Silicon Valley’s Forgotten Unicorn

Right now the tech world is abuzz with rumours, speculation, and anticipation for the graduating class of 2019 unicorns. Airbnb, Lyft, Pinterest, Slack, Uber, and a handful of other tech unicorns are all considering or preparing for 2019 IPOs. But there’s one unicorn that nobody is talking about, and it’s the most profitable one of them all.

Among the 2019 cohort, Uber’s IPO is expected to be the largest, between $72-120 billion according to some estimates, while startups like Slack expect to be at the lower end of the spectrum between $5-10 billion.

It’s an exciting time to be a vested employee or underwriting investment banker, but it’s easy for onlookers to get carried away in the hype. It’s even easier to overlook the fact that none of these companies have ever reported a profit.

Lyft recently unveiled their S-1, showing losses of $911M in 2018, and I expect that Uber’s S-1 will mirror Lyft’s. Growing revenues at the expense of growing losses. It’s not unreasonable to believe all the other upcoming tech IPOs will tell the same story.

Don’t get me wrong, I have nothing against any of these companies. They have enormous potential and may turn out to be good investments, but it’s important to remember their potential to provide a good return on investment is just that, potential. 

These IPOs deserve a high degree of skepticism until they’ve proven a path to earning a return for their investors.

As Warren Buffett says:

“Growth can destroy value if it requires cash inputs in the early years that exceed the discounted value of the cash that those assets will generate in later years”

I’m not going to debate the merits of each company now, that’s for a future blog post. But the reality is that tech unicorns often cycle between burning cash and raising more of it from venture capitalists. This isn’t always bad either, there are many wildly successful tech companies that took this approach and won because of it.  But why should cash-burning and repeat fundraising be the only way to grow a tech company?

Well, it’s not actually.

Silicon Valley’s Forgotten Unicorn

There’s one tech unicorn, right in the heart of San Francisco that has consistently bucked the trend of ‘losing money and then raising more of it’ in Silicon Valley. But nobody ever talks about them. Any guesses?

Here are a few hints:

  • Their net profit margins are likely double the 39.6% that Facebook touts
  • The company has no VC investors
  • Their website operates on the scale of 1 billion+ page views per day
  • The founder still helps out with customer service

If you haven’t figured out the company yet, you should wonder why nobody ever told you their story. Ask yourself this:

Why do you know all about the money-losing unicorns in Silicon Valley, but nothing about the most profitable one?

It’s worth taking a second to ponder, maybe there’s a lesson in there.

This company is practically printing money - likely earning over $500M of profit this year at roughly an 80% net profit margin. It’s an incredible business, and it’s a shame more people don’t know about it (though I think it’s by design).  The company basically ignores all media requests and inquiries to stay focused on giving customers the best possible experience.

Not Your Typical Silicon Valley Startup Story

Perhaps the most interesting aspect of this Silicon Valley unicorn is the founding story. For the first 4 years, the project was only a side hobby for the founder. He had a full-time job as a programmer, and only turned his hobby into a full-time gig once his project achieved real product-market fit. He also waited until then to incorporate.

From what I can tell, I don’t believe the company ever raised capital. They certainly never needed to. They created a service that solved a true problem after 4 years of iterations and grassroots community development. Then, they built a business model around it to support their costs. But until that business model was proven, the founder paid his bills with his full-time job.

This is a valuable lesson in patience. Bill Gates once famously said:

“Most people overestimate what they can do in one year and underestimate what they can do in ten years.”

Progress was slow for almost half a decade before the company was even incorporated. How many founders have that level of patience?  After establishing product-market fit, the company became a rocket-ship, and soon after became one of the Bay Area’s most valuable unicorns.  No growth hackers, MBA consultants, or venture capitalists involved.

In the Bay Area, where cash-burning and VC fundraising have almost become Olympic sports for startups, it’s refreshing to know that the most profitable unicorn of all doesn’t participate in either one. I hope one day someone writes a book on the full story of this company, I’d buy it in a heartbeat.

Still can’t figure out which company I’m talking about? It’s Craigslist!

Craigslist: The Silicon Valley Powerhouse

Founded by Craig Newmark in 1995, Craigslist only has 50 employees. They remain one of the world’s top 50 websites by traffic, almost 25 years after creation. Craigslist doesn’t release their financials but longtime ad analysts at AIM Media estimated that in 2016 Craigslist did almost $700 million in revenue, $500 million of which was profit. Insane margins.

Just 2 months ago, AIM updated their estimates. AIM now believes revenues are roughly $1 billion/year. In a previous report, AIM also mentioned that Craigslist could hike up ad revenues by 10x without suffering user attrition. What a business model. And the entire company is owned by the founder Craig and his long-time CEO Jim Buckmaster.

Craigslist perfectly illustrates the power of network effects. Craigslist has been one of the world’s great internet companies for over 20 years now, despite having a website that looks like it was designed by a 4th grader. But what Craigslist lacks in website design, it makes up for in business model design. That’s a powerful lesson that many companies overlook.

Truly great businesses have such strong moats that even with all the money in the world, it would be a futile exercise to compete with them. Facebook is learning this lesson now. Even with billions of dollars in capital and thousands of employees, Facebook’s Marketplace hasn’t yet toppled Craigslist’s empire.