Time to Put the Unicorn Back in the Fairy Tales

February 4, 2020

My eight-year-old daughter is undoubtedly a lover of unicorns, but even she questions their existence. In a business sense, a “Unicorn” is a privately held startup company valued at over $1 billion that has experienced hyper-growth in a new or evolving market. Venture capitalists coined the phrase to express the rarity of these companies.

The Venture Capital investment model is built around the premise of investing in many companies. The hope is one will become a “Unicorn” and will go on to reap a significant return for investors, making up for the vast majority of their investments which are not successful.

Becoming a “Unicorn” has been seen as a status of success for the last several years. But, should this be a goal for every company? If less than 1% achieve this status, what happens to the other 99%? The answer usually isn’t pretty.

What really makes a “Unicorn.”

Unicorns” have often redefined a market through the use of technology. This gets to the core of what drives the growth of “Unicorn”; they create a new market/segment for themselves.

6 Characteristics of Unicorns:

1. Technology-driven market disruptors

2. Tremendous growth or potential to grow

3. Aggressive cash burn for the first decade or so

4. Funded by large investment rounds on average, every 18 months

5. Relentless founder’s focus on  staff and growth,

6. In a market space that is so large, the opportunity for investors seems endless  – this is why a fair portion are consumer-centric businesses

But… for every “Unicorn,” hundreds if not thousands of companies don’t succeed in achieving their goal. This can be particularly detrimental for founders.

Let me give you an example:

Company A raises $20m at a Valuation of $100m. However, to keep growth going, the company needs to spend the $20m pretty fast, so it expands and spends like they haven’t before doubling staff in the first six months and doing things they may not have been comfortable doing in the past.

Move on three years; Company A has gone through the $20m in cash, and growth has slowed. Investors want an exit, and because growth is on a decline, they get a valuation at $50m – Uh Oh – investors preference (first right to money back) now kicks in, and founders see very little of the value.

The outcome? The company gets sold. Founders are now out of a job and haven’t made enough money to start another business. So they are now applying for jobs!

Success comes in many forms

What does success look like for founders – Is it building a “Unicorn”? Maybe for some. Others might have a goal to achieve an IPO. Some have a goal of building a business that is number one in their category, their country, or something else. For some, it is to provide jobs, earn money and give back to society (see: social entrepreneurs).

Aligning goals and success metrics is critical for companies.

Success can be achieved in different ways:

1. Consistent, long-term growth which takes years to build and is less risky

2. Fast-paced, high-pressured growth, including investment which dilutes control and has a low chance to succeed (think one in a thousand “Unicorns”)

3. Or; take a sustainable growth approach which has an exponentially higher chance of getting there, take some strategic investment funds, and have a well-thought plan to deliver the results

Which one of these is the most likely to yield positive results for the stakeholders?

Could Company A have had a better exit for founders than the example given above? If they had taken a different approach, they might have ended up keeping more equity in their company and control of their direction. They may have ended up with a similar-sized company, but they still own and control the company. If they decide to sell, they become wealthy individuals.

In my opinion, #3 is fundamentally the best-proven way to grow any business in any sector in any decade over the last 100 years. Assuming you fancy your chances of succeeding and returning money to founders and investors.

If it is a land grab and you need a first-mover advantage, then number 2 could be an excellent option to scale quickly.

Looks may be deceiving

“Unicorns” are very eye-catching, and we all love to read about them. So I followed in fascination the drama surrounding WeWork, with the founder walking off with several hundred million dollars, an extremely rare outcome for a founder whose investors are in the red.

Was there a different way to build the company which would have seen real value built for all involved?

I certainly think so. Sustainable growth and keeping control of your company have a much higher likelihood of success for founders.

Dreaming big is undoubtedly a powerful mindset for entrepreneurs, but keeping your feet on the ground is also important for those who want to build businesses that will have a high chance of lasting more than a few funding rounds.

It may be time I learn to ride a horse like my daughter instead of dreaming of Unicorns.

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