How Regulation Can Drive Or Deter $4 Trillion In Unicorn Wealth

view original post

Funding for unicorns, privately held startups worth at least $1 billion, exploded in 2021, topping $140 billion. According to CB Insights, funding for fintech unicorns soared to $131.5 billion in 2021 from $49 billion in 2020. With Q1 and Q2 hitting just $50 billion, 2022 feels for many like the year of the donkey. However all 2022 funding looks on track to exceed 2018, 2019, and 2020.

Investors are keenly interested in unicorns’ quarterly metrics, and they use enterprise tools like Crunchbase, CB Insights, Tracxn, and others for detailed information on unicorn financing, valuations, earnings, exits, business relationships, company data, patents, market analysis, key executives, news and calculated ratings based on business factors. Policymakers attempt to take a longer term view and ideally develop policy which supports all innovation, including unicorns. As such, enterprise platforms also serve a valuable purpose to track unicorn growth over time, years if not a decade, offering policymakers one helpful but not definitive measure of innovation policy.

Following is a brief review of 2022 year to date unicorn performance by country, industry, company, and some preliminary policy observations.

Top Countries for Unicorns

While unicorn value fluctuates and the number of unicorns changes frequently with entry and exit, a recent report shows 1178 unicorns globally with a total valuation of $3.8 Trillion. US companies dominate the list with 633 unicorns valued at $2 trillion, 54 percent of the total group. China is in second place with 173 unicorns worth $673 billion, 17 percent of total value. India is third with 69 unicorns valued at $197 billion, 5 percent of the total value. The United Kingdom has a higher slightly value at $205 billion, but fewer unicorns, 46. Germany holds the 5th spot with 29 unicorns valued at $78.8 billion or 2 percent of the total value.

It would be wrong to conclude that producing unicorns is merely associated with being a populous country. Countries and their respective number of unicorns like Israel (22), Canada (19), South Korea (15), and Singapore (13) defy that logic. Similarly unicorns from large, emerging countries like Brazil (17), Indonesia (6), and Nigeria (1) provide another perspective. When indexing unicorns against population, China is less impressive, producing just 1 unicorn for every 8 million people versus the US which produces a unicorn for every half million, some 16 times more frequently.

MORE FOR YOU

Fintech is the Top Industry for Unicorns

Fintech is by far the most active sector of the unicorns, some 244 unicorns valued at $895 billion—about one-fifth of all the unicorns and one-fifth of the total value of the data set. Internet software and services follows closely with 224 unicorns worth $654 billion. Thereafter follows artificial intelligence (AI) with 87 unicorns valued at $334 billion; Health with 93 unicorns at $231.66; and Ecommerce with 107 unicorns worth $154 billion. The top 5 sectors account for roughly two-thirds of the value and the companies. The remaining categories are supply chain; cybersecurity; data analytics; auto/transport; mobile/telecom; hardware; edtech, consumer/retail, and travel.

Top Companies: Stripe, Checkout, Revolut, FTX

Fintech standouts include US payment processing platform Stripe, reaching $95 billion in July, though today down to $74 billion. UK’s Checkout.com, founded as Opus Payments in 2009, is valued at $40 billion in 2022. Another UK unicorn, the online bank Revolut founded in 2015, is valued at more than $30 billion today. The US-born Sam Bankman Fried (SBF) developed the cryptocurrency exchange FTX and then headquartered it in the Bahamas. It trades some $10 billion in crypto daily and has over one million users. Sweden’s Klarna, known for its “buy now, pay later” tool, topped $800 million in funding in 2021, but then fell 85 percent in value to $6.7 billion today. Such swings are not uncommon in the heady world of unicorn fintech.

The UK overperforms in fintech; its 25 top fintech unicorns are worth as much as 125 US fintech unicorns. “London is a money center, and it has developed into a springboard for banking platforms, notes Futurist and fintech expert Tom Vartanian of the Financial Technology & Cybersecurity Center. Over the last decade, fintech markets have been energized by the shift from digital commerce to digital economies. This has created a huge economic opportunity for the creation of seamless, cross-border, highly scalable digital payments and lending platforms which have been jet propelled by cryptocurrencies. It is only natural that unicorn fintechs would proliferate during this period, particularly outside the regulated financial services industry which can be off-putting to many investors given that regulation naturally limits risk assumption and requires higher levels of capital,” he adds.

However impressive the UK’s performance in fintech, it is worth investigating why the country has produced so few unicorns in other areas, particularly given its preponderance of human and financial capital It a question which should stimulate policymakers to review regulation across the board, as UK policymakers need no longer subscribe to the European Union rules, many of which are misguided and un-evidenced.

Other top unicorns include Elon Musk’s Space Exploration Technologies Corp. or SpaceX valued at $120 billion and ByteDance maker of TikTok, valued at $140 billion, down from $300 billion earlier this year. Notably ByteDance and other Chinese unicorns introduce difficulty to the policy analysis. The Chinese government’s “golden share” of ByteDance, while nominal, enables it to outvote other owners. Moreover, Chinese unicorns which go public and list on US exchanges get to play by their own set of rules to avoid disclosure, a galling double-standard allowed by the Security Exchange Commission for years.

Policy Observations

Countries compete for human and financial capital, and innovation matters because it improves economic growth and living standards. Policymakers should reflect on whether, how, and to what degree their countries innovate, which policies contribute to innovation, and which inhibit it. This includes policies for investment, taxation, industry, immigration, education, and technological advancement.

There are many measures of innovation, with the number and type of unicorns giving just one perspective. However it is a valuable form of inquiry because data has been collected for almost a decade, is continually updated, and offers international, industrial, and financial comparisons. Reviewing such data is especially important to temper politically driven and opportunistic policy making like net neutrality, an arcane regulation which many policymakers promised would “guarantee” internet innovation in 2016. Essentially the regulation forces price and traffic controls on consumer broadband networks, limiting the technology and diversity of offers and partnerships available to end users and innovators. By limiting the commercial availability of broadband, regulators have unwittingly handicapped innovation in their respective countries. While the regulation was promised to deliver the next Google, it has done the opposite. Google search and other established platforms enjoy greater market power and profitability than ever in the countries with such rules.

The brief review of unicorn data suggests that innovation is not correlated with net neutrality. Most unicorns were founded before this policy was implemented in 2016, and indeed the most successful unicorn nations, US and China, have either removed the rules or never had them at all. Moreover the industrial sector analysis shows how countries like UK produce world leading unicorns in fintech, a country with relative permissionless innovation for financial technology, but under-perform in other areas, particularly internet-based innovation where net neutrality rules apply.

The burden of proof should be back on policymakers to demonstrate why net neutrality is needed when there is little to no internet innovation to show for it.

Related Posts