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Opinion | Unicorn Schadenfreude and the introspection illusion

Tech firms are changing the business landscape by revolutionizing user experience

The misfortune of others tastes like honey," is how the Japanese defined Schadenfreude. Human beings—not always the most noble creatures—love it. And the internet loves it a tad bit more. WeWork’s failed initial public offering (IPO) saga refuses to die down and there are hundreds calling the once remarkable startup a sham.

What started as an analysis of risks of WeWork’s business which could serve as a learning curve for startup entrepreneurs—which this columnist has also written about— seems to have metastasized into unabated bashing of WeWork and its greatest benefactor Softbank, making it emblematic of the entire tech Unicorn space.

“Unicorn delusion", “Softbank a Ponzi scheme", and “Uber an app which my cat could have written: Larry Ellison", are among some of the recent headlines. And this is where the problem lies —of turning it into a generic Unicorn Schadenfreude or a sweeping indictment of the tech industry at large.

At the heart of the criticism of these new tech stars has been the business model. Tech which supercharges businesses, tons of easily available venture capital (VC) money sloshing around which jacks up valuations (yes, Softbank!), the boards that are useless and that these companies (mostly unprofitable) cut corners to rise to the top which bomb at the public markets litmus test.

Criticism is fair and warranted. But it has to now take the argument to the next level and it’s time to pop the big question: Are we looking at a world better off without Softbank and the Unicorns? What is the answer? A clear yes or an ambiguous no?

Unicorns, the billion-dollar tech startups once considered as scarce as the mythological creature, are now real cogs in the global economy. At a time when traditional industries—infrastructure, oil & gas, steel and automobile— show signs of slowdown in many emerging economies, tech startups are filling the gap in terms of economic growth and employment.

Uber, for example, employs 22,263 people directly and supports around 3 million drivers worldwide. Similarly, WeWork employs 15,000 people, Flipkart 30,000, Nvidia 13,227 and Oyo 17,000.

Tech companies are changing the business landscape forever by revolutionizing consumer experience on the back of relentless disruption. Imagine the convenience that we are now so used to that we tend to take it for granted: no more hassle of queuing up at grocery stores, food delivery on demand, or hopping on to a cab whenever we desire. These companies have millions of satisfied global customers. And such relentless disruption comes at the cost of relentless capital, which is where a Softbank comes in.

With every affordable cab ride that you make, that piece of pizza that you get home-delivered on a cashback discount, with the reduced bill on your monthly grocery dispatch, chances are there is a big financial sponsor behind it—funding a lot of operating losses, relying on leverage and cross-subsidy to bring this convenience economy to you.

There is no denying that the exit report card for investors doesn’t look good. More on that too. While we are fixated on a few big names, a report in the Slate quoting Bloomberg states that the IPOs of unprofitable companies have outperformed the index.

Going back to 1999, nearly half of IPOs for unprofitable companies outperformed the greater market one year after their listings. And so far in 2019, new unprofitable IPOs are on pace to outperform the market at a higher rate for the fifth straight year.

There is commentary calling for introspection. Here is the problem—good to introspect but there is no guarantee that it will change anything. Social psychologists call it “Introspection illusion": the mistaken belief that we can learn what we truly desire through sheer intellectual contemplation.

What has changed since the dotcom bust? At a time when buzzwords like “e-commerce" and even “the Internet" were conceptual, investors who hungered to be part of this innovation quickly threw money into anything that seemed capable of turning a profit. The same behaviour is seen now. For all the snarl directed at Softbank, one is not sure if changing its playbook is a great idea. Its vision of backing ideas if capital was not a constraint created the “Softbank Advantage" in the first place. On the question of bouncing back, Softbank’s persistent founder Masayoshi Son knows it fairly well. At the height of the dotcom boom, he was the richest man in the world for three days before he lost about 97% of his wealth in the crash. He has not looked back since then.

Shrija Agrawal is Mint’s associate editor. Due Diligence covers issues in venture capital, private equity, deals and startups space.

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