They don't necessarily need brains, just cash.
A lack of discipline in private markets created hundreds of billion-dollar unicorns, but with sanity prevailing in public markets, a new horde of "zombicorns" has begun to form.
WeWork and Juul are the latest and most notable examples, but there are several others. These highly-valued and money-losing startups may have a business model that is only capable of burning cash, or face plateauing growth from scandal, regulation, or competition. Some over-valued unicorns are attempting to focus on profitability and grow into their valuations, or accept an IPO downround, but the zombicorns appear to have fewer options. In 2020, we expect more VCs attempt to quietly exit their positions without the spotlight of an IPO, be it a sale, SPAC acquisition, or direct listing.
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WeWork and Juul Get a $10B+ Haircut
WeWork: Once valued as high as $47 billion, WeWork's billions in losses and ridiculous governance practices have made it the prime zombicorn, a spectacle witnessed by investors, employees, landlords, and tenants. With the IPO door slammed shut, the company fired its founder-CEO, began laying off hundreds of workers, and accepted a multi-billion dollar rescue/salvage package from SoftBank.
Juul: Tobacco giant Altria paid $12.8 billion for a 35% stake, valuing the company at $38 billion. But after a surge in vaping illnesses and Juul's growing popularity at high schools, the FDA banned flavors representing 80% of the company's sales. The CEO resigned, and Altria wrote down its investment by $4.5 billion.
Other Zombicorns?
Palantir: Valued at $20 billion in 2015, Palantir was reportedly pursuing a 2019 IPO worth $40 billion, but the unprofitable data mining company would likely face investor pushback in this environment. It is now turning again to private markets, with an IPO rumored as late as 2023.
Vice Media and Buzzfeed were valued at $5.7 billion and $1.7 billion, respectively, but slowing growth has caused the digital media companies to lay off hundreds of employees.
Zenefits: This insurance and benefits software provider was one of the original zombicorns, valued at $4.5 billion in 2015, before its founder-CEO stepped down amid scandal. Its valuation was slashed, and Zenefits laid off half of its staff. Some four years later, the company may have recovered, giving hope to other zombicorns.
Robinhood achieved a $7.6 billion valuation in July, growing rapidly by offering zero-fee trading, but it faces an uphill battle now that Schwab, TD Ameritrade, and Fidelity have also dropped their commissions to zero.
While SmileDirectClub (SDC) managed to go public at a $9 billion market cap, its nearly -50% drop since the September IPO may cause trouble for other direct-to-consumer brands in competitive spaces.
