The Last Of The Unicorns
These rare, magical startups may be the last of their kind.
One of the defining features of a so-called financial “bubble” is that people often don’t know they’re operating in one until it’s too late. Recently there has been a lot of talk about the tech funding bubble and about how the days of finding free-flowing cash from eager investors are about to come to an end permanently. But for many startup founders looking for much-needed funding and struggling to find it, it seems the bubble has already burst.
Finding Funding
Take, for example, the decline of the so-called “unicorn startup”, or a company that’s valued at $1 billion or more. One of the defining characteristics of the tech bubble, these companies rely on venture capital funding to grow, rarely turn a profit in the beginning and focus singularly on reaching “scale”, or the point of mass usership. In early 2015, Fortune estimated that the billion dollar club was at 80 members, a figure that is said to have since doubled. However, according to Quartz, things started to change at the end of last year. “Financing for startups fell 29% in the fourth quarter of 2015 from the third quarter, and it dropped another 8% for the first three months of this year. The birth rate for new unicorns also fell precipitously. Startups began scrambling to get their finances in order. Layoffs mounted, perks vanished. For consumers, prices started to rise.”
Falling Short
Having seen more than a few hyped startups—some of which were unicorns—fail to deliver on their promises and thus to attract mass usership, investors are becoming more cautious. In this current political climate, it seems the attention is turning away from shiny unicorns, who promise big but can also fail big, to cockroaches, those resilient beasts who pose far less risk. In a piece for Business Insider, Tim McSweeney, a director at technology-focused merchant bank Restoration Partners was quoted as saying: “Everything is about resiliency now to weather the storm, Unicorn, it’s a mythical beast, whereas a cockroach, it can survive a nuclear war.” In other words, in more realistic economic times, the safe bet is becoming more attractive than the one-hit-wonder.
Because of this downfall of the unicorn, the very idea of valuation as a metric of success is being called into question. After all, you can have the most hyped company in the world, but if there is no way to earn the amount of money you will eventually need to build into your business model, you simply won’t be promising to investors. Chasing the valuation dream can also lead to hamstrung founders down the line, as Bill Bryant, a partner at DFJ told TechCrunch: “Valuation alone doesn’t mean much. Many entrepreneurs agreed to onerous terms to get a unicorn-esque valuation and that’s really hard. Any new investor coming into the deal must radically discount the valuation. I always advise entrepreneurs to set realistic valuations at each stage.”
Shoot For The Stars
So what can founders and entrepreneurs do to survive the bursting of the unicorn bubble? The first is perhaps to go against the axiom of Silicon Valley to go big or go home. Being slightly more conservative and realistic in both your business proposition and how quickly you plan to grow is prudent approach. In addition, don’t assume that eyeballs are enough; you actually need a way to make money once your rounds of investment have passed. Showing investors that you know this—and have a plan of action—is confidence boosting.
In short, everyone wants to be a unicorn, but sometimes being a plain old work horse is a safer and more sustainable bet.