The Unbridled Unicorn
Are billion-dollar startups riding into the sunset or racing to record-breaking growth?
By Maridel Allinder
Three years ago, after centuries as a mythical creature, the unicorn appeared in a TechCrunch article as something else: a startup company valued at more than USD1 billion. That post by Cowboy Ventures Founder Aileen Lee gave a name to a phenomenon: the meteoric market capitalization of tech startups.
In November 2013 when Lee coined the term “unicorn,” only about 40 of the past decade’s tech startups funded with venture capital had reached the USD1 billion valuation mark. Today approximately 200 unicorns roam the startup range, although some say the herd is showing signs of thinning.
From consumer-oriented unicorns like Uber and Alibaba to enterprise software in dozens of industries to the burgeoning internet of things, the technology industry has become crowded with startups at the unicorn threshold. Pundits dubbed 2015 the “Year of the Unicorn,” but 2016 put a damper on the rapture with cries of “bubble.”
Some forecasters looking into their crystal balls are wondering if the magical kingdom can last. Still others anticipate no end to new technology’s lucrative and continuous disruption of the status quo.
Define and dominate or decline
Stefan Beiten, YPO member and Founder of the Berlin-based investment firm Argo Ventures, believes the startup sector will continue to breed unicorns.
“The entire ecosystem has expanded in quality and volume, as well as in the ability to penetrate markets rapidly,” Beiten says. “It’s part of an exponential growth curve that usually is led by unicorns.”
Over the past decade, while a turbulent stock market and record-low interest rates helped to create the climate for unicorns by driving traditional investors into venture capital, there was also a growing element of cachet in gaining admission to the billion-dollar startup club.
But now, forecasts of the unicorn era’s approaching demise — or at least its decline in bravado — abound. “The biggest danger is not so much the viability of the unicorn business models themselves but rather the architecture of their financing, which is very sensitive to any crisis in the global financial system,” Beiten says.
YPO member Bhanu Choudhrie, Founder of C&C Alpha Group, a London-based private equity firm, is cautiously optimistic. “At the beginning of this year, there were 229 so-called unicorns, compared to 39 at the tail-end of 2013. It’s a huge increase, but a billion-dollar valuation isn’t in itself the most important way of looking at a company. We are comfortable with risk at C&C, but we are always looking at long-term potential.”
Choudhrie emphasizes that high-growth startups usually define and dominate a product category, if not an entire platform. “If you do that successfully the money will follow,” he says, citing the launch in 2015 of Customer Bank’s mobile division (Choudhrie is a director of the bank.). “BankMobile is rewriting the virtual banking playbook. It already has 2 million customers and 26 percent of the student market, with customer acquisition costs that are one-third of traditional banks.”
When Daniel Gutenberg, General Partner of the Swiss venture capital firm VI Partners and a YPO member, surveys the current crop of unicorns, he predicts a sustainable future for most. “I think almost all of these unicorns will turn profitable at some point, but the valuations of some will drop substantially.”
Free-range unicorns: global growth
While most of today’s unicorns were born in the United States, a growing number are coming from other countries. China already has an impressive herd, and Europe, led by Germany and the United Kingdom, is experiencing a rise in activity.
“The startup playing field is changing all the time,” Choudhrie says. “Silicon Valley leads the way, but it’s not the only show in town. We do a lot of business in India, and I have seen how quickly the tech startup sector is growing there. It’s the biggest democracy in the world, with a business-minded government and a very young population.”
In a cnbc.com article published in May 2015, “The Billion-Dollar Unicorn Trend Is About to Go Global,” YPO member Ed Fernandez, a startup investor, advisor and entrepreneur based in Palo Alto, California, USA, predicted that unicorns would become an increasingly global phenomenon — particularly in emerging economies.
“It’s precisely in emerging markets with lower legacy barriers where disruption and more rapid adoption of new technologies happen,” he wrote. “We have seen this move before, for well over a decade, where mobile technologies, wireless and smartphones were spreading faster than in mature countries as other access mechanisms were less of a barrier.”
While Beiten points to China as “the most scalable territory on the planet,” he also sees more European unicorns on the horizon. “Europe’s rich culture in a relatively dense territory is its most undervalued economic factor,” he says. “In food and other consumer products, we are seeing consumers make a switch from quantity to quality. When it comes to creating life quality, Europe is unbeatable.”
Rising stars and reality checks
Every wave of new technology — from the semiconductor to the personal computer to the internet to social networks to mobile — has given rise to superstar startups. So who are the rising stars of tomorrow? Forecasts range from blockchain technology companies (think Bitcoin) and DNA-driven health care services to artificial intelligence.
“Industries ripe for disruption include insurance, health care and higher education,” says YPO member Sean Fenlon, Founder and CEO of Abovo42 Corp., a “social email” consumer tech company, and Meta42, an online marketing company. “However, the biggest of the big tech trends will absolutely be AI.”
While Beiten mentions the wide-open future of genomics and molecular-based health care, he believes the biggest change on the horizon will be a demographic shift in power. “Vast parts of the world still have social systems in place that oppress women,” he says. “When these women have real-time access to the world’s knowledge, it will create a revolution greater than the next tech innovation.”
Many think of Facebook when envisioning the next great tech innovation. “It created a completely new level of fantasy for any investor,” Beiten says. But Choudhrie cautions that there is no such thing as a template for reaching the startup summit.
“The Facebook story has inspired a generation of tech entrepreneurs, but it’s a mistake to take it as a template for your own startup strategy. You need to write your own story,” Choudhrie says. He points out that millions of companies are started every year, but only a tiny percentage are startups — and only a miniscule fraction of that tiny percentage become unicorns.
“Even if you’re a billion-dollar startup, you’re not immune to the challenges of how to stay ahead in a fast-moving world,” Choudhrie says. “The really important questions to answer are these: Do you have a strong unique selling proposition? Would you leave an unfillable hole in the market if you weren’t there? Are you committed to continuous improvement?
”If this doesn’t sound like a magic potion, that’s because even unicorns need reality checks. A “Business Insider” column by financial reporter Oscar Williams-Grut suggested that it was time for a new startup metaphor — and magic wasn’t what he had in mind. With the headline “Forget unicorns — investors are looking for ‘cockroach’ startups now,” the commentary predicted that investors are returning to a focus on survival in uncertain times.
When asked his opinion of this outlook, Fernandez responds with a more inclusive and upbeat take. “In the venture capital space, many species coexist and grow,” he says. “This is probably the most exciting time in history from a technology standpoint. I see a bullish future for unicorns, centaurs, cheetahs and cockroaches alike.”