The percentage of tech companies that are unprofitable when they file for IPOs has hit a new low, surpassing the previous low during the 2000 dotcom bubble, according to data fromJay R. Ritter, a professor of finance at the University of Florida.
The milestone will cause tech veterans to take a deep breath even as they enjoy close-to-zero unemployment, and hiring starts in the high five- and low six-figure range for coding/engineering skills. There are now 82 venture-backed “unicorn” companies valued at more than $US1 billion, according to the Wall Street Journal.
Seeing unicorns all over the place is not in itself a sign of a bubble. But the fact that most companies are selling stock to the public before they’re able to make profits is worrying.
Lack of profits does not mean a company is dysfunctional. Plenty of companies plough all their revenues, and investor capital, back into their businesses in hopes of growing. In fact, an extended period of non-profitability is more common than not in early stage tech companies.
Nonetheless, the fact that only 11 of 127 companies going public in 2014 were actually able to make money at the time suggests that investors have become forgiving when it comes to new companies with business models that are not yet fully proven out.
A large appetite for risk, of course, is a sign of a bubble.
Here is Ritter’s data, as presented rather beautifully by The Information, where we saw it first. Go directly to The Information if you want an interactive version with the granular detail.