Jeff Funk is a retired Associate Professor and winner of the NTT DoCoMo mobile science award for his lifetime contributions to social science research on mobile phones. His recent articles have appeared in Scientific American, IEEE Spectrum, Issues in Science & Technology, Mind Matters News, and Ozy.com. This is the first of a three-part series for Mind Matters News in which he explores the decline in profitability of companies that depend on technological advances.

As America continues to recover from COVID-19, we must distinguish between its devastating impact and pre-existing problems that it is making worse. Startups fall into the latter category. Despite years of hype about them and the technologies they have tried to commercialize, their mounting losses and disappointing IPOs, along with slowing productivity growth, suggest that new approaches to innovation are needed.

In this three-part series, I want to look at the state of today’s startups. The data presented below show that successful startups today are taking longer to become profitable than successful ones founded before 2000—defined as those that achieved top 100 market capitalization for the world. For instance, Apple, Microsoft, Oracle, Home Depot, EMC and Genentech were founded in the 1970s; Cisco, Qualcomm, Amgen, Gilead Sciences, Dell, Amgen Celgene, Sun Microsystems, Compaq, PayPal, and Adobe in the 1980s; and Amazon, Google, Netflix, Salesforce.com, Nvidia, PayPal, EBay, and Yahoo in the 1990s. These startups have been among the top 100 companies in terms of market capitalization for many years, in addition to providing great value to customers and high wages to employees. But since 2000, Facebook is the only startup to make the top 100 and have an impact similar to that of startups founded in previous decades.

It is not for lack of money. Venture capital (VC) funding has been high for more than a decade, reaching a record high between 2015 and 2019. And it’s not for lack of ideas. During the 2010s, it was commonly said that we were living in the most innovative time in human history. Smart phones, robotics, the Internet of Things, virtual and augmented reality, the sharing economy, artificial intelligence, drones, and driverless vehicles are some of the technologies that have been regularly hyped over the last 10 years, and many of them still are.

Some would point to Uber and Tesla as the next Google and Amazon. But they are taking far longer to become profitable than companies founded since 1970 that have achieved top 100 market capitalization: Twelve of 24 of them had profits by year 5 and another 10 had profits by year 10. This high rate of profitability once extended to startups in general. Profitability for all startups at IPO (initial public offering) time has dropped from about 80% in the 1980s to just over 20% in the last two years, even as median years to IPO has increased.

Amazon, the most famous loss-maker of all time, was profitable at year 10 while Uber and Tesla are unprofitable at years 10 and 17. Uber’s cumulative losses are six times and Tesla’s are two times bigger than those of Amazon at its peak losses and the losses for the former two are still growing.

My analyses of unicorns, that is, startups valued at $1 billion or more, also suggests that a new Google or Amazon has not yet emerged. Of 130 American unicorns, only 45 have done IPOs and of those 45, only eight had profits in 2019 (See Table below). This percentage of profitable Unicorns (18%) is smaller than the more than 20% of startups that were profitable at IPO time over the last few years. That, in turn, was much smaller than the 80% profitability for startups founded in the 1980s. Thus, not only has profitability dramatically dropped over the last 40 years among startups doing IPOs, today’s most valuable startups (those with greater than $1 billion), are less profitable than those that have not achieved $1 billion in valuations.

Profits and Losses for Unicorns that Did Initial Public Offerings (IPOs) 

Source: Earnings before interest, taxes, depreciation and amortization (EBITDA) from income statements by Yahoo Finance

The bottom line is that the most successful startups of today aren’t as profitable as those founded 20 to 50 years ago, suggesting that something is terribly wrong with America’s current startup system. Whether the problems lie with the venture capitalists, entrepreneurs, business schools, or consultants, a closer look at this ecosystem is needed. Part 2 of this series looks at the disappointing IPOs in terms of share price changes and market capitalizations.

Here’s Part 2: Why do today’s tech startups disappoint investors? Only 14 of the 45 recent Unicorns showed increases larger than those of the Nasdaq generally. Companies we hear a lot about, like Zoom and Beyond Meat, are not profitable compared to an earlier generation of tech startups.

And Part 3: Why the next Googles and Amazons, are MIA. The internet has matured, making many new Internet-based companies comparatively low-tech. Today’s startups have targeted a much different set of technologies than did startups in past decades.

Further reading: Stanford’s AI index report: How much is BS? Some measurements of AI’s economic impact sound like the metrics that fueled the dot-com bubble. (Jeffrey Funk and Gary Smith)