When Homer Simpson was asked, “How do we get out of this hole?” he replied, “We’re digging our way out!” Many people who find themselves in holes they can’t climb out think that’s the solution to dig harder, making the hole even deeper and more difficult to escape.
Which brings us to Carvana CVNA,
the online used car dealership with a cool name. For many car buyers, including us, the worst part of the experience is hours of haggling with relentless salespeople. The income that car salespeople make comes from the pockets of the buyers and the dealership, so both can make money by taking the salespeople out of the equation — not to mention the many hours that buyers waste haggling.
You still can’t buy a new car without going through a franchised dealership, but there are reputable companies that will sell used cars without negotiation. The country’s largest non-bargaining dealer is CarMax KMX,
which has 225 locations and sold more than 750,000 vehicles last year.
Carvana was founded in 2012 and went public in 2017 with the slogan “Skip the Dealership”. Carvana buys cars at auctions and from dealers, trade-ins and private sellers. Unlike CarMax, where buyers and sellers have to go in person, Carvana customers can do it all online in minutes through a simple, attractive website and then have the car delivered to their home or pick it up at Carvana’s 33 auto machines – that’s it pretty much what they sound like. The buyer walks up to a glittering glass tower filled with shiny cars, pockets an authorization token, and watches as the elevators and conveyor belts take the car down to the delivery bay, ready to be driven home. Buyers didn’t have a chance to kick the tires or take their cars for test drives prior to pickup, but they can return their cars within seven days, no questions asked.
It’s all very cool, and the buzz and glitz propelled Carvana’s stock price from $11.10 in 2017 to $370.10 in August 2021 — helped in part by the COVID-19 restrictions on personal auto dealerships. Unfortunately, buzz and shine are expensive, as is maintaining a fleet of used cars. The company’s auto machines look great on social media, but they’re a lot more expensive than a parking lot with a handful of valet attendants.
Carvana bled money and borrowed money to keep going. After his last attempt at financing failed, Apollo Global Management got into the money pit and gave Carvana a very big scoop. Carvana will issue $3.3 billion in debt and preferred stock (of which Apollo will buy $1.6 billion) at a 10.25% interest rate with a five-year prepayment lock.
A measure of Carvana’s desperation is that while it lends money at 10.25%, it lends money to car buyers at a competitive interest rate of 3.9%. Borrowing at 10.25% to lend at 3.9% is a financial disaster that no sane company would do if there were good alternatives. Moody’s has cut Caravana’s credit rating to triple-C, and Carvana’s stock price has fallen from a peak of $370.10 to $59.56 at Wednesday’s close.
Other loss-making startups are stuck in similarly deep holes and are reaching for the shovel. Losses must be funded, and most unicorns have much greater losses than Carvana, both current and cumulative. Carvana’s cumulative losses are now $900 million, a large number but relatively small compared to many other startups. Looking at losses through December 2021, 46 of the 140 U.S. unicorn startups currently publicly traded have more cumulative losses than Caravana, despite generating much lower revenue.
The largest cumulative losses are for Uber Technologies UBER,
($23.6 billion), WeWork WE,
($14.1 billion), Snap SNAP,
($8.4 billion), Lyft LYFT,
($8.3 billion), Teledoc Health ($8.1 billion), Airbnb ABNB,
($6.3 billion) and Palantir Technologies PLTR,
($5.5 billion), followed by four others – Nutanix NTNX,
Rivian Automotive RIVN,
Robinhood Markets HOOD,
and Bloom Energy BE,
– with losses exceeding $3 billion. Another 16 have losses greater than $2 billion, 39 have more than $1 billion, and 77 have more than $500 million.
Carvana’s $900 million cumulative losses are far less than its 2021 earnings of $12.2 billion, while 79 of the 140 publicly traded unicorns have cumulative losses greater than their 2021 earnings , meaning she will have an even harder time recouping her losses than it will be for Carvana. Aside from the startups with no or very little revenue (seven startups), many publicly traded unicorns have accumulated losses far greater than their 2020 earnings.
Only 19 of those 140 publicly traded unicorns were profitable in 2021, down from 17 in 2020 and 12 in 2019. An improvement, but not by much. At this rate, it will be decades before most unicorns become profitable — and investors won’t wait decades.
The public problem of private enterprise
There’s an even bigger problem beneath the surface: privately owned unicorns. There are now 1,091 private unicorns worldwide, about half of them in the USA. Since the most profitable startups tend to go public first, it’s likely that the privately held unicorns are in even worse shape than the public ones.
Larger blades make the task even more difficult. With interest rates rising, many unicorns have to pay even more than 10.25% to stay alive. What happens to privately held startups when interest rates rise? Will venture capitalists continue to cover losses? Softbank has already announced that it will no longer finance some of its startups. Rising interest rates and falling stock prices are likely to convince other financiers to do the same – stop handing out shovels and leave some startups in their self-digged graves.
Jeffrey Lee Funk is an independent technology consultant and former university professor focusing on the economics of new technologies. Gary N. Smith is the Fletcher Jones Professor of Economics at Pomona College. He is the author of “the AI craze,“(Oxford, 2018), co-author (with Jay Cordes) of “The 9 pitfalls of data science‘ (Oxford 2019) and author of ‘The phantom pattern problem“ (Oxford 2020).
More: Death to the dealership – the Tesla sales model is about to take over America
Also read: Bullish optimism boosting “unicorn” stocks is more like delirium — and a hard dose of reality is upon us
https://www.marketwatch.com/story/once-richly-valued-unicorn-startups-are-being-gored-and-investors-and-funders-have-stopped-believing-11651726349?rss=1&siteid=rss Opinion: Once highly rated “unicorn” startups are being skewered and investors and financiers have lost faith in them