Unicorns distract tech founders from the grave
This week’s article will be much smaller and lighter to consume, it is merely a warning to all #founders and investors out there about #unicorns.
Lee calculated that 1 in 1,538 software and internet companies actually made it to unicornhood—or 0.7%
Unicorn tech companies are a bad thing for all other companies, every single one that we start or fund. These companies create goal posts that we then aspire to grow into and make it so that we measure our success against what they’ve done, how they’ve scaled and their growth patters, when in reality, we all create things much closer to mom and pop shops than we do to Microsoft or #Google.
What is a unicorn?
In the #venture capital industry, a unicorn refers to any tech startup company that reaches a $1 billion dollar market value as determined by private or public #investment. The term was originally coined by Aileen Lee, founder of Cowboy Ventures.
As you can tell, the majority of the pizzazz is baked into the name and as such, unicorns are, by definition
- Rare: Lee calculated that 1 in 1,538 software and internet companies actually made it to unicornhood—or 0.7%. A billion-dollar company doesn’t happen every day. Unicorns are rare success stories for everyone involved.
- Aspirational: Unicorns want to revolutionize the world. Early on, Uber wasn’t just about building an app that got you a car—it was about taking on entrenched taxi interests and giving consumers a better price. Unicorns are “on a mission to build things that the world has never seen before,” and they want to tackle new problems at enormous scale.
- Magical: Despite the massive valuations and all the press headlines, unicorns are elusive. A UC Berkeley Professor of Linguistics says, “the term romanticizes techno-companies: takes them from the remote and unintelligible to the magical and even lovable, while also being rare and powerful.”
Who creates unicorns?
The majority of unicorns are created when just the right market conditions exist. First and foremost, there has to be some new leap in #technology or paradigm shift in the way we do something.
Lastly, the current investing landscape has changed radically so below we see the other reasons why so many more investors exist and jump on the bandwagon of finding the next unicorn.
- We’re in a super friendly fundraising environment. In 2007, the Federal Reserve set interest rates at around 5x what they are today. Since the 2008 financial crisis, central banks have set interest rates close to zero percent. Beyond just venture capital firms, private equity and banks have all rushed in to join the party, pumping up valuations.
- Nontraditional investors are taking part. Everyone wants a piece of the pie—mutual funds Fidelity and BlackRock are participating in late-stage fundraising in order to participate, instead of waiting until an IPO.
- It’s easier to stay private. An IPO costs an average of $13M for a company that’s raised between $100M – $200M (and bankers take a 7% cut). An IPO ushers in public scrutiny over profitability and accounting ledgers. Staying private is a way around this. Investor Tom Tunguz points out that “while private multiples have remained constant, public software multiples halved.” Not only is it costly to go to IPO, but there’s also less opportunity for easy cash.
- The Jobs Act of 2012. Before 2012, you could have 500 investors before the SEC forced you to go public. Now you can have 2,000. Regulatory shifts like the Jobs Act make it easier for small companies to raise more capital. It’s how a company like Uber can raise $2.8B in its latest funding round—more than Google’s initial IPO.
A brief history of unicorns
First and foremost, the overwhelming majority of the unicorns (and #decacorns – companies valued at over $10 billion) live in California.
Ninety-eight of the unicorns are in the consumer space, especially in retail and the sharing (or “collaborative”) economy. Examples of unicorns in retail include the online marketplace Etsy and Alibaba, the massive Chinese commerce platform. In the collaborative economy, you’ll recognize names like Airbnb and Lyft. Another 112 unicorns can be found in enterprise technology infrastructure or vertical industries, such as fintech, healthtech, cleantech, and the current growth darling, IoT (Internet of Things).
Examples in IoT include Nest (acquired by Google), DJI (the drone company), and Jasper Technologies, which builds technology for self-driving cars.
Where the unicorns live
All told, 101 unicorns are headquartered in California. Another 23 are in New York, with a few handfuls scattered in states such as Massachusetts, Texas, and Illinois. Europe, as a whole, only has 13 — split between Germany, the UK, and a few other countries — which leaves China as the other heavyweight contender.
Interestingly, Europe ranks low both in terms of absolute number of unicorns and value creation. While the average global unicorn has returned 7X its invested capital in current valuation, Europe — which has not produced a single decacorn — sees returns of less than 4.5X.
Who invests in unicorns?
This is where the world’s top investment firms — almost all U.S.-based — make their money. Top firms include Sequoia, with 37 unicorn and decacorn investments, Accel Partners, with 29, and Andreessen Horowitz, with 28.
“Investing at unicorn valuation is risky, as 30 percent of exits are done below the unicorn valuation marks,” Cases warned. “However, with a portfolio approach, returns are stellar at more than 78 percent per year.”
Late-stage investors, however, tend to be big, old, institutional capital firms with names like Goldman Sachs, T. Rowe Price, Wellington Management, and Insight Venture Partners. The ranks of investing companies are dominated by giants like Google, SoftBank, and Alibaba.
Why does all of this matter?
It’s a fair question, right? Well, every Tom, Dick and Harriet these days thinks that their idea is the next billion dollar idea. So much so that at Angel and investor meetings I constantly see literal ideas being valued at over $1M.
In 2017 alone, there were 57 new unicorns created – which sounds absurd, but so much of the US economy is just that these days. Everyone seems to be afraid to miss out on the last little bit of bubble or blow-out that might happen with the market and they are trying to get in just ahead of it.
As mentioned in previous posts – consulting or service based companies tend to not get unicorn level valuations, most copy cat companies or being the Uber of cleaning supplies is likely to not get you to $1B either.
Lastly, many new or first time founders focus on putting the absolute perfect product out to market. That’s such a bad idea – let the market and your early alpha and/or beta groups (and the data they provide) guide where to go. You need to ship and ship really fast – get your product in front of a lot of people (including people who use your competitors’ products).
I’ve been part of the founding team at three companies and a non-profit. I have also helped founders (as an employee, investor, board member and advisor) reach their multi-million dollar valuations in super human (flash like) speed. It’s addictive, and fun, and fulfilling. It’s also draining, and difficult, and frustrating. Having investors and board members who are experienced, accessible, and kind helps enormously. So does spending time with other founders and building relationships that allow you to talk honestly about what’s hard, and what you’ve learned. Being part of a startup accelerator is great, because it gives you a network of both mentors and peers.
My current #startups are focused on many things – real estate (and property tech), fraud detection, #artificial intelligence (deep learning), consumer marketplaces, high-tech wearables and ad-tech. I won’t say which is which at this point, but if you dig around, you’ll see which ones I advise, invest and work the most in – they’re all pretty super (otherwise I wouldn’t be part of them).
Have a great week – and… Let’s Go RAPTORS!