I NVESTORS OFTEN describe the world of business in terms of animals, such as bears, bulls, hawks, doves and dogs. Right now, mere ponies are being presented as unicorns: privately held tech firms worth over $1bn that are supposedly strong and world-beating—miraculous almost. Next month Uber will raise some $10bn in what may turn out to be this year’s biggest initial public offering ( IPO ). It will be America’s third-biggest-ever tech IPO , after Alibaba and Facebook. Airbnb and WeWork could follow Lyft, which has already floated, and Pinterest, which was set to do so as The Economist went to press. In China, an IPO wave that began last year rumbles on. Thanks to fashionable products and armies of users, these firms have a total valuation in the hundreds of billions of dollars. They and their venture-capital ( VC ) backers are rushing to sell shares at high prices to mutual funds and pension schemes run for ordinary people. There is, however, a problem with the unicorns: their business models.

As we report this week, a dozen unicorns that have listed, or are likely to, posted combined losses of $14bn last year. Their cumulative losses are $47bn (see Briefing). Their services, from ride-hailing to office rental, are often deeply discounted in order to supercharge revenue growth. The justification for this is the Silicon Valley doctrine of “blitzscaling” in order to conquer “winner-takes-all” markets—or in plain English, conducting a high-speed land grab in the hope of finding gold.

Yet some unicorns lack the economies of scale and barriers to entry that their promoters proclaim. At the same time, tighter regulation will constrain their freedom to move fast and break things. Investors should demand lower prices in the IPO s, or stay away. Tech entrepreneurs and their backers need to rethink what has become an unsustainable approach to building firms and commercialising ideas.

Today’s unicorn-breeding industry would not have been possible 25 years ago. In 1994 only $6bn flowed into VC funds, which doled out cheques in the single-digit millions. Before Amazon staged its IPO in 1997 it had raised a total of only $10m. Three things changed. Growing fast became easier thanks to cloud computing, smartphones and social media, which let startups spread rapidly around the world. Low interest rates left investors chasing returns. And a tiny elite of superstar firms, including Google, Facebook and China’s Alibaba and Tencent, proved that huge markets, high profits and natural monopolies, along with limited physical assets and light regulation, were the secret to untold riches. Suddenly tech became all about applying this magic formula to as many industries as possible, using piles of money to speed up the process.

Make no mistake, the unicorns are more substantial than the turkeys of the 2000 tech bubble, such as Pets.com, which went bust ten months after its IPO . Ride apps are more convenient than taxis, food delivery is lightning quick, and streaming music is better than downloading files. Like Google and Alibaba, the unicorns have large user bases. Their core businesses can avoid owning physical assets by outsourcing their IT to cloud providers. As IPO documents point out, their sales are growing fast.

The big worry is that their losses reflect not temporary growing pains but markets which are contested and customers who are promiscuous. In the key digital monopolies, the network becomes more valuable to each user the more people use it—hence Facebook’s 67% market share in social networking. The unicorns’ dynamics are not as compelling. Despite subsidies, ride-sharing customers are not locked in to one firm. No wonder Lyft’s shares have fallen by over 20% below their IPO price. Anyone can lease an office and rent out desks, not just WeWork. Some unicorns have to fight other richly funded rivals and established firms. Spotify, which listed in 2018, has a 34% share of music streaming in America and is going head-to-head with Apple.

Because the unicorns’ markets are contested, margins have not consistently improved, despite fast-rising sales. Managers are terrified of cutting their vast marketing spending, for fear of losing customers. Many firms are scrambling to develop ancillary products to try to make money from their users. And without deep moats around their businesses a permanent question-mark hangs over the unicorns: if Uber really is worth $100bn, after investing only $15bn or so, why wouldn’t its rivals keep trying their luck, or an established tech giant be tempted in?

External forces will make blitzscaling harder, too. The earlier generation of firms did not face many rules—few legislators had imagined the internet—so they could charge ahead first and beg forgiveness later. The unicorns followed suit: Airbnb sidestepped taxes on hotels and Uber drove through regulations on taxi-licensing. Today a reaction is in full swing, including over digital taxes and data and content laws. The unicorns’ investor circulars have pages dedicated to their legal dangers and gory regulatory risks.

All this is good for consumers. Money is being thrown at them; the subsidy to the public from the dozen firms amounts to $20bn a year. Whereas the commanding heights of the tech industry, such as search and social media, have been monopolised, the unicorns are at least creating competition in other areas.

Investors, meanwhile, need to hold their nerve. It is tempting to extrapolate the triumph of Google and Alibaba to an entire new group of firms. In fact, most unicorns face a long war of attrition and soggy margins. Eventually, struggling firms may be bought. And here another risk arises: most unicorns cap outside investors’ voting rights (Uber is an exception), and many have “poison pills” too, making takeovers hard and constraining investors’ ability to intervene if the firms do not eventually find a way to make enough profits to justify their IPO valuations.