon has certainly captured that as well as anyone.
        thank you for the conversation.
        Stay well

  20. Cobalt Programmer says:

    Normal people have no understanding of these unicorns (or even FED). They watch main stream media and thinks oh! the rideshare, timeshare, BnB and so on. I can save $5 by downloading their app.Big companies, stocks are doing good, and CEO are giving lectures in Harvard/NPR and so on. Chill…If you don’t know or say they wont work, you will be classified as a barbarian-philistines.

    People who understand these unicorns have two options. Stay away or MAKE MONEY OUT OF IT. When a ponzai scheme or MLM pops up, let me get in there first, so I can make money out of the suckers and cash out early. They need these unicorns. Its their bread and butter. Classical pump and dump.

    • RD Blakeslee says:

      “People who understand these unicorns have two options. Stay away or MAKE MONEY OUT OF IT.”

      Have you any respect for people who stay out of it for personal ethical reasons?

      • Cobalt Programmer says:

        My personal anger is due to my own inability to make money from any one of them (cowardice rather than morality). Universe is non-judgemental. I don’t count.

        But our society likes winners, money makers and CEOs. This is a very harsh truth but proven right. Even NPR do not invite people who stay out because of ethical-moral standpoints. How many scientists questioned Theranos? If Even if Tesla goes bust, he won’t end up in jail. He will be compared to actual Tesla, invited for Harvard lectures (might as well run for President).

      • Steve Schoonover says:

        Thank you R D, You have hit upon the missing element in many of these responses. Treating others as we would wish to be treated would go a long way.

  21. Satya Mardelli says:

    Doordash is toast. They are still losing money, have lost access to VC money and arrived at the IPO party a few months too late. They’ll run out of capital in 18 months or sooner. WeWork was peak insanity in the pump and dump IPO process. It will be another 10-15 years before this model works again. For DoorDash its timing for their highly anticipated IPO was bad due to the WeWork implosion. On the other hand, this could all work out quite well for Uber. If Uber acquires GrubHub they’ll have food delivery to themselves the day DoorDash folds. This acquisition attempt by Uber makes sense in the current scheme of things.

  22. SocalJim says:

    While many startups are trash, housing is doing better and better. Today’s weekly mortgage application report is getting good. Google the title “Weekly mortgage applications point to a remarkable recovery in homebuying” from cnbc.com.

    • Ethan in NoVA says:

      The job losses will trickle up at some point?

    • VeryAmused says:

      I have no doubt that while the world burns people are totally ready to go buy houses that are priced so far from the median income they no longer have.

      It is reported by the Mortgage Bankers Association so it must be true.


    • Paul says:

      No one in that probably 20+% of the unemployeed population probably ever was going to go into the housing market by design.

      Why would what happens in steerage affect the party decks?

  23. interesting says:

    “operates on the principle: the more it sells, the more it loses”

    AKA the Michael Scott paper company, sell and cash out……life imitating art? LOL ~!~

  24. Brant Lee says:

    Most corporations on the stock market seem to operate like cash sinkholes to me. It’s all about the quarterly report. Boeing stopped being an aircraft manufacturer and went for the big bucks business model of stock buybacks and cutting corners plus they manage to pay little taxes as do most corporations. Wells Fargo backdoor fleeced their own customers. The CEOs retire filthy rich and live happily ever after.

  25. Bet says:

    One day the markets will trade against the fed. Just as there are times in the past when one sees a tell of a top or an end, such as the magazine cover back in 2007 of a house vomiting cash, or on Christmas 2018 a headline of a bear at that market drop low. I wonder if when a fed chairman talks about printing money out of thin air forever On prime time TV…
    Maybe we will look back at that as the inflection point. Just a thought

  26. Just Some Random Guy says:

    At one point there were something like 100 car companies in the US. Obviously most of them failed or were bought up by Ford or GM. That’s how new technology works. Not every startup makes it. But as a whole the unicorns have and will continue to revolutionize the world. Amazon changed the way we shop. Uber changed the way we get around. Zillow changed the way people buy and sell houses. AirBnb changed the way people travel. And Tesla, ’nuff said. Think of the world 20 years ago before all these companies were around( Amazon was around but it wasn’t really what it is today). You don’t think there’s value in what they provide?

    • Wolf Richter says:

      Just Some Random Guy,

      Only a small number of companies emerged from the dotcom bust and thrived. Hundreds of companies disappeared. The amounts of money they’d swallowed was huge. It took the VC industry a decade to recover. The layoffs in Silicon Valley, San Francisco, and other tech centers were enormous. In SF, the average rent plunged 25% between 2001 and 2004 because people left. It wasn’t until 2012 that the average rent finally exceeded the rent of 2001.

      The dotcom bust was a torturous period for the areas where it happened and for the people it happened to, including investors. The Nasdaq plunged 78%.

      So yes, there will be a few companies that will emerge from this and thrive. But many hundreds or thousands spread around the US will not. And there will be lots of people looking for jobs (already happening) and a lot of investor money will be discovered to have gone up in smoke.

      • Tim SE says:

        I think it was John Stuart Mill who explained that a bursting bubble doesn’t itself destroy value – rather, it exposes value already destroyed during the preceding period of malinvestment.

      • Just Some Random Guy says:

        I was part of the .com boom and bust. I was laid off but got a new job almost immediately. Part luck, part being in a fairly niche environment, part knowing the right people who were hiring. Looking back on it, getting laid off was the best thing that could have happened to me, it took me in a direction I never would have otherwise gone. The company I worked for imploded. But out of those ashes came several new companies started by former employees, many of which are still around today and doing great. Everyone I know who worked there landed on their feet eventually and went on to bigger and better things.

        Sure NAS was down 78%. And it’s what, up 800% since the 2002 lows.

        That’s the beauty of capitalism. Long term is always positive. And which is why I roll my eyes at the doom and gloom predictions people make every time there’s a temporary hardship.

      • Stevie says:

        Along with the horrendous collateral damage done to the legitimate businesses Wolf mentioned that actually have to make a profit while trying to compete against these money losing colossuses. I’d bet if such external costs were added in the total losses would at least double.

        When you add in Chapter 11 bankruptcy, Zombie companies, monopoly and oligopoly, no wonder smaller companies are gasping for air.

  27. Just Some Random Guy says:

    “My understanding is the cloud side subsidizes the rest”

    Your understanding is incorrect. AWS is roughly 15% of AMZN’s revenue. It’s a side business for the company.

    • MonkeyBusiness says:

      No AWS is not a side business. It’s responsible for MOST of Amazon’s operating profit. As much as 70%

      Read the financial statement.

    • jack says:

      from Amazon 2019 Annual Report
      AWS – Revenue – 12% of total
      AWS – Net Income – 63% of total – $9.2 Billion of $14.5 Billion total

      So rest of business outside AWS is a 2% net margin business

  28. Marc 60 says:

    I can’t believe so many here have got it so wrong the idea isn’t to create value in these companies or dare I say it they actually make a profit. The idea is simple its all about generating fees and bonus’s for those in the know and backed by the Fed and other CB’s so they can never lose. They don’t care at all if pension funds or small investors get to see their money vanish into thin air as long as the CB’s do there job and keep making them whole by creating yet more money out of thin air that everyone else picks up the tab for. So no losses just lots of gravy for those that count and SFA for anyone and everyone else. It really is that simple.
    Now what is truly staggering is after the GFC which lets remember was caused solely by the banks and their greed in bundling ever more worthless bad debts. Which Tax payers throughout the world bailed them out of so they could still receive their huge wages and bonuses. All the major governments announced much needed Austerity measures for all but the bankers. Yet along comes a nasty pandemic and suddenly they all suddenly are able to create untold Trillions of currency to support yet again the banks and big business that wasted their money buying back shares to hit bonuses and big payouts yet again but not paid for by them of course. If anyone has even the slightest doubt or thought that the whole system isn’t rotten to the core and rigged beyond all reason you are living in a fantasy.

    • RD Blakeslee says:

      Personally, I don’t think most of these people are living in a fantasy. I think they just numb their consciences.

    • Lisa_Hooker says:

      Marc – You’re fairly accurate. Perhaps the third time (scam) will be the charm?

  29. John says:

    Totally agree. Way overvalued and major stealth concoction. Mister Softee ran from 37 in 2013-14 to 137 there abouts. In one year it’s up almost 50. Fast money right here with that one. Baffles me.

  30. Joe says:

    Wolf called Uber a “taxi operation”. They won’t like that.

    • Wolf Richter says:

      Uber has since disclosed that it is shedding or reducing or reviewing several of its other initiatives. Most likely, it will trim down this stuff to become a pure taxi and food-delivery operation with thin profit margins.

  31. Matt says:

    Wolf – would it be possible to publish your podcast on iTunes, Google Podcasts etc. They are more easily consumed than YouTube. Thanks

  32. Jon says:

    Call me ignorant, but who invests in these companies? Don’t they even bother to investigate the unicorns’ profitability? Is this just a symptom of cheap money from the Fed being thrown into anything that moves?

    • Lisa_Hooker says:

      Jon – You’re just looking at the wrong metrics for “profitability.”

      The new metric is:
      what_I_sold_the_stock_for – what_I_paid_for_the_stock = profitability.

      This is a short-term focus, much as the corporate focus on quarterly reports. Typically shorter than quarterly. It is not investing, as mentioned often it is speculation.

    • Willy Winky says:

      VC’s understand that these plays are unlikely to ever be profitable.

      They are buying into a ‘story’ and hoping to get on the wave early then unload shares at a profit either as the wave builds or at the IPO.

      This is why you see Uber plugging other dumb ideas that will never make money into their main money spinner (food delivery, self driving cars, etc…) If you have a good PR team you can turn lead into gold — and that gets you to the FOMO holy grail.

      They are (see Softwank) motivated to make sure each round of investment comes in at a higher price per share.

      So in that respect it’s like you own a wave-making machine and you keep turning the volume of the wave up a little every couple of months.

      This ‘business model’ is on the verge of total collapse because Papasan of Softwank is getting clobbered…. so the bloom is coming off the rose.

  33. Tim says:

    Perhaps the phrase for those investors who have lost out is:

    ‘Skewered on the Debt Horn of a Unicorn’

  34. Raymond Rogers says:

    I’m wondering if Spotify would be included on that list. They are profitable 2 quarters out of the year (2019 data). They’ ve spent a ton of cash this year. I wasnt able to find their debt loads.

  35. SocalJim says:

    More bullish housing news … 63% of listings in metro Boston had multiple bidders. Google “Bidding wars in a pandemic? Housing is heating up fast” on cnbc.com. Article sites date from Redfin.

    • Seneca's cliff says:

      What kind of dim bulb would buy a house in Boston now. It will be the epicenter of the collapse of the two biggest bubbles in the economy. The Covid will certainly collapse the higher ed bubble, ( most predicting enrollments down 20-30%) and the medical industrial complex, which will be economically devastated from Corona costs, and elective losses. Bug meet windshield.

      • MonkeyBusiness says:

        We wouldn’t know how dim these people are until much later. Remember, the Fed can always create another bubble. That’s probably their only competency at this point.

        The bug can only meet the windshield if both are traveling in opposite direction.

  36. Mark Sanders says:

    I need a little education here. Once shares are on the market, the dollars go from the seller to the buyer, and the company doesn’t increase or decrease its cash assets (unless it itself is the buyer or seller). So where does the unending money that is burned come from? Do the companies continue creating new shares to sell? Or am I missing something?

    I enjoy reading about economics and finance, but it’s a little like trying to learn Latin — you think you have a grip on things and then you realize you don’t.

    • Wolf Richter says:

      The IPO raises money for the company (company sells shares to the public), as do follow-on offerings (company sells more shares to the public), such as Tesla’s $2.3 billion share sale in February.

      But you’re right, when shares are traded, the company doesn’t get any of that.

    • BuySome says:

      The stock is part of it Mark. But the company also borrows money. Bonds sold for a price with a promise to pay interest until redemed for their value at a future date. They just keep issuing more and bigger bonds to cover up the fact that they don’t earn squat. And the money they owe to suppliers is a form of loan until payment day comes due. It’s a well practiced shell game where there really is no pea (real profit) under any of the shells. All slight of hand and them some.

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