‘Unicorn’ is a term used to describe a privately held startup with a valuation of $1bn+, coined by Aileen Lee in 2013, founder of Cowboy Ventures, a seed-stage fund, based in Palo Alto. The UK has 105 unicorns, with 20 reaching a $1bn+ valuation in 2021 according to Tech Nation. It’s now part of the lexicography of startup land, and become the default way to assess both an individual company and more broadly, the comparative strength of the tech scene, driven in part by venture funds needing larger exits in order to deliver acceptable returns.
When AI startup Tractable reached a $1bn valuation in June 2021, it became the UK’s 100th startup unicorn. There are now more tech unicorns in the UK than the rest of Europe combined, behind only the US and China. Two of the UK’s fintechs, Monzo and Revolut are there too. Monzo is famed for the fastest funding round in history, raising £1m in 96 seconds through crowdfunding platform Crowdcube and became a unicorn in 2018. Revolut has seen a slower but more sustained rise. It was launched in 2014 and has since amassed 12m users and a $10bn valuation.
The pandemic also brought a wave of innovation that propelled startups in certain sectors. Hopin’s success during lockdown made it one of the fastest UK startups to become a unicorn. Johnny Bourfarhat launched the web conferencing platform in 2019 when he was bed-bound by a viral infection. At the start of 2020, Hopin employed six people, they now employ 650. Its latest funding round was on a valuation of $5.6bn. Another example is meal kit retailer Gousto, whose popularity sky-rocketed during lockdown, as restaurants closed and people went back into the kitchen. As the number of users soared, so did demand from investors, a £25m round in November 2020 and a further £111m in new investment last week valuing them at $1.7bn. Gousto is profitable.
The hype surrounding unicorns doesn’t seem to abate, the news cycle eagerly awaits the next mythical emergence. With the large amounts of money feeding unicorns, it’s understandable why startups might aspire to their lofty heights. But unicorn status does not equal success, and I believe there is a problem with our obsession. I don’t get their apparent beauty; I think that our obsession with them is misleading. While they are often born as ‘tech disruptors’, and while it sounds counter-intuitive, the emergence of unicorns impedes innovation rather than promoting it.
Why? Because primarily they hold back investment in and scaling of the other 99% of tech businesses which are often overlooked by investors who are all chasing the next horse with a horn. It’s also a fantasy for most tech founders and creates delusion, and skews the talent pool, creating localised short-term vortexes. It’s doing nothing for the economy either, rather fuelling the ego of founders and investors. So let’s look a couple of high-profile unicorns, and the lessons we can take from them to explore my points.
In 2019, WeWork, an emblem of unicorns, was a casualty of consensual hallucination between a bombastic startup founder and investors who seemingly shopped at the tailor who makes emperor’s new clothes. WeWork was valued at $47bn, having lost $1.9bn on revenues of $1.8bn the previous year. In frothy capital markets, such a romantic delusion is possible, where the charisma and audacity of the founder is more alluring than reality, and venture capitalists jostle with each other to write cheques of $100m. But following investigation of its numbers by analysts, its IPO was postponed, and founder Adam Neumann left a toxic waste to clean-up behind him. For me the fundamental flaw at WeWork was that capital isn’t a strategy, which had been the WeWork operating model.
Then last week saw the conviction of Theranos founder Elizabeth Holmes on fraud. Theranos was also a unicorn, promising to disrupt the medical industry and revolutionise lab testing by producing multiple fast blood-testing with just one drop of blood at a fraction of the cost. However, the technological breakthrough Holmes touted was never demonstrated, they faked test results, hid malfunctioning technology and manipulated their financials. Holmes misled investors, business partners and the medical industry. In 2015, it had a $10bn valuation but after revelations of fraud and burning $900m investor funds, it failed and 800 people lost their jobs.
So, what are the lessons from the froth at WeWork and Theranos for ‘ordinary’ startups? Just take a step back from the unicorn hype, and get a more realistic view of what enables a sustainable tech startup.
Are Unicorns overvalued? In a recent survey, Yes said 91% of VCs who don’t have Unicorns in their portfolio; and Yes said 92% of the VCs who do. The valuations are based on unsustainable rates of assumed rocketing growth. Uber, once considered the biggest and fastest unicorn, is currently valued at $82bn: it finally made a profit for the first time – $8m in Q3 2021. It’s on a 2023 earnings multiple of x122.
Takeaway: We need to blend the ambition of founders with the sober adult supervision of investors. Show your startup has a genuine edge and innovation, an ambitious customer scaling roadmap, and a credible strategy to achieve cash generation – don’t get greedy on your valuation.
Asked whether they make a gut decision to invest in a fledgling company rather than relying on analysis, 44% of VCs said yes. Some 9% admitted they didn’t use financial metrics to back this up. The lack of due diligence on Theranos, and the blind faith on WeWork scalability, speaks volumes of inadequate due diligence.
Takeaway: A startup is a bet on a business model attaining the scale beyond which the unit economics start making sense. Focus on determining the economic drivers of success, not outrageous revenue projections, and build a growth story around this. WeWork failed to demonstrate any economies of scale, Theranos evidenced no return on their R&D investment.
SoftBank’s relentless cash infusion helped WeWork cover the increasing costs of its whirlwind growth. WeWork spent heavily, buying out new tenants from their existing leases, and providing free rents. There was thus a chasm growing between revenue and costs. WeWork’s occupancy rate went up, but the deals made it difficult to determine the natural demand and price point for its product.
Takeaway: Think of scaling as building the base of a pyramid, the foundation upon which everything is built, and you know that it will hold. Focus on building your architecture in an intelligent way, without over taxing your cash or endangering your roadmap.
Set and hit your (proper) metrics
Holmes told her trial that there was no explanation as to why investors were shown a revenue projection for 2015 of $1bn, when internal estimates were far lower, including a projection of $40m from pharmaceutical contracts. Holmes said Theranos had no revenue from pharmaceutical firms.
Takeaway: Facts, proof, transparency, and evidence have to be delivered to prove you are on the road to deliver the dream. The hype of unicorns supersedes numbers. It is accounting jujitsu at its finest. At some point, startup gestalt of overpromise and underdeliver can paint founders into a corner where they begin massaging numbers.
Know the risks in your business model
WeWork isn’t a commercial property firm renting desks, it’s a Space as a Service (SAAS) firm according to its web site; the IPO prospectus disclosed $47bn in lease obligations and forecast $3bn in revenue this year. How were they going to close such a gap?
Takeaway: Your strategy is not to wish and dream of becoming a big fish, but to pick a small pond, engage with the smallest viable audience, and gain the reputation and trust you need to move to bigger audiences.
Have a vision and purpose, but don’t hallucinate
Holmes tried obsessively to become the female version of Steve jobs: her purpose to change humanity, wearing a black turtleneck, she even faked how she spoke by talking with a deeper baritone voice. In such cases, attention invariably focuses on the founders’ hubris. Ultimately, they fall off their pedestal because the foundations lacked a sense of reality. Learn from icons but don’t try to copy them.
Takeaway: The unicorn world is filled with the idolatry of winners, constantly promoted on Instagram, creating a high many then chase. The spoils, coupled with the false narrative that we live in a meritocracy, have dulled our sense of reality. We’re lying to everyone. We’re lying to ourselves. We’ve lost sight of what’s important. We’ve lost ourselves. We’re addicted to growth at all costs. I’ve always preferred opportunities where time is an ally, not an enemy.
Blitzscaling doesn’t work
The unicorn folly begins with an idea that needs scale rapidly. The idea spreads because of network effects, and the more people use the service, the better it gets. Unicorns ‘blitzscale’, they attempt to disrupt a whole industry before anyone can stop them, raising fortunes to acquire users. But that’s the issue – they raise investor funds and ignore customer revenue.
But ultimately, unless you can finance your growth from revenues, Blitzscaling means you need investors with very deep pockets. For every entity like Paypal that pulls off the feat of hypergrowth without knowing where the money would come from, there is a graveyard of those that never figured it out. The risks of potentially disastrous defeat are ignored. Oh, the blind folly.
Takeaway: Even before WeWork’s fiasco, the taps were being tightened. The Theranos debacle may tighten them further. Blitzscaling may become a dirty word. It’s a do-or-die approach. Cash-burning firms may find themselves stranded when the tide goes out.
Leadership red flags
I’m stunned at how Holmes’ sheer force of personality kept the obvious questions about Theranos’s future at bay. The cult of personality provided for an outsized and delusional view of the firm’s potential impact in society. Theranos assembled an all-star board, featuring some respected leaders but Holmes was not able to benefit from their advice as she kept advisors in the dark about the challenges her organisation was facing.
Takeaway: The vacuum of leadership, transparency and governance in both Theranos and WeWork undermined the fragile startup culture that investors tolerate and accept. If lies become your strategy, you’ll be buried under them. In the case of Theranos it resulted in a calculated and deliberate fraud. Mindset drives behaviour, behaviour drives culture, culture drives business outcomes.
The salutary lesson from failed unicorns is the quest for growth at all costs is hallucinatory, we need more responsible distribution and stewardship of startup capital to improve overall macro-economic growth. The goal should be to make startup ventures sustainable, not just explosive, in a vibrant eco-system. After years in which VCs have cast themselves as infallible Merlins, we need to see investors shouting when an entrepreneur, for all his or her charisma, cannot demonstrate how they’ll zoom from unprofitability to profitability in a way that’s not obvious to the naked eye.
Raising capital isn’t a cure-all. Unicorn hubris isn’t innovation celebration, most of them rely on a ‘get big fast’ growth model, financed though more rounds of private investments, the more cash-in; and, with that, an almost compulsive need to spend the cash faster. Unicorns are a neologism for market disruption. Except that we should expect future marketplaces and technologies to be fairer, more sustainable and definitely more inclusive. The current zeitgeist around unicorns is terrible for entrepreneurship generally. Increasingly, folks are playing the game while looking at the scoreboard instead of playing the game with eyes on the field. Becoming a unicorn has become the end-goal, rather than a milestone on the journey.
One new unicorn is undoubtedly huge news for the British economy but equally, so are 25 smaller businesses worth £50m each. A healthy economy needs both and everything in between to thrive. It’s time for a mindset change. Too much of a focus on unicorns is leading to a damaging belief among young founders that the only route to success is to build the next industry giant. We’ve been too focused on unicorns. You want a unicorn? Here’s a horse with a cone on its head, that’s the best I can do.